Q: Is contract revenue earned determined by the contract once certain requirements are hit?
A: The contractor estimates revenue , usually by dividing the number of man-hours used up on the job to date by the total man-hours estimated originally to finish the job. The key point is that the contractor provides the estimate of revenue earned to date. Further, keep in mind that it is only an estimate that may be revised as the job unfolds.
Q: Why would you be permitted to bill more than what has been earned?
A: Billing practices are usually stated in the contract. It is common for a contractor to overbill in order to obtain financing to help complete the project or job.
Q: Are under billings generally created when a contractor has completed work but only bills monthly or every other week?
A: Frequently, a contractor will submit the same bill monthly but then find that it has completed more work than it billed for. In such a situation, the contractor has under-billed. At times, too, the bookkeeping may be inadequate, and the contractor finds out a week or month later that it has billed for less than its estimate of revenue earned.
Course overview: Understanding and Analyzing Contractor Financial Statements: Part I of II