Overbilling is a severe issue for both contractors and their clients. Whether by human error or intentional fraud, billing errors are costly for everyone involved.
After glancing at them, Americans accustomed to paying bills may be surprised to learn that billions are paid annually in erroneous charges. This is especially true for large projects.
Delays in Payment
A common practice for contractors is to frontload (bill higher upfront) on projects because they know payment cycles can be slow. This can lead to a ‘job-borrow’ situation where a project is overbilled, representing an asset and not a liability on the company balance sheet.
While this can be a great strategy, some less-than-reputable contractors use it as an opportunity to bilk clients. By inflating costs, they hope their client will only notice and cut them a check after checking the invoice.
This situation can be a problem for project-based companies because the over/under billings on the balance sheet indicate the company’s current cash flow status. The problem is that if the company remains net overbilled for an extended period, it will send up red flags to lenders, showing them as mismanaged and financially struggling. This can be a challenging situation to get out of.
Healthcare fraud is a significant problem for business owners because it can be costly.
Contractors can also overbill by falsifying pay applications, concealing buyout savings in the Schedule of Values (SOV) line items, or using erroneous labour rates and wage categories. Some advanced overbilling schemes involve bribing or recruiting employees within the company to help cover up the scheme.
Fraud can be lessened by implementing clear and concise policies in the workplace, along with an easy-to-use software tool that allows employees to track their work hours accurately. This will minimize the opportunity for unintentional human error or planned fraud. In addition, it will reduce the risk of bogus expense claims. Moreover, it will prevent contractors from inflating their expenses to clients by billing them for more than they worked on the project.
Decreased Cash Flow
Managing cash flow and keeping it stable is essential to business operations. Significant negative cash flow over a prolonged period is cause for alarm. It may signify a company losing money and needing to find ways to turn around the situation.
In construction, contractors often frontload the schedule of values on a job requisition to accelerate customer payment. This practice can positively affect a contractor’s cash flow and create overbilling. Overbilling occurs when the actual costs of a project exceed the amount billed to the customer. This can occur due to poor up-front cost estimation, unapproved changes, or incurring costs on non-billable work.
Some companies hide these additional fees by disguising them as a “processing fee” or something similar. This can lead to consumers paying billions in erroneous charges every year. Contractors should monitor their net job borrow and cash-to-overbilling ratios regularly.
Sadly, some contractors overbill to cover debts incurred on other projects. They may falsify invoices or other documents to cloak their fraud. They hope their company will cut them a check without noticing the inconsistencies. This is illegal and can result in treble damages.
Other times, overcharging is simply the result of incompetence. Contractors with significant billing experience typically have better accounting practices than those without. Unfortunately, the latter is more likely to be victimized by overbilling schemes.