What is Progress Billing Software? Benefits, and Example

Amaey Anand

Senior Writer

Progress Billing

Many industries that operate through massive projects that involve millions of dollars and lengthy timeframes depend on progress billing for accounting. But what is progress billing?

Progress billing software is a type of invoicing used for long-term or expensive projects. In this type of invoicing, the contractor bills the client and is paid in phases. Each phase of billing is based on the progress of the project or the level of its completion.

This type of billing is essential for specific industries. It ensures smooth and transparent billing and protects both the contractor and the customer. Let us dive into the details of progress billing meaning, how it works, its benefits, and how you can implement it for your business.

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How Does Progress Billing Software Work?

For progress billing accounting, the client and the contractor decide on the invoice payment terms and conditions beforehand. They also decide on the phases or milestones for payment and the payment schedules. Before preparing an invoice, they also determine which items will be included in the invoice, the amount of retainage, possible cost increases, etc.

Based on their agreement, the contractor bills the client at fixed intervals. This type of invoicing system helps them get paid regularly. It also allows them to adjust for increases in labor or material costs. Customers also benefit as they don’t have to fund the project upfront. Progress billing is essential for projects with a long duration or large budgets.

Let us consider a progress billing sample. A POS machine manufacturer gets a contract to replace the old machines with new ones in 14,000 stores for a retail chain. The project is for a 2-year duration, with 3500 stores covered every six months. The retail chain pays them in four installments of 25% of the project value each.

What Is the Purpose of Progress Billing?

The purpose of progress billing is to make payment simpler and more transparent for certain types of projects.

These projects usually have large budgets or take a long time to be completed. Progress billings spread the payments throughout the work. Invoicing is done based on mutually agreed milestones in the project. The customer pays based on verified completion of these project milestones once satisfied with the work.

Progress Billing Purpose

As the progress billing sample in the above section shows, it is helpful for all stakeholders involved in such long-term and expensive projects. 

Key Benefits Of Progress Billing Software

Progress billing is ideal for specific industries and projects because it provides definite benefits. Transparency and convenience are two of the most obvious advantages. There are also particular benefits for contractors, customers, and the industries where it is used.

Benefits Of Progress Billing 

  1. Benefits for Contractors

    • They get paid regularly in defined installments. This feature makes financial management easier for them. They can budget accordingly and ensure they have enough funds to cover material and labor costs.
    • They are less dependent on credit and debt. Because they receive money regularly, contractors can pay their vendors regularly. They also don’t have to borrow large sums to cover costs. As interest on loans can reduce profits, this is a significant benefit for them.
    • They can identify payment issues quickly. As payments come in installments, they can track and check them. Doing so helps them avoid wrong or missed payments.
    • They avoid the risk of loss due to non-payment. Since the payments depend on stages of completion, they can stop work if they don’t get paid for a particular portion. They don’t run the risk of completing the whole job and then not getting paid. This possibility makes customers more prompt in paying regularly.
  2. Benefits for Customers

    • They don’t have to pay a large sum upfront. They can pay a sum as a deposit to get the work started and pay as they go. 
    • They face lower financial burdens. Since the payments are spread out, they get more time to procure funds for each payment. They also have to pay only for the completed portion of the work, so there is no need to pay extra.
    • They incur less risk of non-completion or poor work quality. As the payment depends on the actual percentage of completed work, contractors are less likely to leave the project incomplete or do poor-quality work to finish faster. Customers can withhold payment in such cases.
    • They can get work completed faster. Contractors can get paid more quickly if they complete work on time or before deadlines. Sometimes, they can also get incentives for early completion without compromising quality. Such incentives also motivate them to stick to the project schedule.
  3. Benefits for Specific Industries

    • Some industries cannot have one-time or upfront payments due to their nature. Such sectors include the construction industry, defense, technology, infrastructure, etc. Their work takes years and costs massive amounts, so breaking up the invoicing is the only solution.
    • Progress invoicing keeps money and resources circulating in these industries. Because of regular billing, payments don’t get blocked, and necessary resources are easily bought and sold.
    • It helps companies in these industries manage costs by tracking hours worked. Typically, the projects in these industries are complex, sometimes involving subcontractors. Keeping track of work done by labor and subcontractors allows companies to pay them accurately and on time.
    • It helps companies spread costs and improve viability. They don’t have to incur the charge of expensive material or equipment in one go, so their margins also improve.

What Is Included In Progress Billings?

A progress billing invoice is somewhat different from a regular invoice. It might contain many details that the customers and contractors agree on in advance. However, five key types of information are most frequently included in any progress billing invoice. These are:

  • The total amount due for the whole project.
  • The amount that has already been billed and paid.
  • Approved changes and the adjusted amount due.
  • The current proportion of project completion.
  • The balance to be paid at the end of the project.

The progress billing process might also include a schedule of values. The schedule of values is a technique that assigns separate costs or values to each of the project tasks or phases. This technique lets clients and contractors calculate the completion percentage of each step easily.

Including a schedule of values also helps gauge when and why budget overruns occur. As each phase has a distinct assigned value, contractors can find overspending quickly. It keeps the process transparent and protects contractors legally and financially.

Another element often included in progress billing is “Retainage“. Retainage is a small amount (typically 5% to 10% of the project value) the client holds back. The purpose is insurance in case of problems with the project’s completion. Contractors need to account for this amount when drawing up payment schedules.

How To Implement Progress Billings?

Since progress billing is essential for both the contractor and the client, it is necessary to have a robust billing workflow from the start. There are specific steps that you can follow and measures you can take to make the progress billing accounting more accurate.

8 Progress Billing Steps to Follow 

There are eight steps in the progress billing process that you need to follow:

Steps to Follow in Progress Billing

  1. Create a schedule of values

    The schedule provides the values of each project task and helps calculate costs accurately. Many industries have established values assigned to various tasks. Contractors and customers can use the schedule to decide on payment stages. They can also use it to check whether the project is completed within the budget.

  2. Decide on the payment schedule

    The two parties also need to decide on the frequency of payments. They can establish the project’s milestones, the percentage for each milestone, and the amount to be paid at each stage.

  3. Draft the agreement

    This legal contract contains all the relevant terms of the deal, like deadlines, milestones, costs, payment schedules, etc.

  4. Start the work

    Once the agreement is ready, the contractor starts work on the relevant phase of the project. However, this is not a single step. The contractor repeats this step and the following three steps for every project stage.

  5. Submit an invoice

    Once the milestone is reached, the contractor submits an invoice to the client. The invoice contains details like completion percentage, payment due, payment already made, etc.

  6. Customer Review

    The customer or client reviews the invoice to ensure all the details are accurate. They might even evaluate the project to decide if the completion percentage matches the invoice and if the quality is per expectations.

  7. Payment based on the invoice

    Once the customer is satisfied with the invoice and the project’s progress, they release the amount. If there is any retainage, they withhold that amount while paying. It is vital to complete the payment by the invoice’s due date to avoid delays or work stoppage.

  8. Complete the project

    This is the final step of the process. The contractor submits the final invoice when the last phase or milestone is complete. The customer does a final review before making the balance payment, including retainage.

Measures to Include for Accurate Invoicing

Although progress invoicing is not complicated, the projects it applies to are complex and lengthy. Manually adjusting for every change can be challenging. So, as part of the process of implementing progress billing, contractors can do two things to avoid missteps and miscalculations in the billing process:

  1. Use accounting or invoicing software. Manual data entry and calculations can lead to errors in amounts, percentages, or other critical information. The best way to avoid such mistakes is to use the right invoicing or accounting software. Billing software can consistently and accurately manage invoices and keep track of payments.
  2. Include cost increases in the contract. Costs can increase while the project is ongoing. Reasons for cost increase include a change in the scope of the project, a rise in the price of materials or labor, unforeseen damage to the project, theft, design errors, or poor planning. To ensure they don’t face a loss, contractors should discuss acceptable types and percentages of cost increase with the client beforehand. Whatever they agree on should be included in the contract.

Example of Progress Billings

Clients and contractors agree on the invoice payment terms and the schedule of the payment beforehand. Based on the milestones they set, the contractors start invoicing clients. Let us try to understand how it works with a progress billing example.

ABC Constructions agrees to build a two-story shopping complex for a client. They agree on an amount of $4,000,000. Of this, $2,500,000 is for costs, and $1,500,000 is for profits. The project is supposed to take three years.

  1. Year One:

    Project Completion percentage – 30%

    Invoiced amount – 30% of $4,000,000 = $1,200,000

    Amount breakup – $750,000 in costs, $450,000 in profits

  2. Year Two:

    Project Completion percentage – 60%

    Previously billed percentage – 30%

    Current billed percentage – 30%

    Invoiced amount – 30% of $4,000,000 = $1,200,000

    Amount breakup – $750,000 in costs, $450,000 in profits

  3. Year Three

    Project Completion percentage – 100%

    Previously billed percentage – 60%

    Current billed percentage – 40%

    Invoiced amount – 40% of $4,000,000 = $1,600,000

    Amount breakup – $1,000,000 in costs, $600,000 in profits

The above progress billing example is a simple one. Often work in progress billing is a more complex process with cost adjustments. To ensure accurate invoicing, it is always better to take the help of technology.

Progress Invoice

Source: Knowify

Final Words

Progress billings can be a great tool in your toolbelt if you work on large-scale, complex, or expensive projects. It is easy to understand and is simple to implement, especially if you opt for the right billing software. And it can boost your bottom line by avoiding delays in work or mismanagement of payments.

Frequently Asked Questions

   

You would use progress billing if you work on long-term projects or projects with huge budgets. Or if you are hiring a contractor on such a project. Progress billing ensures payments at regular intervals, making the process convenient for clients and contractors. It also reduces the risk for both parties and provides transparency in billing.

Industries with long-term projects and projects with huge budgets typically use progress billing. Some examples of such industries are large-scale construction projects, technology, defense, aviation, and aerospace.

Progress billing is considered as “contra assets” by contractors in their books. Progress billing amounts offset entries in the Construction-in-Progress (CIP) accounts for them since it is work in progress billing. They add the costs and progress payments to their Profit & Loss Statement at fixed times, typically quarterly.

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