What Is Progress Billing?
Progress billing is the process of incrementally invoicing clients for a project. Progress billing is typically used for large, long-term projects, and it helps contractors maintain an adequate level of funding throughout the duration of the project. It shows the original contract amount, changes made to that total amount, the total balance already paid, the percentage of work completed, the amount currently due, and the total amount outstanding for the project.
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 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 to find 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.
Essentially, progress billing helps contractors get paid for work already completed during a long-term project. This process continues throughout the life of the project until the final 5% to 10% of the total balance, which is typically paid upon official project completion. It’s a sort of pay-as-you-go program.
Progress Billing: How to Do It
Implementing a progress billing process could be challenging in the beginning—but as you move on to new projects and both you and your clients get used to the process, you might actually come to prefer this method.
If you’re interested in progress billing, here’s how to implement the process:
1. Negotiate 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.
2. Create 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. Identify 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 completed work.
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 entire 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 of the current invoice.
“QuickBooks Online has a very efficient and easy-to-use progress billing feature,” says Billie Anne Grigg, a bookkeeper, certified QuickBooks ProAdvisor, and Fundera contributor. “Just enter the estimate for the job, and when you’re ready to bill you can choose what percentage of each line item on the estimate to include on the invoice. QuickBooks Online then does the heavy lifting for you, keeping track of what is left on the estimate for future invoicing.”
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. Confirm Ongoing Completion of Work
The most common point of contention between vendors and customers in a progress billing 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.
6. Address Changes in the 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 may want something bigger than was initially budgeted. Over time, these changing requirements can add up to huge disparities in the cost 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 cost 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% to 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 another neutral third party) are allowed. In this clause, include the itemized rates for additional revisions after the project is declared complete.
Why Would You Use Progress Billing?
In almost any project with a 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 mentioning:
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 while 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
Although 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 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 the project is going.
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 accountants, it’s been common practice in certain industries for a long time. It can be used in any industry with long timelines or large budgets, but let’s look at a few types of work where progress billing could be the obvious best choice.
Progress billing will probably 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 and provides peace of mind for both the client and the vendor that the job will get done.
Aerospace and Defense Industries
Another industry with significant experience in progress billing is the field of aerospace and defense. Similar to construction projects, aerospace and large-scale defense projects typically have huge budgets 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% to 10% of work completed, aerospace and defense projects could be incrementally billed as closely as 1% at a time.
Web Development and Design
While web development—along with other large-scale digital projects—doesn’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.
For accountants or CPAs 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.
Now that you know how progress billing works, try implementing it into your business’s next long-term project and see if the whole process runs more smoothly.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.