The rundown on progress billing invoices
Wondering about progress billing and whether it is an option for your business? Progress billing allows many industries to send progress invoices and create a payment schedule that compliments the progression and completion of the project for various stages and clients. In this article, we will discuss how it works and why so many businesses prefer to invoice their customers this way.
What is progress billing?
Progress billing is an invoice payment schedule that outlines the terms of payment and installments over a period of time, usually used in the construction industry. Progress billing occurs incrementally and is usually used for long-term projects or large-scale construction projects to bill at certain project milestones instead of all at once at the completion of the project.
Often progress billing is based on payment schedules known in the industry as a schedule of values which refers to the project completion percentage roadmap and how that will be measured from start to finish. It is a legal document that lays out both the cost and value of work, raw materials, product, labor, and more required for the entire project.
For example, a contractor may choose to bill their clients at stages such as:
- When work begins
- A specific project task
- The purchase of expensive, custom, or general raw materials
- Payment schedules based on a percentage of completion of the project
- Project completion or schedule of values (SOV)
Who uses progress billings?
Progress billing, sometimes known as automatic bill payments, is sometimes used in other industries but predominantly in trade services and construction projects. Many roofers, plumbers, general contractors, painters, electricians, carpenters, and builders use progress billing as their preferred payment schedule. The costs of raw materials, labor, and delay in construction are one reason this industry uses progress payments.
This technology is also utilized to support engineering projects, especially in the aerospace and defense sectors, in the belief they typically require massive budgets with projects that can span years in construction. Many of these industries with various project stages or long-term projects use progress billing to help track the progress and approval of various stages. It protects both clients and contractors to sign an agreement, or schedule of values, every time they pay.
How does progress billing work?
The progress billing process is slightly different from your typical invoice payment since progress billable accounts require some supplementary information which cannot be found in typical invoices. Instead of sending a one-off invoice, these are sent as installment payments as a project progresses or on a specific timeline. Like lump-sum invoices, the amount of payment due can still differ from invoice to invoice but they are generally set out ahead of time and agreed upon with the client. Clients are expected to settle up on unpaid invoices and outstanding balances before work continues.
These can be a breeze to implement with invoice templates and software which can help you keep track of multiple payment methods over time and subtract them from the total sum of money.
Here are some common terms you might see on invoices for progress billings.
Total payment: Total payment typically refers to the total of what customers have paid for the project so far.
Project completion percentages: Project completion percentages indicate the number of completed works and the cost to be paid.
Appointed changes and subsequent adjustments to prices: These include the approval of any modifications to the project and the price differential.
What are the benefits of the progress billing process for the construction industry?
Many businesses, companies, and general contractors swear by this invoicing method because it reduces risk and gets their money to them sooner. Through Progress Billing, project owners, contractors, subcontractors, and other partners have a common understanding of scope, milestones, and payment plans.
Many common pain points of long-term projects are found as a project progresses, which can be resolved by implementing progress billing. For example, more and more money, work, and time has been sunk into the project, including expenses for raw materials, other businesses, products, or employees they might have to pay for.
Giving both the client and the contractor a chance to settle up thus far, sending a progress invoice helps both parties feel secure with the work completed and having the balance paid. It also offers an incentive for the worker or company, such as the completion of work earlier or on budget. If the client, for example, is unsatisfied with the work, this also gives them a check-in point to object and withhold payment rather than at the end of the final payment. This also serves as a check-in on financial management, giving the client an idea of how much the overall project is turning out to cost and whether they can indulge in the fancier faucet system or if they should cut back on the velour cushions for their new breakfast nook.
As a contractor, this acts as a safeguard so you can have the balance paid to date rather than sinking more costs into the project and then chasing your client for payment while taking out the cost, which often comes out of your own pocket.
Special considerations: Factoring in cost changes
As you know, life happens.
Naturally, the cost of a project may be subject to change over time. Whether unforeseen costs were left out or caused by a lack of planning or other typical cost overruns occur, it is a good idea to build a small safety net into your progress billing cash flow or contract.
This becomes a little more complicated with progress billing as the predetermined agreement specifies the way the client approves the price change, and the customer must sign/initialize the document to indicate that particular changes will be made or modified. Typical cost overruns may also occur – so some contractors who use progress billing choose to incorporate a small allowance clause whereby a small percentage is considered a price allowance to allow for higher prices. Of course, these changes should fall within reason, and the cost allowance should be laid out in your terms as with the contractor.
When to use progress billing vs. other payment methods?
While progress billings certainly provide more security than other payment methods when it comes to payment schedules, it also creates a more regimented budget and delivery schedule. Without accounting for unforeseen costs, you can end up locking yourself into a tight project timeline. Progress billing can also end up backing you into a tough spot with your customers if you need to buff up your prices after work begins. Furthermore, it takes up a little more time to preplan your cash flow for the entire project and may not be necessary for all projects. While it can be useful to adopt progress billing for project milestones or an expensive large-scale or lengthy project, there are certain times it makes more sense for both the customer and you to send a lump-sum or scheduled invoice or implement recurring billing for example.
Progress billing vs. Recurring billing
In the larger picture. progress billing, like recurring billing is another invoicing method that lets you automate your billing to make it easier to collect payments. You can send it out to be paid just like a regular invoice, the only difference is that like recurring billing, there will be multiple iterations. The differences being the amount and the payment schedule.
Recurring billing let's you save your customer's payment details to their customer profile which you can then charge on a recurring date for an approved and agreed upon amount. For example, every month you might charge a customer $38 as part of their contract for an annual gym membership.
Progress billing amounts will vary depending on the scope and progression of a project or client agreement. Progress billing also requires approval through means of a contract, and payment is required to continue offering services or work on the project. Clients may see varying amounts charged for each invoice, but they should have a general idea based on the schedule of values laid out ahead of time.
The secret to freeing up cash flow & customer security
If your company or business is used to billing customers for large-scale projects or projects with a long timeline, like a construction company or contractor, it may be worth considering using progress billing to become more efficient. This type of billing gives customers manageable payments as the job progresses, rather than one large sum at the end, which can be difficult to pay all at once. It may also give customers a sense of security, knowing that they will not have to pay the entire balance upfront. Plus, as a benefit to you, it ensures you get your money sooner, which you can use to pay your employees and buy materials.