For businesses that engage in projects with long timelines and large budgets, it can be pretty difficult to identify the fairest way to invoice clients. On the one hand, clients don’t want to cut huge checks before any work has been completed. But from a vendor’s perspective, it can be difficult—if not impossible—to keep up with the overhead costs of completing a large-scale project without any cash coming in the door.
If you’re struggling with a billing method that meets the unique needs of your long-term project, an invoicing method known as progress billing could be just what you’re looking for.
What Is Progress Billing?
In the simplest terms, progress billing is the process of incrementally invoicing clients for a large-scale project based on the percentage of work that’s been completed.
A single progress invoice shows the original contract amount, any changes made to that total amount, the total balance paid to date, the percentage of work completed to date, the dollar amount currently due, and the total dollar amount outstanding for the project.
As various milestones in the total project are reached that indicate a certain percentage of work complete, the vendor issues a new invoice for that percentage of work. This process continues throughout the life of the project until the final 5-10% of the total balance, which are typically paid upon official project completion.
Reasons to Choose Progress Billing
In almost any project with a large budget and long timeline, progress billing is really a win-win billing alternative for both the vendor and for the customer. If you’re considering progress billing as an alternative to your business but aren’t sure how to sell the idea to your vendors or customers, here are a few benefits worth bringing up:
Benefits for Vendors
In most cases, projects with long timelines require a significant amount of overhead for the vendor, either in raw material costs or in payroll for personnel. With a progress billing cycle, your business gets paid as the work gets done, so you have a consistent flow of cash coming in right as you have to order more materials or issue payroll for the next phase of the job.
From a management perspective, progress billing can also be a great way of motivating your team—especially any freelancers or independent contractors. Simply put, if the work doesn’t get done, you don’t get paid… And if you don’t get paid, they don’t get paid. Knowing that their paycheck is directly tied to the result of their work will certainly get your crew moving in the right direction!
Benefits for Customers
While vendors are often the ones to initiate project billing as the invoicing method for a contract, the benefits to customers might be even bigger!
Traditionally, billing for long-term projects has always involved some amount of upfront payment—often a deposit of 50% upfront with 50% paid at completion of the job. But if your project has a budget in the six- or even seven-figure range, that can be a lot of cash to put down upfront, before you see any work getting done! By contrast, with progress billing you make small, continuous payments as the work gets done, so you have the opportunity to feel confident in the direction.
Another significant concern, especially in construction, is the idea that vendors on a large job might “take the money and run.” This could come up from a true con artist situation, or even because the vendor goes out of business. If the customer has paid for 50% of the project but the vendor only completes 10%, that’s a significant risk of capital loss on the project!
With progress billing in place, customers issue payments as the work gets done. So while losing a vendor would still be a significant blow to the customer’s project timeline, they would have the opportunity to continue the project with a new vendor, with minimal capital lost.
Finally, using the progress billing method incentivizes the vendor to finish the project as efficiently as possible. Because large-scale projects across industries notoriously take longer than initially projected, any incentive to finish quickly is always good news for the customer.
Industries That Benefit From Progress Billing
While progress billing is a new concept for many bookkeepers and even accountants, it’s been common practice in certain industries for a long time. Let’s look at a few types of work where progress billing could be the obvious best choice.
Progress billing will be most familiar to those with experience in any construction field. Land developers, general contractors, plumbers, painters, roofers, and others like them have all been using progress billing for years. In most cases, this billing method is a given in construction contracts.
The popularity of progress billing in construction stems first and foremost from the high cost of raw materials. Vendors have to order significant supplies in order to complete a job, and progress billing gives them enough cash flow to place those orders as needed. Further, the frequency of delays on construction jobs makes progress billing a great solution to providing peace of mind for both the client and the vendor that the job will get done.
Aerospace & Defense Industries
Another industry with significant experience in progress building is the field of aerospace and defense. Similar to construction projects, aerospace and large-scale defense projects typically have huge budgets—usually in the millions of dollars—and require several years to complete. It would be impossible to simplify these behemoth projects into clear-cut billing cycles, so progress billing is the natural solution for both vendor and customer.
Within these fields in particular, it’s essential that project managers confer with the customer on the frequency of billing as well as the milestones that signal progress in the project. And while construction jobs are often billed in increments of 5-10% of work complete, aerospace and defense projects could be incrementally billed as closely as 1% at a time.
Web Development & Design
While web development—along with other large scale digital projects—don’t involve the same high cost of raw materials as construction and aerospace, these digital industries do share the challenge of long project timelines.
Larger scale application development or website design projects can take several months or even years to complete, often with unclear goals or requirements from the client in the initial phase of the project. Progress billing allows revenue for the project to be consistent and adjust with the goals of the work, while allowing room for flexibility in the exact timeline of work as well as the ability to change the scope and total size of the contract along the way.
Any Industry With Long Production Cycles
Although progress billing might be a relatively new concept in some industries, it’s an option worth considering for any industry with large budgets and long project timelines. So even if progress billing hasn’t historically been the norm in your industry, don’t rule it out as an alternative accounting method.
Progress Billing Step By Step
Once you’ve determined that progress billing is the right choice for your business, there are certain steps you’ll need to follow in order to negotiate, set up, and bill your project according to progress billing standards.
Remember that implementing this process could be challenging in the beginning—but as you move on to new projects and everyone gets used to the progress billing process, you might actually come to prefer this method! Let’s review each step involved in your first progress billing project:
1. Negotiating the Initial Contract
If you’re new to progress billing or it isn’t commonplace in your industry, you’ll want to negotiate for this billing method as part of your initial contract for a project. Both the vendor and the customer should agree on the frequency of billing, the milestones for completion of the project, and other basic billing terms.
For industries where progress billing isn’t the norm, you’ll need to explain the practice and how it works in order to include this as a term of your contract. Once you explain the benefits, it’s likely that your customer or vendor will agree!
2. Creating a Progress Timeline
In order to know when you’ll be paid through a progress billing system, you’ll need a timeline for the project. Break down your project into the various steps from start to completion, and identify the materials, information, and time required for each step.
For example, let’s lay out what a typical progress timeline might look like for the design and build-out of a new website:
Step One: Come up with an initial concept and design idea for the site and gain approval from the customer.
Step Two: Create the basic framework of all the pages to be included in the website, add placeholder pages for each, and create the pathways that direct how users navigate between pages.
Step Three: Add in the content and graphic components for each page. This would likely be the most extensive phase, as the team needs to develop individual graphic components, write copy for various areas of the site, or build the code for various complex animations or other special components.
Step Four: Submit the website for approval from the client and implement any revisions the client may have.
3. Identifying Progress Milestones
In progress billing, the timeline of your project is broken down into percentages of completion. When 15% of the project is complete, the client pays 15% of the total contract amount, and so on.
As your project timeline unfolds, and through your own past experience, you’ll be able to break down the various steps in the timeline into percentages of completion for the entire project. These percentages will be important for identifying your progress milestones, which then translate into the frequency that you get paid for your work.
For each percentage of completion, it can be helpful to identify a milestone that both the vendor and the client can verify and agree upon. For example, consider a construction project where a carpenter is installing new cabinets into a kitchen. Milestones along the project timeline might include when the framework for the cabinets is complete and on site, when the cabinet frames are installed, installing the cabinet doors, painting or staining the cabinets, and installing hardware.
Each milestone in the process translates to a percentage of the entire project, which initiates an invoice from the vendor to the client. By agreeing on these milestones from the beginning, you’ll reduce the amount of back-and-forth when invoices are issued about what constitutes 10, 20, or 30% of work complete.
4. Issuing Progress Invoices
For accountants or bookkeepers unfamiliar with progress billing, the most difficult part of this process will probably be the significant change in the elements and formatting of progress invoices.
While the exact formatting might differ based on your accounting program and your individual preferences, below are the basic elements that should be included on every progress invoice for a project.
Original Contract Amount
This is the total billable amount for the project, as agreed upon in the initial invoice.
Updated Contract Amount
If there have been any changes to the scope and budget of the project, the updated total should be reflected on the invoice here. When an updated contract amount exists, it’s a good idea to detail the scope changes and dates of client approval on the invoice itself.
Percentage of Work Completed to Date
This is the total percentage of the project completed based on the project manager’s most recent timeline. It should reflect the percentage of work verified as complete at the time the invoice is issued.
Balance Paid to Date
This reflects the dollar amount that’s already been paid toward the project total from previous invoices.
Current Outstanding Balance Due
This identifies the current outstanding balance using the following formula:
(Updated Contract Amount) x (Percentage Work Completed) – (Balance Paid to Date)
Total Project Balance Outstanding
This is the total amount that remains unpaid for the project, including the balance current invoice.
For Quickbooks users, there are plenty of easy video tutorials online detailing exactly how to issue progress invoices through the software. If you use a different accounting program or generate invoices manually, there could be additional calculations or formatting involved to properly create your progress invoice. Once you have a progress invoice template in place, it should be much easier to issue progress billing statements for subsequent projects.
5. Confirming Ongoing Completion of Work
The most common point of contention between vendors and customers in a progress billing set-up agreement is the completion of work. If the vendor and the client aren’t on the same page about the milestones that make up the varying degrees of work completion, the result can be an endless series of disputed invoices and delays in payment.
As a vendor, be sure that you’re checking the status of each project as it’s completed to ensure that the work is actually done before an invoice is issued. Promises of “it’ll be done this week” or “it’s done except this one piece” are a fast way to create animosity between vendor and customer. So assign someone on your management team to check work off as it is completed, and make sure the lines of communication between project managers and bookkeepers are consistent and clear.
6. Addressing Changes in Scope of Work
Another common issue in any large-scale project is continual changes in the scope of work requested by the client. Customers change their mind about a certain element, or want something bigger than was initially budgeted. Over time, these changing requirements can add up to huge disparities in the costs and time required to complete a project.
In order to keep your progress billing in line with the work actually being done for the client, it’s important that the project manager continues to update the project timeline, and stays in close contact with accounting personnel about costs and time estimates for the changing scope of work. To avoid disagreements over the costs of work or timeline of invoicing, the client should agree on the updated project timeline and progress billing milestones for the project before any additional work is completed.
7. Finalizing the Project
Any experienced project manager will tell you that it’s often the last 5-10% of a project that can take the longest to complete. Materials for a certain piece of the project get back-ordered, the client’s plans change, inspectors identify issues with the work, or rounds upon rounds of revisions need to be made.
For these reasons, it’s common in progress billing to include a clause in the contract that the final 10% of the contracted amount will be paid only when the entire contract is declared complete by all parties, and all required fixes or revisions have been made. This gives the customer peace of mind that the vendor will not disappear leaving an unfinished project in their wake.
At the same time, most vendors are familiar with the endless cycle of “just one more change” that a customer might request, infinitely delaying the completion of the project.
To minimize these ongoing delays, you could include a clause in your contract outlining how many subjective revisions (i.e. change requests that are not issued by an inspector or other neutral third party) are allowed. In this clause, include the itemized rates for additional revisions after the project is declared complete.
For accountants with experience in relatively straightforward billing for projects with short production cycles, progress billing can feel unnecessarily complicated or even overwhelming. But for those who have experienced the challenge of covering expenses while working on a long-term project, it’s easy to see why progress billing is an ideal solution for maintaining positive cash flow.
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from Fundera Ledger https://www.fundera.com/blog/2016/01/20/progress-billing/