Progress billing is a way to manage invoicing in industries where projects may take months—even years — and cost hundreds of thousands or millions of dollars. While it’smost oftenassociated with the construction sector, the concept of incremental billing tied to progressmilestones makes sense for a number of businesses.
Still, while it's a straightforward concept, there are some nuances around execution thatcompanies and customers should be aware of.
What Is Progress Billing?
Progress billing is an invoicing method that provides for a regular payment cadencethroughout a large-scale, long-term project. Companies bill customers on a predefinedtimeline based on completion of milestones.
The method is most commonly used in construction.
Key Takeaways
- Progress billing is a standard invoicing method for large, long-term projects thatrequire ongoing funding for supplies and labor.
- Progress billing keeps project owners, general contractors, subcontractors and otherstakeholders on the same page about scope, milestones and payment.
- Cost changes and disputes are two of the top challenges.
Progress Billings Explained
The contractor and customer or lender contractually agree to a set of milestones withassociated payment percentages, and work begins. Progress billing is calculated on a to-datebasis by multiplying the project's percentage complete by the total project price.
As it meets milestones, the contractor submits an invoice for completed work. As long as thecustomer is satisfied with the quality of the product, it makes the payment. The contractorcan then fund the purchase of goods and labor for the next phase of construction.
Upon satisfactory completion of the project, customers sign off and make the final payment.
What Is Included in Progress Billings?
Progress billing invoices require some items not found on typical invoices to ensure thatpayments are accurate.
Total project amount: This is how much the project is estimated to cost uponcompletion. There may be incentives built in, for example, if the contractor completes thejob early or under budget.
Total paid to date: The total paid to date is how much the customer has paidso far in the project.
Project completion percentage: The project completion percentage is how muchof the project is complete and is billed.
Approved changes and subsequent adjusted price: Includes any approved changeorders affecting the cost of the project, along with the price difference.
Remaining balance: The remaining balance is how much the customer still oweson the project. It includes the current invoice balance, the balance of work left and anyoutstanding and overdue invoices.
Who Uses Progress Billing?
Progress billing is helpful for any project that has defined stages and milestones towardcompletion. However, the steady cash flow and compatibility with long-term projects make ita staple in some industries.
Which industries use progress billing?
Construction is the most common industry to use progress billing. Carpenters, masons,electricians, painters, plumbers and roofers as well as the general contractors that employthese specialists commonly employ incremental invoicing to keep up with the ongoing payroll andmaterials costs throughout construction projects.
Companies in the technology integration, aircraft and defense industries also use progressbilling. Projects in these industries tend to have many complicated moving parts, and theycan take years to complete. Using the schedule of values simplifies the invoicing processwhile ensuring that every project task has financial accountability.
How Does Retainage Impact Progress Billing?
Retainage is the small amount, typically 5% to 10% of the payment amount of each progresspayment that clients hold in reserve as "insurance" of sorts against a contractor notfinishing the job. Once the job is complete, the project owner makes the final payment forthe work done and the retainage amounts.
Since it's owed but not paid until the end of the project, contractors should account forthis amount when determining payment schedules to ensure that the retainage percentagedoesn't hinder purchasing supplies or paying workers.
Progress Billing Benefits
Simplicity and transparency are among the most significant benefits that progress billingprovides to both vendors and customers. However, there are some vendor-, customer- andindustry-specific upsides to progress billing.
Vendor advantages
Paid as they go: Getting paid in defined increments makes financial managementsimpler for contractors, enabling them to budget for expenses and ensure that they haveenough funds to cover materials, workers and subcontractors.
Keeps debt low: Contractors receive a steady influx of funds throughout theproject, so there is less need to go into debt to pay for materials and labor. This factoris essential because interest payments eat into the bottom line.
Payment issues are easier to identify: Vendors can track when paymentsshould come in and their amounts. That helps avoid missed or incorrect payments and makes iteasier to find and fix discrepancies.
Can stop work if not paid: Receiving payment as work progresses also meansthat contractors avoid the risk of doing an entire job and not being paid. That motivatesthe customer to make regular payments to ensure timely completion of the project.
Customer advantages
Low risk: Progress billing reduces project owners' risk of shoddy work orcontractors leaving projects incomplete. The contractor won't receive payment for work notdone to specification.
No upfront payment: Customers don't have to pay a significant amountupfront. Instead, they pay a deposit to get work started and then disburse funds as theproject progresses.
Faster work: Contractors have an incentive to complete projects promptly toensure quick payment and, potentially, incentives. However, progress billing alsodiscourages rushing that leads to subpar work because the contractor doesn't receive paymentuntil the customer deems the work acceptable.
Industry advantages
Progress billing has particular advantages over other types of invoicing in the construction,technology and aerospace/defense industries.
Cost tracking: These projects are usually complex, lengthy and depend ontasks being performed by multiple subcontractors and individuals. Progress billing helpscompanies in these industries track the hours worked by their laborers andsubcontractors more precisely, ensuring that their pay is accurate.
Cost spreading: Progress billing is also helpful in these industries forspreading out the cost of expensive materials, equipment or tasks so that the customer ormortgage lender doesn't incur these costs all at once. This can be a helpful selling pointwhen bidding on contracts.
Progress Billing Challenges
Progress billing is an excellent invoicing method in many situations, but it has downsidesfor vendors, customers and the industry.
Vendor challenges
Time to set up the project: Preparing contracts, such as the schedule ofpayments and milestones, may be an enormous time-sink since they have to account for manyminute details. It can also take a while to negotiate prices, milestones, retainage and other contract terms.
Multiple invoices: Contractors must bill the client multiple timesthroughout the project. This process is a bit more involved with progress billing, requiringadditional time and administrative resources.
Disputes: Overbilling is one of the most frequent sources of conflict, butcustomers and contractors also commonly disagree about how to value milestones before theproject starts and how much of the work is actually complete at invoicing intervals. Clearlydefining project stages and milestones in the contract, while time consuming, can helpcompanies avoid disputes like this.
Customer challenges
Overbilling: Customers risk over paying if they cannot personally assess theproject's progression. Customers, or an expert from their mortgage lenders if applicable,should monitor work on-site whenever possible and request proof of completion for eachmilestone to reduce overbilling risks.
Industry challenges
The industries that most often use progress tend to be heavily regulated and must adhere togovernment and industry standards and are subject to local zoning and inspections.Contractors must incorporate these realities into the contract, project tasks and billingactivities, further complicating the progress billing process.
Customers should predicate payments on local building inspectors and planning boards signingoff at various stages.
How To Implement Progress Billing
There are eight essential steps to successfully implementing a progress billing-basedproject:
Develop a schedule of values: The schedule of valuesoutlines project tasks and their corresponding costs. In the constructionindustry, this breakdown is according to the 50 divisions of constructionportion of the MasterFormat guide developedby the Construction Specifications Institute (CSI), with the contractor andclient agreeing on an estimated value for each unit of division.
A schedule of values provides vendors and customers with a standard way toorganize project tasks and stages. It also makes it easier for contractorsand clients to agree on the project's scope, specific project milestones andpayment terms.
Contractors and clients may also compare estimated task costs with theiractual costs. They can do this either at each payment iteration or at theend of the project. A schedule of values is a good arbiter of whether theproject came over or under budget.
Determine the payment schedule: The frequency of payments isanother important aspect of progress billing. The contract should delineatethe project milestones triggering payments, each milestone's percentage andeach progress payment amount.
Draft the contract: The contractor and customer can nowcraft an agreement that details the project's scope, milestones and price.These aspects must be well-thought-out and accurate as they form the basisfor the agreement.
Commence the project: The contractor performs the specifiedwork within the agreed-on timeline to meet the milestones set out in thecontract.
Submit an invoice: Once the contractor meets a milestone,they apply the completed tasks as a percentage of the project and issue aninvoice for the portion of their completed work.
Customer review: The customer or lender reviews theinvoice for accuracy. They also make sure that the work billed formeets expectations.
Invoice payment: The customer sends the payment minus anyretainage amounts. That should occur by the due date of the invoice to avoidwork stoppage for non-payment.
End the project: Once the project is complete, thecontractor submits the final invoice. The customer does a final review ofthe work and sends the last payment, including any retainage amountswithheld.
Handling Cost Changes in Progress Billings
The length and complexity of typical progress billing projects make them prone to costchanges. The most common reasons for making changes that result in additional costs are:
- Fluctuations in materials and labor prices
- New customer requests and change orders
- Construction or design errors
- Damage, theft or other loss
- Unforeseen regulatory challenges, such as demands by local inspectors
Avoiding costly missteps involves ensuring the contract stipulates the criteria for makingchange requests, the extent of allowable adjustments and how to handle changes in context ofthe progressive invoice. Typically, the customer has to sign a form detailing the changesand agreeing to costs before the contractor will proceed.
It's also helpful for contractors to add cushions in their schedule of values estimates forexpenses that are likely to fluctuate throughout the project to ease some financialuncertainty.
Progress Billing Examples
Here's how a progress invoice works in practice:
A company approaches a contractor to build a new office location. The customer and contractordiscuss the design and construction plan, and the contractor then develops a schedule ofvalues for the work. Both parties come together to agree to the prices, milestones and othercontractual terms, and the work begins.
At the first milestone, laying the foundation, the contractor sends an invoice detailingevery schedule of value item for that stage. That includes:
- Labor and material prices
- The amount billed previously
- The amount billed currently
- The percentage of completion
- The payment amount remaining
- Retainage amounts for each item
Once the customer or the mortgage lender reviews the invoice and verifies that the billedwork is complete, she sends the payment and sets the retained funds aside.
For projects that extend for a year or more, a graphical invoice that shows the progress ofvarious aspects of the project can provide more context for the prices and milestones.
This example gives companies a better idea of what a progress billing invoice looks like.However, it's important to note that any template or sample needs to be tailored to anindividual company's needs to ensure that it addresses the project's exact circ*mstances.
Manage Progress Billing With Accounting Software
Progress billing is a reasonably simple concept, but it's still possible for both contractorsand project owners to make mistakes in the percentages, payments or other important details.Manual entry of information within the software and on invoices is one of the primarysources of miscalculations, inaccurate figures, outdated information and other errors.
A modern ERP solution automatically parses progress billing contractsand data from accounting, operations and other business areas to populate appropriatedocuments and invoices. The system keeps track of project progress, payment schedules andeven retainage amounts. Invoices automatically send as stages mark as complete. This way,contractors can avoid under- and over-billing and clients can be sure that they're payingthe correct amount at each iteration of invoicing.
When searching for a system to help with contracting, look for sophisticated analyticscapabilities that can highlight opportunities for cost and time savings with customizablereports and graphics that provide detailed cost breakdowns, project completion percentagesand other valuable insights. Look also for a financial management system that can simplify theprogress billing process and optimize operations.
Clearly, construction accounting has some nuances, including not only progress billing butthe need to track multiple jobs running concurrently and manage specialized methods forrevenue recognition and tax reporting on projects that can last months or years. Receivingregular payments can help fund the finance expertise needed to keep the books straight.
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Progress Billing FAQs
What is a progressive invoice?
With progress billing, a vendor submits fractional bills as they complete work. Theseprogressive invoices are how a contractor requests iterative payment on a work project.Progressive invoices are submitted on an agreed schedule dictated by completion of specificmilestones.
What is a progress payment in construction?
In construction, contractors provide progress payments as they complete stages of a project.For example, a general contractor working on a new office park project may issue a progresspayment invoice once they pour the foundation, after framing, after installing the electricand plumbing infrastructure and so on.
What is progress billing in accounting?
For a builder’s accounting teams, progressbilling is a tool for bringing in revenue during extended projects so that the booksdon’tbecome lopsided as expenses, such as materials and labor, are incurred. Without progressbilling, there would be no offsetting income until the project closes. That hinders cashflow significantly, and many contractors can't afford to wait months — or years formajorprojects — to recoup costs.
For a customer’s accounting team, progress billing means they don’t have to payout a largeamount upfront. That helps with cash flow. And, it offersprotection against a contractor that fails to complete milestones or provide expectedquality levels, as progress payments may be held back.
Is progress billing an asset?
Contractors consider progress billing amounts as "contra assets" in that they offset acorresponding entry in the construction in progress (CIP) account. Generally, costs andprogress payments are added to the P&L at a set timeframe, generally quarterly.
