Many businesses undertake long-lasting projects with substantial budgets but struggle to find an effective way to invoice customers. Many clients hesitate to make significant payments before the work is completed, so how can your business handle the expenses for labor and raw materials before getting paid? The answer should be progress billing.
Let’s discover the progress billing definition and how it benefits customers and your business for large-scale and lengthy projects in this guide.
TABLE OF CONTENT
What is progress billing?
Progress billing is a method of invoice that bills customers/clients at each stage of the project along the way, with the invoice reflecting the amount of work that has been completed.
Billings on construction in progress refer to the incremental invoicing process used in the construction industry. Rather than billing clients at project completion, contractors invoice them gradually as the construction project advances. This method enhances cash flow, transparency, and efficiency for both contractors and clients throughout the payment process.
Billings on construction in progress, often aligned with the principles of progressive billing, refer to the incremental invoicing process used in the construction industry. Rather than billing clients at project completion, contractors invoice them gradually as the construction project advances. This method enhances cash flow, transparency, and efficiency for both contractors and clients throughout the payment process.
Read More: What Is An Overbilling In Construction?
Which industries benefit most from progress billings?
Progress billing is helpful for any project that has different stages and milestones toward completion. This method is usually used by companies in the technology integration, aircraft, and defense industries as well as the general contractors that have large-scale projects with many complicated moving parts taking years to complete.
However, progress billings is especially the most common in the construction industry, where projects could last for more than a year. By adopting progress billing, project owners, general contractors, subcontractors, and other stakeholders are on the same page about scope, milestones, and payment. The contractor and customers/clients or lenders contractually agree to a set of milestones with associated payment percentages before the work begins. Progress billing is determined on a to-date basis by multiplying the project’s percentage completed by the total project price.
Why progress billing is good for you
Progress billings can remove a huge amount of strain from your cash flow problems. Getting paid at regular intervals makes financial management simpler for you. You can pay for expenses such as raw materials and payroll during the project by invoicing at various stages. Adopt progress billing and payment for arrears in a few weeks allowing you to have working capital to invest in the phase of the project.
Why progress billings are good for your clients
Progress billing prevents the client from having to fund the project upon completion. If the total budget is hundreds of thousands of dollars, the deposit can be huge and many clients can be reluctant to pay it. Progress billing also reduces the potential risks of trading fraudulently since it’s that even well-run businesses can go bust if their market conditions suddenly worsen.
With process billing, your clients can make payments in bite-size chunks for work already completed which gives them a greater degree of confidence. Additionally, progress billing is a strong initiative for your business to push up the process of implementing the project as you don’t get paid until you reach the next milestone.
How to implement progress billings
Project billings are beneficial to protect both the customer and the contractor, it’s important to ensure the progress invoicing workflow is clear and solid from the outset. This will help prevent potential issues before they arise.
We’ll show 8 steps to set up progress billing.
Develop a schedule of values
The schedule of values outlines different costs or values for each of the project’s tasks. A schedule of value is common in the construction company whereby owners and contractors work together to determine how much will be spent on each phase and whether there were cost overruns or the project came under budget.
Having a schedule of values included in the progress billings process helps contractors and owners develop a transparent process where all of the financial detail is included upfront. A schedule of values is a good arbiter of whether the tasks are overrun or are under budget.
Determine the payment schedule
The contractor and owner must agree with the project milestones triggering payments, each milestone's percentage are corresponding with each process payment amount. This will involve breaking the project down into small and measurable steps to identify the labor, raw materials, and timeline for each step.
Draft the contract
Having agreed on the project timeline and the costs, the two parties can now craft an agreement that details information according to the project’s scope, milestones, and price, payment schedules, local state, or federal laws.
Commence the project
The contractor undertakes and performs the specified project within the agreed-on timeline to meet the milestones set out in the contract.
Submit an invoice
Once the contractor meets a milestone, the invoice for the portion of their completed work. This will be rather more detailed than conventional invoices, including the information as follow:
The total contract value (both as originally estimated and as updated, if changes have been made)
The percentage of work completed, including details of what has been done
The balance paid to date
The current outstanding balance
The balance remaining to be invoiced
It’s particularly important that the contractor must check that all work has been fully completed to the client’s satisfaction before billing.
Client review
The owner or lender reviews the invoice for accuracy to make sure the work billed for meets expectations.
Invoice payment
The owner sends the payment minus any retainage amounts by the due date of the invoice to avoid work stoppage for non-payment.
Read More: What is Progress invoicing?
End the project
When utilizing billings on construction in progress, the contractor submits the final invoice upon project completion. The customer conducts a thorough review of the project and proceeds with the last payments, ensuring that all stages of the project have been accounted for in the incremental invoicing process.
Progress billing is particularly important to keep your cash flow healthy while you are handling numerous expenses needed to complete the projects.
>> Read More: How to Create a Chart of Accounts for Construction Company and Contractor >> Read More: Building Trust with Accurate WIP Reporting
Looking for an Expert in Bookkeeping who knows the construction business? Contact the Irvine Bookkeeping team for the best help. Schedule a FREE consultation to find out how we can help reduce your financial stress by improving your construction cash flow management and invoicing process.
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