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 invoice shows the original contract amount, any approved changes, how much the client has paid to date, what percentage of the job has been completed to date, the current amount due, and the total amount outstanding that must be paid at the project's completion.
- Progress billings are invoices that are submitted for work completed to date on a lengthy project.
- They 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 alleviating the client of the burden of having to fund the project up front. The contractor also benefits because he gets paid at regular intervals and can also pay for expenses incurred during the project by invoicing at various stages.
Payments are based on a verified percentage of project completion, so they may be divided up as the project is going based on certain milestones set by one or both parties. The final, remaining balance is generally remitted to the contractor at the satisfaction of the client, once the project is completed.
Why Choose Progress Billing?
Progress billings are fairly common in a number of different industries including construction projects, especially large-scale ones that are expected to take a long time to complete. 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. Projects in these industries typically have tremendous budgets and can take years to complete. Progress billing is a natural solution.
Example of How Progress Billings Work
Once a client chooses the contractor, the two will negotiate the terms of the contract. This includes setting up 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 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 the following gross profit:
- (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.
Both 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.
Assume, for example, 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 1). 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.