Billings in excess of costs is a contract liability that shows up on a contractor’s balance sheet when cumulative invoices to a customer run ahead of the revenue actually earned on the project. The abbreviation is BIEOC. If you’ve billed a client for 30% of a job but only completed 20% of the work, that 10% gap is the liability. You’ve collected (or earned the right to collect) money you haven’t yet earned through performance, and until the work catches up, the balance sits on your books as something you owe the customer in the form of future performance.
Why the Gap Exists
Long-term contracts create an unavoidable timing mismatch between the schedule on which you bill and the pace at which you actually complete work. Billing follows the contract: milestones, a pre-agreed schedule of values, or calendar dates. Revenue recognition follows accounting rules that tie earned revenue to measurable progress.
Under current U.S. GAAP (ASC Topic 606), the older “percentage-of-completion method” has been replaced by “over time” revenue recognition, though the mechanics are similar. A company recognizes revenue as it satisfies its performance obligations and measures progress using either input methods (such as costs incurred relative to total expected costs) or output methods (such as milestones achieved or units delivered).1FASB. ASU 2016-10 Revenue From Contracts With Customers Topic 606
A few recurring situations produce overbillings:
- Mobilization payments. Many contracts allow a large upfront payment to cover moving equipment and crews to the job site. On federal projects, the U.S. Army Corps of Engineers may pay up to 60% of the mobilization line item once the contractor arrives on site, well before most construction begins.2U.S. Army Corps of Engineers. Advanced Payment and Mobilization Costs
- Front-loaded schedules of values. Contractors sometimes allocate a larger share of profit and overhead to early-stage line items, generating higher billings in the first months when cash flow is tightest.
- Milestone-based billing. A contract might allow billing when a structural milestone is reached, even though total costs incurred haven’t caught up to the billed amount.
In each case, you’ve billed more than you’ve earned under the accounting rules. The excess stays on the balance sheet as a liability until additional work closes the gap.
A Worked Example
Say you sign a $5 million contract to build a warehouse, with monthly billing against a schedule of values. At the end of Month 3:
- Cumulative billings to customer: $1,500,000 (30% of contract)
- Cumulative costs incurred: $900,000
- Estimated total project costs: $4,000,000
- Percentage complete (cost-to-cost): $900,000 ÷ $4,000,000 = 22.5%
- Cumulative recognized revenue: 22.5% × $5,000,000 = $1,125,000
Billings in excess of costs is $1,500,000 minus $1,125,000, or $375,000. That $375,000 goes on the balance sheet as a contract liability. You’ve billed for work you haven’t performed yet, and you owe the customer that performance (or, in some circumstances, a refund). As costs accumulate, recognized revenue catches up, and by the time the job is complete, billings and recognized revenue both equal the full contract price. The liability zeroes out.
How It Sits on the Balance Sheet
BIEOC is a contract liability, and ASC 606 is specific about presentation. The most important rule is netting: calculate the net position for each individual contract. If a single contract has both overbilled and underbilled elements, only the net figure appears, as either a contract asset or a contract liability. Netting across different contracts is not permitted.1FASB. ASU 2016-10 Revenue From Contracts With Customers Topic 606
On a classified balance sheet, the portion expected to be earned within the next 12 months is current; anything tied to performance obligations beyond that window is noncurrent. Many construction companies classify the entire BIEOC balance as current because their normal operating cycle spans the full life of their contracts.
You’ll usually see the line labeled “Contract Liabilities” or “Deferred Revenue.” The footnotes carry the detail: opening and closing balances, how much revenue was recognized during the period from amounts that were contract liabilities at the start of the period, and significant changes in contract asset or liability balances. Those disclosures are where the real story about billing and performance lives.
Costs in Excess of Billings: the Mirror Account
Costs in excess of billings (CIEB) is the other side. It appears as a contract asset when you’ve recognized more revenue than you’ve billed. The work is done and the revenue is earned under ASC 606’s progress measurements, but something prevents invoicing yet, perhaps a contractual requirement that billing can’t occur until an inspection is passed or a deliverable is formally accepted.3SEC.gov. MasTec Inc Form 10-Q Quarterly Report September 30 2019
Flip the warehouse example: if you’d billed only $900,000 but recognized $1,125,000 in revenue, the $225,000 difference would be a contract asset. Both BIEOC and CIEB are temporary, both exist because of the timing gap, and a healthy portfolio typically carries a mix of both.
Tax Treatment of Overbillings
The IRS generally requires long-term contracts to use the percentage-of-completion method for taxable income. Section 460 of the Internal Revenue Code defines a long-term contract as one not completed within the tax year it begins, and it requires income to be recognized based on the ratio of costs incurred to estimated total contract costs.4Office of the Law Revision Counsel. 26 US Code 460 – Special Rules for Long-Term Contracts
The practical point: taxable income follows the cost-to-cost calculation, not the billing schedule. In the warehouse example, if you’ve billed $1.5 million but your cost-based progress supports only $1.125 million of income, you’re taxed on $1.125 million. The extra $375,000 you billed isn’t taxable income yet. The overbilling creates a financial reporting liability, and for the same reason, it doesn’t accelerate your tax bill.
Section 460 also includes a look-back provision. Once the contract is complete, you recalculate what income should have been recognized in each prior year using actual (rather than estimated) costs. If the estimates were off, you either owe interest to the IRS or receive an interest payment, depending on the direction of the error.4Office of the Law Revision Counsel. 26 US Code 460 – Special Rules for Long-Term Contracts
Job Borrowing: the Risk Behind the Number
The real-world danger of overbilling isn’t accounting. It’s cash. When you collect from an overbilled project, the money doesn’t sit in a segregated account. It goes into general operating funds, and contractors routinely use cash from overbilled jobs to cover costs on other projects, buy equipment, or meet payroll. This is “job borrowing,” and it’s one of the most common ways contractors get into serious trouble.
Job borrowing happens when the estimated costs to finish one contract exceed the remaining billings available on it, meaning you need cash from somewhere else to complete the work. The somewhere else is usually another project where billings are running ahead of costs. In moderation this is a normal part of managing portfolio cash flow. The problem is when it snowballs. A contractor that habitually overbills new projects to cover shortfalls on older ones creates a cycle that looks manageable until something breaks. If a major project hits unexpected costs or new work slows, the overbilling cushion disappears and the cash crunch can be sudden.
What Sureties and Lenders See
Surety underwriters and bank lenders both scrutinize BIEOC, but they’re looking for different things.
Surety Bonding
For contractors who need performance and payment bonds on public or large private projects, the BIEOC balance is one of the first things a surety underwriter examines. Large overbillings aren’t automatically a red flag, but the underwriter wants to see that the cash from those overbillings is actually on the balance sheet. If you show $2 million in overbillings but only $500,000 in liquid assets, the obvious question is where the money went.
The underwriter also evaluates working capital. You can carry significant overbillings and still maintain a strong bonding position if current assets comfortably exceed current liabilities. When overbillings push current liabilities up without a corresponding increase in liquid assets, bonding capacity shrinks. In the worst case, the surety concludes that job borrowing has eroded your ability to complete existing work, and the bond program gets restricted or pulled.
Bank Lending
Lenders focus on BIEOC for a related but distinct reason: it inflates current liabilities and can trigger covenant violations. Many commercial loan agreements require minimum financial ratios, such as a current ratio or a debt-to-equity ceiling. Because BIEOC is a current liability, a large balance pushes those ratios the wrong way.
A new project with front-loaded billing can spike your BIEOC balance in the early months, temporarily depressing the current ratio below a covenant threshold. That technical default may require renegotiation, potentially on less favorable terms. Experienced contractors build this into their billing strategy, sometimes slowing billings on new projects to keep ratios in compliance even when the contract allows billing more aggressively.
Reading the Balance as a Health Signal
A BIEOC balance by itself tells you very little. What matters is the trend, the size relative to the overall portfolio, and where the corresponding cash ended up.
A growing BIEOC balance might mean you’re winning new work with favorable billing terms, which is healthy. It might also mean you’re front-loading billings because you need cash, which is a warning sign. The distinction shows up in the relationship between overbillings and liquid assets. If both are growing together, you’re accumulating a cushion. If overbillings are growing while cash is flat or declining, the money is being consumed by operations or by underperforming projects.
Comparing BIEOC and CIEB across the portfolio is also revealing. A contractor with nearly every contract overbilled and almost none underbilled is either exceptionally good at negotiating billing terms or is systematically billing ahead of actual progress. A mix of both is normal and generally signals that billing and production cycles are being managed across projects at different stages. The balance sheet line gives you the number. The footnotes explain why it moved and how fast the company expects to convert those liabilities into earned revenue.