What is Progress Billing? Importance & How to Implement
June 24th, 2022
Researched and Written by: Russ Davidson
Progress billing is a new way of doing business. Instead of waiting to be paid at the end of a project, you can receive payments based on a payment schedule. This means receiving a paid invoice every week instead of once or twice per year.
Progress billing works by having clients pay their vendors on a set percentage basis each time a certain milestone is hit or a predetermined amount of time has passed. For example, if you’re collecting a percentage of the original contract price every time your business hits a certain completion percentage, then at the end of the project (when that bill would normally be first invoiced), you would be fully paid up.
This means that companies get paid quicker and more consistently for the work they complete. Likewise, businesses can pay down invoices at a quicker pace and have fewer liabilities in their construction accounting software, as they no longer have to wait for an official invoice to settle before they can pay.
What is Progress Billing?
Progress billing is a type of invoice that bills for work completed along the way of a lengthy project. Instead of invoicing at the completion of the project, progress billing occurs incrementally as the entire project advances. This billing method is used when companies want to keep track of their spending while they’re working on a project, or if there’s no clear end date for the project.
Primarily used for large-scale projects in the construction industry, progress billing is a way to reimburse a company for the work they have done. It allows you to track costs, payments, and work, and is an invaluable tool in project management and getting paid for the work that has been done.
Using a schedule of values, stakeholders on construction projects can list the value and cost of every billable work item on a step-by-step timeline and the percentage of work completed to date. This will provide insight into the total amount of money that has been spent so far, and how much remains to be spent. It also helps stakeholders track progress, identify issues early in the process, and adjust plans accordingly.
Most construction project management software will include construction invoice templates that project managers, general contractors, subcontractors, and independent contractors can take advantage of. These invoices will include line items for work to be performed, a contract amount, contractor’s certification, and more.
How Does Progress Billing Work?
Progress billing is a method of invoicing that is used to charge a client for work that has been completed. It works similarly to the way progress payments are applied in construction projects, where you pay your contractor as they complete different stages of the job.
You can use progress billing to charge clients for small jobs or long-term projects, large purchases and/or small ones. They are most commonly used by a construction company and found within construction contracts.
Main Sections of Progress Billing
Progress Invoicing: Create invoice documents that financial management obligations of the contractor, such as detailed labor and material costs. Display line items clearly along with other additional information. Create an accounts receivable structure that can incorporate partial payments based on a percentage of completion, project milestone dependencies, specific project dates, or project categories in terms of the type of work performed.
Change Orders: Affect payment application on a construction project via changes to the scope of work, or the work outlined in the contract. These change orders bring about adjustments to time and money, which is why it’s important to account for them during initial negotiations.
Project Management and Job Costing: Create alerts automatically when certain billing thresholds have been reached and pair it with completed tasks along the way. Identify individual job charges and pair them with line items.
AIA Billing: A standardized methodology of progress billing created by the American Institute of Architects via forms G-702 and G-703.
How to Implement Progress Billing
Progress billing offers a tremendous opportunity to improve cash flow, manage risk, and better meet customer demands. But if you don’t have the right tools, the management of progress billing and retainage can become overwhelming and inefficient.
Develop a clear and detailed scope of work: Include what the project will entail, how long it’ll take, who will be involved and what the final product should look like.
Develop a detailed work plan: Stay on track with your milestones and determine when each task needs to be completed within your project schedule to avoid falling behind or missing deadlines.
Develop a detailed payment schedule: Break down all charges into categories such as labor costs and equipment rentals (if any). Don’t forget about taxes! Be sure they’re calculated into every invoice so you don’t end up paying them out of pocket at the end of the year because they weren’t included in your progress billing invoices throughout the year.
Importance of Progress Billing
Progress billing is a process that allows you to charge your customers for work that has already been done, instead of waiting until the project is complete.
This is an important tool for small businesses and freelancers, who often don’t have enough capital to pay upfront for their projects. It’s also useful in industries where customers are not able to pay upfront, such as healthcare or construction.
Progress billing can help you improve cash flow, manage projects better and keep better track of all your resources throughout the project cycle. In addition, it helps with customer satisfaction by keeping them informed about how far along they are with their order or service request. This makes them more likely to recommend your business or refer new customers in the future.
There are a number of benefits associated with managing your progress billing through a program designed specifically for the task:
Allows you to track the amount of time spent on each task by individual employees. This ensures that everyone is working as hard as possible and it also allows you to allocate more resources when needed so that deadlines are met on time (or even earlier).
Helps businesses keep track of receivables so the business doesn’t lose money unnecessarily due to outstanding invoices. If someone isn’t paid within 30 days then there may be penalties or interest charges associated with this which can quickly add up to thousands of dollars per month.
Handle deposits and partial payments as components of a single project or work order, so that the relationship between all billings is clearly maintained.
Provides a consistent platform, rather than having salespeople or project managers work up their own manual invoices.
Provides a mechanism to handle % of work calculations and other financial computations, which can decrease accounting errors.
Offers a common platform, which can be more easily supported and trained on.
Provide tools to create, manage, and maintain contract documents.
Centralizes a repository of previous contracts and invoice documents, allowing for ongoing reporting and templating.
Who Uses Progress Billing?
Progress billing is a system where you bill your clients for the work that you have done. It’s very similar to traditional time and material contracts, except that instead of charging by the hour or per day, you are working on a project-by-project basis. You can do this for any type of project including:
Construction–building homes or new buildings
Engineering–designing roads and bridges
Architecture–designing houses and buildings
Within these industries, users of progress billing software capabilities may include:
General Contractors: Responsible for coordinating all aspects of a building project, they will coordinate with architects, engineers and subcontractors to ensure that their part in the billing process goes smoothly.
Subcontractors: Responsible for specific parts of projects such as plumbing or electrical wiring, they may require a constant flow of payments in order to keep their payroll consistent and ensure their staff are adequately compensated before, during, and after their jobs.
Developers: These decision-makers handle property acquisition and manage the construction project of a new real estate project. They can also be considered a general contractor, and will coordinate with architects, engineers, and subcontractors to execute project tasks and ensure project funding is established
Property owners, managers, investors, and management companies: These individuals are responsible for hiring the necessary contractors to develop or improve the property they own. They are responsible for paying their general contractor on time and may need to agree to specific progress invoicing during the initial planning stages.
Why Should A Company Adopt Progress Billing?
Progress Billing can help your company increase its cash flow and reduce risk. The reason for this is that it allows for better control of the billing process, which will, in turn, lead to increased profits and reduced disputes.
Here is a breakdown of each individual reason:
Increased cash flow: When you use progress billing, you’ll be able to charge customers as soon as they have been invoiced. This means that they will have less money tied up in their accounts receivable balance sheet item—which means more free cash available for other things! With a reduction in A/R balance sheets items comes an increase in available capital that can then be used to grow business operations or invest back into the business itself.
Reduces risk: Progress billings systems allow companies to invoice their customers when work is completed rather than waiting until everything has been finished before invoicing them—and this reduces risks associated with not being paid on time (or at all). This means there’s less chance of having clients default on payments due if there isn’t enough time between when services were delivered but not yet billed versus if everything was completed upfront before invoicing took place
Quicker receipt of payment, rather than postponing invoicing until project completion.
Greater flexibility for clients by allowing them to break lump sum payments into more manageable, periodic payments over the course of the project.
More direct funding of project costs, such as equipment, labor, and subcontractors during work-in-progress (WIP).
Protection against clients who may pay late or not at all, by limiting receivables exposure to a single phase of the project rather than the entire project as a whole.
Peace of mind for customers who want to make sure the job is finished properly before making final payment.
Increased flexibility in terms of allowing for scope changes.