The core problem
On a progress-billed job there are always three separate figures moving at different speeds:
On a small residential job those three converge within a couple of weeks and nobody has to think about it. On a six-month commercial job they can diverge by tens of thousands of dollars for months at a time. A profit and loss statement that treats billing as revenue will, in that case, tell you a story about a month that did not happen.
The symptom to watch for: a profit and loss statement that swings violently month to month while the crew's actual workload is steady. That is almost never a real change in performance. It is a billing calendar being read as a performance report.
Why the swings happen
Consider a $300,000 job running May through August with billing at the end of each month, and a crew whose payroll and material spend is steady at roughly $60,000 a month.
In May you mobilize, buy long-lead material, and complete relatively little installed work. Costs are high, the earned percentage is low, and the invoice reflects the earned percentage. May looks like a loss. In July the material is already paid for, the crew is installing quickly, and the billing catches up. July looks spectacular.
Neither month is real. The job has one margin, spread across four months, and the monthly profit and loss statement is chopping it up according to a schedule that has nothing to do with performance. This is why a contractor can be busy, profitable, and still convinced from the numbers that something is badly wrong.
The fix
The standard construction accounting answer is a pair of balance-sheet accounts that absorb the difference between what you billed and what you earned. Their formal names are long; what they do is simple.
Formally, costs and estimated earnings in excess of billings. It is an asset. It says: this work is genuinely done and the invoice has not gone out yet. Large or growing underbillings are worth attention — either your billing is lagging your production, which is a cash problem you can fix this week, or your cost estimates are drifting.
Formally, billings in excess of costs and estimated earnings. It is a liability. It says: this money has been invoiced but not yet earned. Overbilling is normal and often deliberate, because front-loaded billing funds the job. It is also the reason a contractor can have a healthy bank balance and no profit — the cash belongs to work not yet performed.
With these two accounts in place, the profit and loss statement shows revenue that tracks completed work rather than the invoicing calendar, and the swings flatten out into something you can actually manage against.
Reading it
| Look at | Because |
|---|---|
| Gross margin percentage, not dollars | Dollar profit moves with volume. Percentage tells you whether your pricing and production are holding. A month with more revenue and a thinner margin is usually worse news than the reverse. |
| Job-level margin before company-level margin | Company margin is an average, and averages hide the losing job. Project profitability is where the decision lives. |
| Overhead as a percentage of revenue, over several months | This is the number that tells you what you actually need to bill each month to keep the lights on, and it is stable enough to plan from. |
| The over/under billing balances | They are the early-warning system. A rising underbilling balance is a cash-flow problem forming before it shows up in the bank account. |
| The balance sheet, honestly | Customer deposits and retainage both sit here and both distort the picture if misclassified. See our retainage guide. |
Sanity checks
Progress billing is most common on commercial and new-construction work — typical for general contractors, electrical contractors, and plumbing contractors on multi-month projects. If your work is mostly same-day service calls, most of this does not apply to you, and that is worth knowing too.
Flow Bookkeeping Services is a bookkeeping firm, not a CPA firm. Which revenue recognition method is appropriate for your business, and how it interacts with your tax filing, is a question for your tax preparer. What we do is make sure the underlying records support whichever method you and your CPA choose.
Send us your QuickBooks Online file and we will tell you exactly what is wrong with it — free, in plain English, with no call required.
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