Upon completion of his fellowship at the American Film Institute, Underwood began working as a staff Director for Barr films, a company specializing in the production of educational films. Underwood directed over one hundred short films, including an adaptation of the Kurt Vonnegut short story, "Deer in the Works", starring Dennis Dugan. While directing and producing short films for the educational market, Underwood pursued work in the motion picture industry. One of the first movies Underwood worked on was Futureworld (1976) as a production assistant. The film starred Blythe Danner and Peter Fonda, actors he would later direct in 2004. During the filming of Futureworld, one of his tasks was to babysit a young Gwyneth Paltrow. Soon after Underwood served as the location manager on the Peter Hyams directed motion picture, Capricorn One (1978). Another early job was acting as an assistant Director to first-time Director David Schmoeller on Tourist Trap, a low-budget horror film. After this he continued to direct and produce educational films for the next seven years. In 1986 Underwood established himself as a Director when his animated special The Mouse and the Motorcycle won a Peabody Award, which was followed two years later by the sequel Runaway Ralph, for which he received a Daytime Emmy nomination.

Following his critically acclaimed venture into television, Underwood decided to have a go at directing feature films. His first effort was Tremors starring Kevin Bacon, Fred Ward and Reba McEntire in her acting debut. Written by his friends Brent Maddock & S. S. Wilson, it was released by Universal Studios in 1990. The film was well received by the critics and later established itself as a cult classic.

Underwood received his first taste of commercial success with 1991's City Slickers, which starred Billy Crystal, Daniel Stern and Jack Palance, who won an Academy Award for his performance. The film made $179m worldwide with a budget of only $27m. It was the tenth most successful film released in 1991 (the fifth most successful in the US). His next film, also written by Brent Maddock & S. S. Wilson, Heart and Souls (1993), was again well-received by critics but struggled at the box office (making a total of $16m in the US). It starred Robert Downey, Jr., Charles Grodin, Tom Sizemore, Kyra Sedgwick, Elisabeth Shue and Alfre Woodard. He followed this with Speechless (1994), written by Robert King and starring Michael Keaton and Geena Davis.

Given the opportunity to direct a big-budget film by Walt Disney Pictures in 1998, he was asked to direct Mighty Joe Young, a remake of the 1949 RKO film. The film, starring Charlize Theron in her first lead role, was nominated for the Academy Award for Visual Effects and featured some of the most sophisticated special effects seen in film up to that point, paving the way for later ape films like Peter Jackson's King Kong (2005). The special effects drove production costs to around $90m.

Underwood has returned to his roots, directing both low-budget films and television. He directed Stealing Sinatra (2003) for Showtime, for which william H. Macy received an Emmy nomination, Back When We Were Grownups (2004) for the Hallmark Hall of Fame which garnered star Blythe Danner nominations for the Golden Globe and the Emmy, and In the Mix (2005), starring R&B singer Usher, Chazz Palminteri and Emmanuelle Chriqui for Lions Gate Entertainment. He directed several holiday themed movies for television: The Year Without a Santa Claus, Holiday in Handcuffs, and Santa Baby. He has directed a number of episodic television dramas, including episodes of Monk, Boston Legal, Reaper, Ugly Betty, Heroes, Chaos, Grey's Anatomy, Burn Notice, Once Upon a Time, Desperate Housewives, Nashville, Scandal, Agents of S.H.I.E.L.D., Quantico and The Good Fight.