What Are Progress Billings?
Progress billings are invoices requesting payment for work completed to date. Progress billings are prepared and submitted for payment at different stages in the process of a major project.
This type of billing is common in projects that last a long time. It allows the person billing—usually a contractor—to fund the project and themselves as the project continues.
The progress billings invoice can include the original contract amount, the amount client has paid to date as well as what percentage of the job has been completed. However, progress billings can include other items that owners and contractors should understand and work out before work begins.
- Progress billings are invoices that are submitted for work completed to date on a lengthy project.
- Progress billings are primarily used for long-term projects that often come with large budgets.
- Progress billings are common for large-scale construction projects, and the aerospace and defense industries.
Understanding Progress Billings
Progress billings allow contractors to bill their clients incrementally as the project is in progress. For progress billings to work, the client and contractor must agree to a payment schedule when invoices will be submitted for payment.
They are useful for long-term projects that often come with large budgets. Progress billings prevent the client from having to fund the project upfront. The contractor also benefits by getting paid at regular intervals and can also pay for expenses such as raw materials during the project by invoicing at various stages.
Payments are based on a verified percentage of project completion. In other words, the payments might be divided up as the project progresses based on specific milestones set by one or both parties. The final, remaining balance is usually remitted to the contractor once the project has been completed, and the client is satisfied with the work.
What's Included in Progress Billings
The information included in progress billings is different from the typical invoicing practices of many companies. Some of the financial details might include:
- The total amount of the contract that's due for the project
- Any approved changes as well as the adjusted amount owed
- The total amount billed up to that point
- The current completion percentage for the project
- The remaining balance owed at the completion of the project
Schedule of Values
Progress billings includes a technique called the schedule of values, which outlines the different costs or values for each of the project's tasks. A schedule of values is common in the construction industry whereby owners and the contractors work together to determine how much will be spent on each phase of the project. During the progress billings process, a value is assigned to each phase as part of the schedule. Also, the completion percentage can be established for each phase as progress is made on the overall project.
The schedule of values also helps to determine whether there were cost overruns or the project came under budget. For example, the schedule of values would show what was paid for each task as well as the initial estimate. As a result, it can be determined at what point in the construction phase did the project exceed the estimated project cost.
Having a schedule of values included in the progress billings process helps contractors and owners develop a transparent process where all of the financial details are known upfront. It also protects construction companies legally and financially by having the estimates in writing so that there are no surprises at the completion of the project.
In some projects, a specific amount or percentage might be withheld by the owner until the completion of the project. The retention amount or retainage can be 5% to 10% of the total project or for each progress value. Essentially, the money is held in reserve in the event there are any issues during the project. A retainage also helps protect the owner in case the project isn't completed, the contract is followed properly, or if there are any issues with the contractor and the subcontractors. However, the retainage amount can create cash flow issues for the construction company. As a result, both the owner and contractor must come up with an agreed upon retainage amount early in the process.
Who Uses Progress Billings?
Progress billings are fairly common in a number of different industries including construction projects. Many roofers, plumbers, general contractors, painters, electricians, and plumbers will use progress billings as part of their businesses. The cost of raw materials, labor, and delays in construction are some reasons why the industry uses progress billings.
They are also used in aerospace and defense since these projects typically have tremendous budgets and can take years to complete. As a result, progress billing is a natural solution.
Both the client and contractor should sign a document each time a payment is remitted.
Special Considerations: 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. However, some cost overruns are unavoidable while others are due to a lack of planning. Some common cost overruns can include:
- Owner changes the scope of the project task or asks for additional work
- Unexpected damage to a project or building such as termites, mold, or water damage
- Design errors or poor project planning
- Price changes to labor or materials particularly if it's an extended project
Many contractors factor in a price allowance, such as small percentage that provides the ability to increase the price of the project. Owners should discuss with the contractor the extent of any price allowances.
Example of Progress Billings
Once a client chooses the contractor, the two will negotiate the terms of the contract. This process includes establishing a payment schedule or frequency of payment according to certain milestones agreed upon by both parties. Once the work begins, and the milestones are reached, the contractor can then start submitting invoices to the client.
Assume ABC Construction signs an agreement to build an office building for $1.6 million over a two-year period and that ABC’s profit is $600,000.
The total project costs and profit would be broken down as follows:
- $1,000,000 costs
- $600,00 in profits
- In year one, 40% of the project is complete
- The company bills the client $640,000 (40% x $1,600,000)
- The company records a profit of $240,000 in year one (40% x $600,000 in total profit).
- In year two, 100% of the project is complete
- The company bills the client the remaining 60% owed or $960,000 (60% x $1,600,000)
- The company records a profit of $360,000 in year two (60% x $600,000 in total profit).