Progress Billing Meaning
Progress Billing refers to an invoice issued to obtain payment from clients for the portion of a project completed to date. This type of billing enables one to acquire adequate funding to support their operations and themselves as the project keeps running.
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Source: Progress Billing (wallstreetmojo.com)
Such invoices are common for projects that go on for a long duration. It enables contractors and their clients to monitor their spending irrespective of whether the project is still in progress. Moreover, it helps contractors and their clients identify issues in the project early and make the necessary adjustments.
Table Of Contents
- Progress Billing Meaning
- How Does Progress Billing Work?
- How To Implement?
- Examples
- Benefits
- How To Account For The Cost Changes In Progress Billing?
- Progress Billing vs. Milestone Billing
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- Progress billing meaning refers to an invoice issued to collect money from clients for the percentage of the project completed to date.
- Progress billing invoices include the percentage of work completed, the initial contract amount, and the amount paid by the contractor to date. However, it may have other details agreed upon by both parties.
- A key difference between milestone and progress billing is that predefined events do not trigger the latter.
- There are various benefits of progress billing. For example, it lets both parties spot payment-related issues quickly and prevents clients from spending the project’s total cost simultaneously.
How Does Progress Billing Work?
Progress billing meaning refers to an invoice contractors issue requesting payment from their clients against the percentage of work completed by them to date. Such an invoice allows a contract to bill clients incrementally while the project continues. This is useful for long-term projects that involve a substantial budget for both parties and their clients. Hence, their use is common in the defense industry, construction projects, and the aerospace industry.
For instance, let us take the example of construction projects. This type of billing prevents clients from funding the project upfront. Moreover, it allows contractors to receive payments at regular intervals, enabling them to meet project-related expenses, for example, the purchase of raw materials. One must note that both parties must agree to the payment schedule before the work starts. The payment schedule agreement includes when the contract would issue invoices requesting payment.
A progress billing invoice may have the initial contract amount, the amount paid by the client to date, and the work completion percentage. That said, such an invoice can have more items that the contractor and the client may decide to include before a project starts, for example, the cost changes approved by the latter and the adjusted amount payable to the former.
A verified project completion percentage forms the basis of the payments. Simply put, payments could be split based on certain milestones set by the parties. Usually, contractors receive the remaining or final balance after completing the project, and their clients are satisfied. However, since monitoring the completed work and payment schedules can quickly become complicated, carrying out the procedures concerning progress billing is vital for a contractor’s success.
How To Implement?
Let us look at the steps one must follow to execute the progress billing process securely.
- Negotiate the initial contract’s terms.
- Establish the expected progress timeline.
- Spot the important milestones of progress.
- Speak with the other party to decide how the progress billing invoices will be issued.
- Confirm the competition of the ongoing project.
- Address the changes in the project’s scope, if any.
- Finalize the project.
Examples
Let us look at a few progress billing examples to understand the concept better.
Example #1
Let us say that a company hired a contractor named Dave Smith to complete a project in the construction sector. Both parties negotiated and reached an agreement on the contract’s terms. The terms established a regular payment schedule and payment frequency. As a result, the contractor issued an invoice at certain intervals to collect payment from the company against the work done to date.
Overall, Dave Smith issued two invoices. He issued the first one in the first year after completing 60% of the work. Next year, he issued another invoice after completing the remaining 40% of the project.
Example #2
Let us say a contractor agreed to build a three-story building for a client who agreed to pay $5,000,000 for the project. Out of that amount, $3,000,000 covered the cost while the remaining $20,000,000 was the profit. The expected project completion time was 2 years.
Year 1:
Project Completion Percentage: 50%
Invoiced Amount: $2,500,000 ($5,000,000/2)
Amount breakup: $1,500,000 in costs and $1,000,000 in profits
Year 2:
Project Completion Percentage: 50%
Invoiced Amount: $2,500,000 ($5,000,000/2)
Amount breakup: $1,500,000 in costs and $1,000,000 in profits
Benefits
The advantages of progress billing in construction are as follows:
- First, contracts receive payment at regular intervals, which enables them to meet the project’s expenses. This also allows the contractor to avoid taking on debt.
- The process makes it easy to spot payment-related issues.
- Contractors can decide to stop working if they do not receive payment. However, they can start again after receiving the amount due to them.
- Clients do not have to pay the entire project cost in one go.
- Regularly reviewing the billings and payments enables both parties to address issues quickly. Moreover, this helps avoid serious misunderstandings at the end of a project.
How To Account For The Cost Changes In Progress Billing?
When projects run for a long period, the project’s cost may change. This is common when a large amount is involved, and the work is complicated. The contract signed by both parties will mention how a project owner can approve changes to the project costs. Typically, clients sign a change order, stating they agree to the alteration in price that will be billed and included in the project’s final cost.
While certain changes in cost are unavoidable, many people fail to avoid the ones that are owing to a lack of planning. Let us look at what cost overruns may include —
- The client changes a project task’s scope.
- Unforeseen damage caused to a project.
- A poorly planned project or design errors.
- The client is asking for extra work.
- A change in expensive materials’ cost due to price changes in the market.
Progress Billing vs Milestone Billing
Progress and milestone billing can be confusing for individuals new to finance. However, knowing the critical differences between the concepts is essential to avoid confusion. So, let us look at their distinct features.
| Progress Billing | Milestone Billing |
|---|---|
| In this case, predefined events do not trigger payments. | Milestone billing involves making payments after the completion of prespecified stages. In other words, both parties utilize certain agreed-upon events as billing deadlines. |
| It prevents clients from having to pay all project expenses in one go. Moreover, it ensures that contractors get paid regularly, allowing them to cover the cost of the operations while the project is ongoing. | This type of billing helps structure both parties’ budgets. Moreover, it ensures that the contractor and client remain within the structure even if completing the work takes longer than expected. |
| Progress billing in construction is ideal for new clients. | It is ideal for loyal clients. |
Frequently Asked Questions (FAQs)
Contractors consider the progress billing on construction amounts ‘contra assets’. Therefore, they debit the amounts to Accounts Receivable and credit them to Progress Billings on Construction Contracts, serving as an offset to the CIP or Construction In Progress account.
Generally, one can find the retention clause in all contracts or agreements. This refers to the amount the buyer or client retains while paying the contractor as security for the assigned work’s completion.
The main purpose of this type of billing is to obtain cash from clients to cover the cost of the projects without waiting for the entire work to be done. It minimizes cash flow strain on the contractor and prevents them from having to finance their client’s long-term project. Moreover, it allows clients to pay in segments, which is easier than paying the total amount in one go.
A key disadvantage of this type of billing is that it can take a lot of time to prepare a contract agreeable to both the contractor and the client.
Recommended Articles
This article has been a guide to Progress Billing and its meaning. We explain its differences with milestone billing, examples, how to implement it, and benefits. You may also find some useful articles here –
- Construction Work in Progress
- Contract Costing
- Unbundling
This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here
