A project is cash positive when the amount billed and collected to date exceeds the cost incurred to date; tracking this per phase, not just at project close, reveals problems while they're still fixable. A project can look profitable on the original proposal and still be quietly draining the firm's cash every week it runs, if billing has fallen behind the cost of delivering it.
Billed vs Incurred Cost, the Core Comparison
This is the same underlying logic construction accounting uses to track overbilling and underbilling, adapted to a design or engineering engagement. Construction accounting guidance from Deltek lays out the standard method: calculate percentage of completion by dividing total costs incurred to date by the revised estimated total cost, then compare the earned revenue implied by that percentage against what has actually been billed. A positive gap, more billed than earned, means the project is overbilled and cash is currently ahead of the work. A negative gap, more earned than billed, means the project is underbilled and the firm is financing work out of its own cash before invoicing for it.
The formula, applied at the project or phase level:
- Percentage of completion = costs incurred to date ÷ estimated total cost at completion
- Earned value = percentage of completion × total contract value
- Billing position = amount billed to date − earned value
A negative billing position means the project is underbilled, work has been done and cost has been incurred, but the invoice has not caught up. This is a cash flow problem even on a project that will eventually be fully profitable, because the firm is carrying the cost of that gap out of its own working capital in the meantime. Guidance from surety bond advisory firm Axcess Surety notes that underbillings show up on the balance sheet as an asset precisely because they represent real value the firm has delivered but not yet converted into cash. An asset on paper does not pay payroll.
Tracking It Per Phase Instead of at Close
The single biggest reason this calculation fails to catch problems in time is that most firms only run it, informally or not at all, when a project closes out. By then, an underbilling gap that opened up in month two has had the entire remaining project duration to compound.
Work in progress guidance from Beancount frames the discipline correctly: a WIP schedule built only from the accounting ledger misses what the project team already knows, so finance and delivery need to review the underbilling and overbilling position together on a regular cycle, not just at the end. Applied to a phased architecture or engineering engagement, this means running the billed versus incurred comparison at each phase boundary, schematic design closing out, design development wrapping up, rather than waiting for the whole project to finish. A phase level check catches an underbilling gap while there is still an entire phase of billing left to correct it in. A project level check at close only tells the firm what already happened.
This is also where the phase-to-invoice discipline covered in Milestone Billing for Architecture Firms: A Phase-by-Phase Guide pays off directly. A firm that already fires an invoice the moment a phase is marked complete has, by definition, a much smaller gap between earned value and billed value at any given point than a firm still relying on someone remembering to bill after the fact.
What to Do When a Project Turns Cash Negative
A project moving from cash positive to cash negative is a signal, not a verdict. The response should follow a consistent sequence rather than an improvised one:
- Update the cost to complete estimate first. Accounting guidance on WIP schedules is consistent on this point: the estimate needs to reflect current reality, not the original budget, since a stale estimate will misstate the billing position in either direction.
- Check for unbilled work that can be invoiced immediately. Often the fastest fix for a negative billing position is not a policy change, it is confirming that completed, billable work simply has not been converted into an invoice yet.
- Review the remaining billing schedule. If a project is structurally underbilled because of how the original phases were sequenced, the remaining phases may need a revised schedule that brings cash back in line with cost sooner, rather than assuming the gap will resolve itself by project close.
- Flag the project in the weekly portfolio review. A single underbilled project is a normal, correctable event. A pattern of projects turning underbilled at the same phase, repeatedly, is a signal that the firm's phase definitions or billing triggers need to be revisited, which is the portfolio level visibility problem covered in Why Project-Based Firms Lose Track of Receivables (and How to Stop It).
None of this requires treating every underbilled project as a crisis. It requires knowing which projects are underbilled while there is still a phase or two left to fix it, rather than finding out at close, which is the core argument behind the pillar article, How Do Engineering and Architecture Firms Avoid Missed Billing Triggers on Phased Projects?
Frequently Asked Questions
How do you know if a project is cash positive?
A project is cash positive when the amount billed and collected to date exceeds the cost incurred to date; tracking this per phase, not just at project close, reveals problems while they're still fixable.
What is the formula for underbilling on a project?
A standard formula is underbilling equals percentage of completion multiplied by contract value, minus the amount billed to date. If the result is positive, the firm has earned more than it has billed, meaning cash is funding work that has not yet been invoiced.
What should a firm do when a project turns cash negative?
When a project turns cash negative, the firm should update the estimate of cost to complete, confirm whether unbilled work can be invoiced immediately, and review whether the billing schedule for the remaining phases needs to be restructured so cash keeps pace with cost for the rest of the engagement.
