Blog Credit: Joseph Clancey, June 17, 2021 (Progress Billing Defined: Advantages & How to Implement | NetSuite)
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’s most often associated with the construction sector, the concept of incremental billing tied to progress milestones makes sense for a number of businesses.
Still, while it’s a straightforward concept, there are some nuances around execution that companies and customers should be aware of.
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What Is Progress Billing?
Progress billing is an invoicing method that provides for a regular payment cadence throughout a large-scale, long-term project. Companies bill customers on a predefined timeline based on completion of milestones.
The method is most commonly used in construction.
- Progress billing is a standard invoicing method for large, long-term projects that require ongoing funding for supplies and labor.
- Progress billing keeps project owners, general contractors, subcontractors and other stakeholders 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 with associated payment percentages, and work begins. Progress billing is calculated on a to-date basis 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 the customer is satisfied with the quality of the product, it makes the payment. The contractor can 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 that payments are accurate.
Total project amount: This is how much the project is estimated to cost upon completion. There may be incentives built in, for example, if the contractor completes the job early or under budget.
Total paid to date: The total paid to date is how much the customer has paid so far in the project.
Project completion percentage: The project completion percentage is how much of the project is complete and is billed.
Approved changes and subsequent adjusted price: Includes any approved change orders affecting the cost of the project, along with the price difference.
Remaining balance: The remaining balance is how much the customer still owes on the project. It includes the current invoice balance, the balance of work left and any outstanding and overdue invoices.
Who Uses Progress Billing?
Progress billing is helpful for any project that has defined stages and milestones toward completion. However, the steady cash flow and compatibility with long-term projects make it a 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 employ these specialists commonly employ incremental invoicing to keep up with the ongoing payroll and materials costs throughout construction projects.
Companies in the technology integration, aircraft and defense industries also use progress billing. Projects in these industries tend to have many complicated moving parts, and they can take years to complete. Using the schedule of values simplifies the invoicing process while 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 progress payment that clients hold in reserve as “insurance” of sorts against a contractor not finishing the job. Once the job is complete, the project owner makes the final payment for the work done and the retainage amounts.
Since it’s owed but not paid until the end of the project, contractors should account for this amount when determining payment schedules to ensure that the retainage percentage doesn’t hinder purchasing supplies or paying workers.
Progress Billing Benefits
Simplicity and transparency are among the most significant benefits that progress billing provides to both vendors and customers. However, there are some vendor-, customer- and industry-specific upsides to progress billing.
Paid as they go: Getting paid in defined increments makes financial management simpler for contractors, enabling them to budget for expenses and ensure that they have enough funds to cover materials, workers and subcontractors.
Keeps debt low: Contractors receive a steady influx of funds throughout the project, so there is less need to go into debt to pay for materials and labor. This factor is essential because interest payments eat into the bottom line.
Payment issues are easier to identify: Vendors can track when payments should come in and their amounts. That helps avoid missed or incorrect payments and makes it easier to find and fix discrepancies.
Can stop work if not paid: Receiving payment as work progresses also means that contractors avoid the risk of doing an entire job and not being paid. That motivates the customer to make regular payments to ensure timely completion of the project.
Low risk: Progress billing reduces project owners’ risk of shoddy work or contractors leaving projects incomplete. The contractor won’t receive payment for work not done to specification.
No upfront payment: Customers don’t have to pay a significant amount upfront. Instead, they pay a deposit to get work started and then disburse funds as the project progresses.
Faster work: Contractors have an incentive to complete projects promptly to ensure quick payment and, potentially, incentives. However, progress billing also discourages rushing that leads to subpar work because the contractor doesn’t receive payment until the customer deems the work acceptable.
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 on tasks being performed by multiple subcontractors and individuals. Progress billing helps companies in these industries track the hours worked by their laborers and subcontractors more precisely, ensuring that their pay is accurate.
Cost spreading: Progress billing is also helpful in these industries for spreading out the cost of expensive materials, equipment or tasks so that the customer or mortgage lender doesn’t incur these costs all at once. This can be a helpful selling point when bidding on contracts.
Progress Billing Challenges
Progress billing is an excellent invoicing method in many situations, but it has downsides for vendors, customers and the industry.
Time to set up the project: Preparing contracts, such as the schedule of payments and milestones, may be an enormous time-sink since they have to account for many minute details. It can also take a while to negotiate prices, milestones, retainage and other contract terms.
Multiple invoices: Contractors must bill the client multiple times throughout the project. This process is a bit more involved with progress billing, requiring additional time and administrative resources.
Disputes: Overbilling is one of the most frequent sources of conflict, but customers and contractors also commonly disagree about how to value milestones before the project starts and how much of the work is actually complete at invoicing intervals. Clearly defining project stages and milestones in the contract, while time consuming, can help companies avoid disputes like this.
Overbilling: Customers risk over paying if they cannot personally assess the project’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 each milestone to reduce overbilling risks.
The industries that most often use progress tend to be heavily regulated and must adhere to government and industry standards and are subject to local zoning and inspections. Contractors must incorporate these realities into the contract, project tasks and billing activities, further complicating the progress billing process.
Customers should predicate payments on local building inspectors and planning boards signing off at various stages.
How To Implement Progress Billing
There are eight essential steps to successfully implementing a progress billing-based project:
- Develop a schedule of values: The schedule of values outlines project tasks and their corresponding costs. In the construction industry, this breakdown is according to the 50 divisions of construction portion of the MasterFormat guide developed by the Construction Specifications Institute (CSI), with the contractor and client agreeing on an estimated value for each unit of division.A schedule of values provides vendors and customers with a standard way to organize project tasks and stages. It also makes it easier for contractors and clients to agree on the project’s scope, specific project milestones and payment terms.Contractors and clients may also compare estimated task costs with their actual costs. They can do this either at each payment iteration or at the end of the project. A schedule of values is a good arbiter of whether the project came over or under budget.
- Determine the payment schedule: The frequency of payments is another important aspect of progress billing. The contract should delineate the project milestones triggering payments, each milestone’s percentage and each progress payment amount.
- Draft the contract: The contractor and customer can now craft an agreement that details the project’s scope, milestones and price. These aspects must be well-thought-out and accurate as they form the basis for the agreement.
- Commence the project: The contractor performs the specified work within the agreed-on timeline to meet the milestones set out in the contract.
- Submit an invoice: Once the contractor meets a milestone, they apply the completed tasks as a percentage of the project and issue an invoice for the portion of their completed work.
- Customer review: The customer or lender reviews the invoice for accuracy. They also make sure that the work billed for meets expectations.
- Invoice payment: The customer sends the payment minus any retainage amounts. That should occur by the due date of the invoice to avoid work stoppage for non-payment.
- End the project: Once the project is complete, the contractor submits the final invoice. The customer does a final review of the work and sends the last payment, including any retainage amounts withheld.
Handling Cost Changes in Progress Billings
The length and complexity of typical progress billing projects make them prone to cost changes. 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 making change requests, the extent of allowable adjustments and how to handle changes in context of the progressive invoice. Typically, the customer has to sign a form detailing the changes and agreeing to costs before the contractor will proceed.
It’s also helpful for contractors to add cushions in their schedule of values estimates for expenses that are likely to fluctuate throughout the project to ease some financial uncertainty.
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 contractor discuss the design and construction plan, and the contractor then develops a schedule of values for the work. Both parties come together to agree to the prices, milestones and other contractual terms, and the work begins.
At the first milestone, laying the foundation, the contractor sends an invoice detailing every 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 billed work 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 of various 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 an individual company’s needs to ensure that it addresses the project’s exact circumstances.
Manage Progress Billing With Accounting Software
Progress billing is a reasonably simple concept, but it’s still possible for both contractors and 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 primary sources of miscalculations, inaccurate figures, outdated information and other errors.
A modern ERP solution automatically parses progress billing contracts and data from accounting, operations and other business areas to populate appropriate documents and invoices. The system keeps track of project progress, payment schedules and even 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 paying the correct amount at each iteration of invoicing.
When searching for a system to help with contracting, look for sophisticated analytics capabilities that can highlight opportunities for cost and time savings with customizable reports and graphics that provide detailed cost breakdowns, project completion percentages and other valuable insights. Look also for a financial management system that can simplify the progress billing process and optimize operations.
Clearly, construction accounting has some nuances, including not only progress billing but the need to track multiple jobs running concurrently and manage specialized methods for revenue recognition and tax reporting on projects that can last months or years. Receiving regular payments can help fund the finance expertise needed to keep the books straight.
Progress Billing FAQs
What is a progressive invoice?
With progress billing, a vendor submits fractional bills as they complete work. These progressive invoices are how a contractor requests iterative payment on a work project. Progressive invoices are submitted on an agreed schedule dictated by completion of specific milestones.
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 progress payment invoice once they pour the foundation, after framing, after installing the electric and plumbing infrastructure and so on.
What is progress billing in accounting?
For a builder’s accounting teams, progress billing is a tool for bringing in revenue during extended projects so that the books don’t become lopsided as expenses, such as materials and labor, are incurred. Without progress billing, there would be no offsetting income until the project closes. That hinders cash flow significantly, and many contractors can’t afford to wait months — or years for major projects — to recoup costs.
For a customer’s accounting team, progress billing means they don’t have to pay out a large amount upfront. That helps with cash flow. And, it offers protection against a contractor that fails to complete milestones or provide expected quality 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 a corresponding entry in the construction in progress (CIP) account. Generally, costs and progress payments are added to the P&L at a set timeframe, generally quarterly.