What are 'Progress Billings'
Progress billings are a series of invoices prepared at different stages in the process of a major project to seek payment for the percentage of work that has been completed so far. A progress billing (invoice) shows the original contract amount and any client-approved changes to that amount. The billing also states how much the client has paid to date, what percentage of the job has been completed to date, the amount is currently due, and the total amount outstanding that must be paid at the project's completion.
BREAKING DOWN 'Progress Billings'In the construction business, the client that retains a firm to complete a large project does not want to pay for the entire job up front, because it is an expensive and time-consuming task with the potential for many financial miscalculations along the way. On the other hand, the construction company does not want to wait to be paid until the project is completed, as it needs to pay its employees and purchase materials as the project is carried out. A progress billings agreement meets the needs of both the construction company and the client by setting up payments at several stages during the process, and these payments are based on a verified percentage of project completion.
How Progress Billings Work
Assume that ABC Construction signs an agreement to build an office building for $1.6 million over a three-year period and that ABC’s profit is $600,000. In year one, the construction firm incurs $600,000 in costs (40% of the $1 million total cost), and completes 40% of the project. ABC recognizes gross profit of:
(40% x $600,000 total profit) = $240,000
It bills the client for 40% of the $1.6 million project’s price, or $640,000.
Factoring in Cost Changes
It is common for a project’s cost to change, given the total dollars involved and the complexity of the project. The building contract states how clients approve cost changes, and typically, a customer must initial or sign a document that indicates the specific changes.
Assume, for example, that the client approves $100,000 in additional costs in year two, which increases the total project’s cost to $1,100,000 and lowers the total profit to $500,000. At the end of year two, the project is 75% complete, and ABC’s new total gross profit is (75% x $500,000) or $375,000. The construction firm posted $240,000 gross profit in year one, so the gross profit recorded in year two is ($375,000 - $240,000), which equals $135,000. ABC can also bill the client another 35% of the project’s price (75% complete - 40% billed in year one). This example illustrates how the total amount of profit can change, but the dollar amount billed to the customer based on the project's rate of completion stays the same.