The worst possible thing just happened. Your contractor client has informed you that the down market has gotten the better of him. He is moving to Hawaii to become a surf apprentice. He left his office unlocked and wishes you the best of luck in getting your money back. By the way, his accounting records aren’t very good….he apologizes for any inconvenience this may cause.
What do you do?
Your first reaction is probably to print out the accounts receivable and start making money come in the door. By calling on the receivables too quickly, you may be neglecting significant assets called “underbillings”.
What is an Underbilling?
In short, an underbilling (often referred to as “WIP”) represents the cost of services performed which have not been billed. Depending on the billing practices of your client, this amount can be significant.
How do I Determine this Amount?
The first thing to do is make sure to close every open accounting month at the company. All payroll and accounts payable invoices should be posted to a job. The posting of costs is crucial because the payroll and accounts payable modules will interface with a job costing module. It is the job costing module that will tell you how much money you’ve spent on each job.
Once you enter all the payables and payroll entries and post the costs to job cost, you need to find a report that tells you how much you have invested in each project. Additionally, you need to find a report that tells you how much you’ve billed on each project.
For jobs that have costs without the corresponding billing, you probably have an underbilled job.
What do I do with this Information?
After figuring out which projects are underbilled, you need to find the contract or purchase order under which you performed the work. Assuming the work is complete, you should execute a billing immediately. By billing the job, this asset is transferred from an underbilling to a receivable.
Now What?
Bring in the collections crew…you are ready to go to work.
How can Provident Real Estates Services Help?
Navigating the client’s accounting system will probably be more difficult than it sounds. Provident can assist by quickly deciphering the client’s operating systems, billing procedures, and accounting system.
For more information on managing distressed construction and real estate estates, contact Steve DeCleene at sdecleene@providentres.com or Scott Thistle at sthistle@providentres.com.
