Progress Billings: Definition & Overview

KEY TAKEAWAYS

• Progress billings are invoices that request progress payments at incremental stages throughout the lifespan of a project.
• They are common forms of payment in the construction or contracting industry. This is because they often take on projects that take a long time to complete. 
• The costs for progress billings are beneficial to both the contracting parties and the clients. 

What Are Progress Billings?

Progress billings are invoices that request payment for any work that has been completed to date. Before projects begin, there will be a mutually agreed upon schedule for all progress billings that will be identified and set at the start of each project. The billings are prepared and submitted for payment at different stages in the process of a long-term project.  

This is a common form of billing in major projects that take a long time to complete. It means that the company who sends the invoices can fund the project as well as take some profits as the project moves forward. 

Progress billings are a common form of payment in the construction industry or contracting industry. This is because they often take on lengthy projects that take a long time to complete. 

Why Are Progress Billings Important?

Progress billings are a way to allow contractors to bill their clients incrementally while the project is in progress. For progress billings to work consistently, the client and the contractor must agree to a schedule of payments before the work begins. This payment schedule agreement would include when the invoices will be submitted for payment. 

They are very useful for long-term, extended projects that have a large budget for both parties. 

For contractors, there is compensation provided while working a project that allows the contracting company to provide dividends to individuals working on the project. It also allows them to use the funds received for various expenses such as raw materials. 
For clients, it allows them to spread out payments over time and avoid paying for a project all at one time. This improves cash flow for both parties.

What Is an Example of Progress Billings?

Let’s say that a client has hired Contractor X to work on a project in the construction sector. 

Once the choice has been made, the two parties will negotiate and agree on the terms of a contract. The contract terms establish a schedule of regular payments or a frequency of payments according to certain milestones being reached. 

Once the work begins, and the milestones are achieved, the contractor can start to submit invoices to the client. 

Let’s say that Contractor X signs an agreement to help with renovations of a small office building for $160,000 over a two-year period and the contractor’s expected profit is $60,000. 

So the total project cost and profit can be broken down as follows:

• Costs: $100,000
• Profits: $60,000

In the first year, 40% of the project is completed. Contractor X bills the client for 40% of the total price which amounts to $64,000. The contractor, therefore, records a profit of $24,000 in the first year, which is 40% of the total profit of $60,000.

In the second year, the renovations are 100% completed. Contractor X bills the client the remaining 60% owed which amounts to $96,000. Therefore, Contractor X records a profit of $36,000 in the second year. Which is the remaining 60% of the total profit of $60,000.

How Do You Account for Cost Changes In Progress Billings?

When a project has a long lifespan, it can be common for the cost of the project to change. This is even more so when there is a large amount of money involved and the project is complex. 

The contract that is signed by the client and the contractor will state how project owners can approve any change to the overall project costs. The client will typically sign or initial a change order to state that they have agreed to the change in price that will be included and billed for the final cost of the project. 

Some cost changes are unavoidable. While some others are due to a lack of planning on either the side of the client or the contractor. Some common cost overruns can include things such as:

• The scope of the project task is being changed by the client. 
• Additional work is being asked for.
• There is unexpected damage to a project.
• There are errors with the design or the project has been poorly planned.
• There have been price changes within the market that affect the cost of expensive materials.
• Price changes to labor if the project extends beyond the original time frame. 

What Is Included In Progress Billings?

A progress billing invoice can include:

• The total amount of money that has been agreed upon for the entirety of the project
• Any changes that have been previously approved, as well as the adjusted amount owed
• The total amount that has been billed up to that point in time
• How much of the project has been completed at the time of the invoice
• How much money is yet to be paid for when the project has been completed

How To Implement Progress Billings?

There are 7 steps that you will want to take in order to properly and securely implement a progress billing process. They are as follows:

1. Negotiate the terms of the initial contract
2. Create a timeline of expected progress
3. Identify the significant milestones of progress 
4. Decide between the two parties how progress invoices will be issued
5. Confirm and agree on the ongoing completion of work
6. Address any changes in the scope of the project
7. Finalize the project

Pros & Cons Of Progress Billings

Let’s take a look at a snapshot of some of the most important pros and cons of using progress billings.

Pros

• Contractors get paid as they go which assists in cash flow 
• Businesses can pay in segments rather than one lump sum
• Contractors can avoid going into debt as they are paid regularly
• Payment problems are easy to spot
• If a contractor isn’t being paid properly, they can stop working until they are compensated properly. 
• Regular review of payments and billings allows for problems to be addressed in a timely manner as the project progresses. Any concerns are addressed throughout the project rather than waiting until the end of the project, avoiding any larger misunderstandings. 

Cons

• It can take time to put together a contract that is agreeable to both parties
• Preparing regular billing can be time consuming for both parties 
• Disputes are common in a progress billing agreement

Summary

The progress billing process is a good solution for figuring out scheduled payments over a long period of time and for large projects that can cost millions of dollars. Especially when compared to the conventional billing process. 

They are beneficial to both the client and the contractor. As the person billing can earn a living whilst being committed to a long-term project. And the client can avoid having to pay for a project in a lump sum at the start, therefore helping to avoid cash flow and liquidity issues.