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 portion 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 that 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. 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 a 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.

RELATED TERMS
  1. Capital Project

    A capital project is a long-term investment project designed ...
  2. Invoice Financing

    Invoice financing is a way for businesses to borrow money against ...
  3. Completion Bond

    A completion bond is a financial contract that ensures that a ...
  4. Total Project Approach

    The total project approach is a method used to evaluates potential ...
  5. Bill Of Sale

    A bill of sale is a formal document detailing in writing a sale ...
  6. Gross Profit Margin

    A gross profit margin is a financial metric used to assess financial ...
Related Articles
  1. IPF - Banking

    Procrastinator’s Guide to Bill Payment

    Learn how to avoid punishing late fees and keep your credit score intact with these 10 tips on paying your bills in a timely fashion.
  2. Personal Finance

    A project manager's qualifications and career path

    Learn about a project manager's job, the qualifications necessary for the position, and the most common careers for these professionals.
  3. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  4. Insurance

    20 Ways To Save On Medical Bills

    Handy tips to cut the cost of hospital bills, co-pays, prescription drugs and more.
  5. Personal Finance

    6 Ways Advisors Help Clients Manage Consumer Debt

    Here are six practical ways advisors can help clients manage their debt.
  6. Financial Advisor

    How to Construct an Annual Review for Clients

    One of the greatest value drivers advisors can provide to clients is an annual review of their financial situation. Here are some guidelines for conducting a well-considered review.
  7. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
  8. Small Business

    How Often Should You Contact Clients?

    Figuring out how often an investment advisor should contact clients is not easy.
  9. Investing

    Why Chip Stocks Will Keep Rising

    Chipmaker stocks could climb on back of a hefty 27% spike in North American billings for January.
RELATED FAQS
  1. Who uses bills of exchange?

    Find out who uses bills of exchange, why they are important in international trade and what happens when a bill is traded ... Read Answer >>
  2. What is the difference between work in progress and work in process?

    The terms "work in progress" and "work in process" are used interchangeably to refer to products midway through the manufacturing ... Read Answer >>
  3. How does product pricing affect gross profit and EBITDA?

    Learn how changes in product pricing can affect a company's revenue and profitability, including examples of this effect ... Read Answer >>
  4. How do gross profit and gross margin differ?

    Both gross profit and gross margin measure how profitable a company is during a given period, but each shows profitability ... Read Answer >>
  5. What are direct costs of sales?

    Direct cost of sales, or cost of goods sold (COGS), measures the amount of cash a company spends to produce a good or a service ... Read Answer >>
Trading Center