As a small business owner involved with several time-sensitive projects, you’re probably concerned about having enough cash flow to cover your overhead costs. Progress invoicing allows you to get the job done. To implement progress payments through online invoicing, there are some things you should be aware of.
What is Progress Billing?
Progress billing is a method in which regular payment invoices are sent to clients, requesting payment for the work completed up to date for a long-term project. A progress payment invoice is prepared and submitted to the client for payment during different stages in the process that occur in a large project.
Common in projects that have a long timeline, this type of billing allows the business to fund the project and pay themselves while the project goes on. It is a common billing type that is used for construction projects.
Progress Invoicing Explained: How Does it Work?
The purpose of using a progress invoice is to keep the business funded during major milestones that occur throughout a big project. For a progress payments process to work, the customer and contractor must contractually agree on a set of milestones that have an associated payment percentage. Once an agreement has been made, the work will begin.
Progress invoicing will use a to-date basis calculation that’s multiplied by the percentage of the project that’s completed by the total project price. A contractor will submit a progress payment request when it meets a milestone for the work that has been completed. Using these funds, the contractor can use them to begin the phase of construction and purchase goods and the necessary labor.
When a project has been completed successfully, the client can then make the final payment.
What is Included in Progress Payments?
Typical invoices do not have some of the items that are found in a progress payment invoice. This is because the way that progress billing payments are calculated is different. Here are some items that are included in a progress invoice statement:
- Total paid to date – This item line tells the customer how much they have paid to date in the project
- Total project amount – This number is the estimated cost of the project upon completion. For example, there could be incentives that are built into the project if the job is completed early or comes in under budget.
- Project completion percentage – This is the percentage of the project that’s complete and has been billed.
- Approved changes and subsequent adjusted price – This line item will have any approved change orders that affect the cost of the project as well as the price difference.
- Remaining balance – This is the amount that customer still owes on the project. This line item will include the current invoice balance, any outstanding or overdue invoices, and the balance that’s left.
Who Uses Progress Billing?
Progress invoicing is typically used by businesses that complete big projects that have a long timeline. By making progress payments, these businesses can continue to pay their employees and purchase goods or equipment that is necessary for the next phase of the project.
Industries that utilize progress invoicing
The sector that primarily uses progress payments is the construction sector. In this industry, construction businesses will hire specialized workers such as carpenters, masons, plumbers, and roofers to complete various stages of a project.
Some general contractors may also employ these workers. Using progress invoicing, these construction companies can keep up their payroll and buy necessary materials to continue the project.
Benefits of Progress Payments
Progress invoicing offers many benefits to vendors and customers that make it an ideal choice. Let’s talk about these benefits from a vendor and customer standpoint below.
Benefits for Vendors
Vendors benefit from progress billing by getting recurring payments in fixed increments that make it simple for contractors to manage the books. Contractors can budget for expenses and cover labor and material costs.
Using a progress invoice system also allows contractors to keep their debt levels low. Receiving a steady flow of funds while the project is in progress helps them avoid taking out a loan or getting into debt to pay for costs. Interest charges can eat up the revenue received on a project, affecting the bottom line.
If there are payment issues, it is easier to also identity when using progress billing. Vendors can go back and track the payments that should have come in and the amounts. Missed or incorrect payment amount issues can be avoided while making it easier to find and fix errors too.
If progress payments are not received, contractors can opt to stop work. This helps them avoid the risk of not being paid for completing an entire job. It can also help motivate the customer to ensure payments are made on time to ensure that the project is completed promptly.
Benefits for Customers
An advantage for the customers when progress billing is used is that it lowers their risk of poor quality work or the project being left incomplete by the contractors. Using progress payments, contractors who don’t complete the work as contractually described will not get paid.
Customers also don’t have to make an upfront payment for the entire project. Alternatively, the customer will pay a deposit for the work to get started. As the project progresses, funds are then disbursed.
Since contractors are incented to complete the project in a timely manner and can potentially earn incentives, they tend to work faster and produce higher quality outputs to maintain their contract.
Drawbacks of Progress Billing
There are some disadvantages of the progress invoicing for vendors and customers to be aware of as well. It’s a great invoicing system to use in many scenarios, but there are downsides.
Drawbacks for Vendors
Drawing up a contract and scheduling payments and milestones take up quite a bit of time. Since they have to get down to detailed information, down to the minutes, setting up a project can become time-consuming.
Progress payments require multiple billings throughout the project. That means there are more time and administrative resources that must be allocated when processing invoices like this.
With progress billing, the project stages and milestones must be clearly defined and agreed upon. Otherwise, it could be a source of conflict when there is a disagreement between how much work is completed during a milestone and how much is paid.
Drawbacks for Customers
Customers run the risk of being overbilled for milestones if they aren’t able to assess how the project is progressing. This is why customers should have someone that monitors the progress and ask for proof when a milestone has been completed to reduce overbilling.
How to Implement Progress Invoicing
Follow these 8 steps to ensure your implementation of progress billing is successful.
- Determine the schedule of values – This outlines the project tasks and their costs. Vendors and customers have a standard way to organize the tasks and stages when using a schedule of values.
- Create a payment schedule – Agree upon the frequency of payments, what project milestones trigger a payment, the milestone’s percentage, and each progress payment amount.
- Develop a contract – Draft a contract that covers details like the milestones, price, and project’s scope.
- Start the project – The contractor can now start working and meet the milestones during the timeline that was laid out on the contract.
- Submit invoice – After meeting a milestone, the contractor can issue an invoice for the portion of the work that has been completed.
- Review invoice – Completed by the customer or lender, the invoice is assessed for accuracy and expectations.
- Payment – The invoice payment is sent by the customer less any retainer amounts. The payment must occur by the due date to ensure that work does not cease.
- Project completion – The contractor will submit the final invoice once the project is complete. The customer will review the work and send the final payment.
Progress Payments Examples
Let’s look at a progress payment example to see how this type of invoicing looks like in action:
A business is looking to expand and add a new restaurant location. The customer reaches out to a contractor and they talk about the design and construction plan. The contractor creates a schedule of values for the customer to review. Both of these parties then agree on the costs, milestones, and other contractual items to begin the work.
The contract sends their first invoice at the first milestone which includes each detail that was on the schedule of value item during that stage. It also includes labor and material prices, amounts billed previously, amounts billed currently, percentage of completion, payment amount remaining, and retainage amounts for each item.
The customer or lender will then review the progress invoice and verify the work is complete, prior to sending payment.
How to Handle Cost Changes in Progress Billing
A common occurrence during these types of projects is the cost of an item change. The contract should state how cost changes are approved by the customer. Generally, the customer must sign or initiate a document that pertains to the specific changes being made.
Does your Business Need Progress Invoicing?
Progress payments are a good option when you are working on a long-term project that has a large budget. It’s a type of invoicing system that keeps the customer from having to fund the project upfront and allows the contractor to get paid at regular intervals. If your business is either looking to work with a contractor or happens to be one in this situation, progress billing could be a good fit.
Final Thoughts
Progress billing is an effective method of invoicing to use in a variety of situations. When implementing a progress invoicing system, it is important to be as detailed and accurate as possible. Both parties must also be in agreement with the terms outlined in the contract. A good progress billing system will help ensure the success of a project.
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