Progress billings are invoices requesting payment for work completed to date. These invoices are typically prepared and submitted for payment at different stages during the course of a major project.
This type of billing is common in lengthy projects. It allows the person billing—usually a contractor—to fund the project and themselves as the project progresses.
The progress billing invoice can include various details such as the original contract amount, the amount each client has paid to date, and what percentage of the job has been completed. However, progress billings may also incorporate other elements that both owners and contractors should understand and agree upon before work begins.
Key Takeaways
- Progress billings are invoices submitted for work completed to date on an ongoing project.
- They are primarily used for long-term projects that often come with substantial budgets.
- Common industries for progress billings include construction and aerospace, as well as defense.
Understanding Progress Billings
Progress billings enable contractors to bill their clients incrementally as the project advances. For these billings to be effective, the client and contractor must agree on a payment schedule detailing when invoices will be submitted for payment.
They are particularly useful for long-term projects that often come with large budgets. Progress billings relieve clients from the burden of funding the entire project upfront. Meanwhile, contractors receive regular payments allowing them to cover expenses such as raw materials and other costs as the project proceeds.
Payments are based on a verified percentage of project completion, often divided according to specific milestones. The final balance is generally paid to the contractor upon project completion, subject to client satisfaction.
What’s Included in Progress Billings
Progress billings contain more comprehensive financial information compared to standard invoices. Some of these details include:
- The total contract amount due for the project
- Any approved changes along with the adjusted amount owed
- The total amount billed to date
- The current completion percentage of the project
- The remaining balance owed at project completion
Schedule of Values
Progress billings often include a “schedule of values,” which outlines costs or values for each of the project’s tasks. This schedule is especially common in the construction industry, where project phases and costs are collaboratively determined by owners and contractors.
This schedule assigns a value to each phase and establishes the completion percentage as work progresses. It serves as a transparent breakdown of financial details, helping determine whether there were cost overruns or if the project remained within budget. This transparency protects construction companies both legally and financially by having everything documented.
Percentage Retained
In some projects, the owner might withhold a specific amount or percentage until the project’s completion. This retained amount can be between 5% to 10% of the project’s total cost. This reserve is a safeguard against potential issues during the project. However, this retention can cause cash flow problems for construction companies, necessitating early agreement on the retainage terms.
Who Uses Progress Billings?
Progress billings are prevalent across various industries including construction. Different professions like roofers, plumbers, general contractors, painters, and electricians often utilize progress billings to manage the cost of raw materials, labor, and potential delays.
Progress billings are also used in the aerospace and defense industries owing to their substantial budgets and extended project timelines, making incremental billing a natural solution.
Special Considerations: Factoring in Cost Changes
Given the complexity and scale of many projects, changes in costs are common. Contract details should outline how clients approve such changes, usually involving signed acknowledgment of specific amendments.
Common reasons for cost changes include alterations in project scope, unforeseen damages such as termites or mold, design errors, or price fluctuations in labor and materials over extended periods.
Contractors often include a price allowance to accommodate for such unforeseen changes. It’s crucial for owners and contractors to discuss extent and terms of these allowances upfront.
An Inspirational Example of Progress Billings
After selecting a contractor, clients and contractors negotiate the contract terms, including a payment schedule tied to specific milestones.
Assume DEF Construction agrees to build an office building for $2 million over a two-year period, with a projected profit of $800,000.
- Total Project Costs = $1,200,000
- Total Profits = $800,000
Year One
- 50% of the project completes.
- DEF bills the client $1,000,000 (50% x $2,000,000).
- The company records a profit of $400,000 in year one (50% x $800,000 total profit).
Year Two
- 100% project completion.
- DEF bills the remaining $1,000,000 (50% x $2,000,000).
- The company records a profit of $400,000 in year two (50% x $800,000 total profit).
Related Terms: Invoice, Schedule of Values, Percentage Retained, Cost Overrun.
