What Are Progress Billings?

What Are Progress Billings?

Let me explain progress billings directly to you: these are invoices that contractors like me issue to request payment for the work we've completed so far on a project. We prepare and submit them at different stages during a major, long-term job.

You'll see this approach often in projects that stretch out over time, as it lets us contractors fund the ongoing work and cover our costs as things progress.

In these invoices, I might include the original contract amount, what the client has paid up to now, and the percentage of the job that's done. But remember, there could be other details that you as an owner or contractor need to agree on before starting the work.

Key Takeaways

Here's what you need to grasp: progress billings are simply invoices for the work done to date on extended projects. They're mainly for long-term endeavors with big budgets, and they're standard in large construction, aerospace, and defense sectors.

Understanding Progress Billings

I want you to understand that progress billings let contractors bill clients step by step as the project moves forward. For this to function, you and the contractor must agree on a payment schedule upfront, deciding when invoices will come in.

These are especially helpful for projects with long timelines and hefty budgets. They spare the client from paying everything at the start, and for contractors like me, it means getting paid regularly to handle expenses such as materials throughout the stages.

Payments tie directly to a verified percentage of completion. Think of it as dividing payments based on milestones we set together. The final balance usually gets paid once the project wraps up and you're satisfied with the results.

What's Included in Progress Billings

You should know that progress billings differ from standard invoices. They often detail the total contract amount due, any approved changes with adjusted totals, the amount billed so far, the current completion percentage, and the balance left at the end.

Schedule of Values

In progress billings, we use something called the schedule of values, which outlines costs for each project task. This is common in construction, where owners and contractors like me collaborate to set spending for each phase.

During billing, we assign values to phases and track completion percentages as the project advances. This schedule helps spot if there are cost overruns or if we're under budget by comparing actual payments to estimates, pinpointing where costs exceeded plans.

Including this in the process creates transparency, with all financials known upfront. It also protects us contractors legally and financially by documenting estimates, avoiding surprises at the end.

Percentage Retained

Sometimes, owners withhold a percentage—say 5% to 10%—until the project finishes. This retainage acts as a reserve for any issues that might arise.

It safeguards you as the owner if the project isn't completed, if the contract isn't followed, or if there are problems with contractors or subs. But it can strain our cash flow, so we need to agree on the amount early.

Who Uses Progress Billings?

Progress billings are common in construction, used by roofers, plumbers, general contractors, painters, and electricians. Factors like material costs, labor, and delays make them essential.

They're also standard in aerospace and defense, where projects have massive budgets and take years, making incremental billing a practical choice.

Important Note

Remember this: both you as the client and the contractor should sign a document for each payment made.

Special Considerations: Factoring in Cost Changes

Costs often change in these projects due to their scale and complexity. The contract spells out how you approve changes, usually by signing off on specifics.

Some overruns are unavoidable, others from poor planning. Common ones include scope changes by the owner, unexpected damage like termites or mold, design errors, or price hikes in labor and materials over time.

Many contractors like me build in a price allowance—a small percentage to cover increases. You should discuss the extent of any such allowances with your contractor.

Example of Progress Billings

Let me walk you through an example. Once you pick a contractor, you negotiate the contract terms, including a payment schedule based on milestones.

As work hits those milestones, the contractor submits invoices. Suppose ABC Construction agrees to build an office for $1.6 million over two years, with $600,000 profit on $1 million costs.

In year one, with 40% complete, they bill $640,000 (40% of total) and record $240,000 profit. In year two, completing the rest, they bill $960,000 and record $360,000 profit.