Proper billing is an important aspect of both job management and cash flow management. Without proper billing, and by that term I mean billing that is sent out on time and is correct and complete, how can you expect to receive proper payment for all of your work?
One way to have a better handle on your outstanding dollars and your profits is by using progress billing. Many in the construction industry are familiar with this concept; however, not all are as effective in implementing it. Contract projects can span large periods of time and can have heavy material and labor costs associated with them. It’s these types of projects that make progress billing a useful tool, as you are invoicing customers throughout an entire contract based on the project’s progress.
Using progress billing for invoicing allows contractors to continue to get paid throughout a project and to pay, in a timely manner, expenses related to the project. This method of billing, based on the progress of a job, also helps ensure that the work gets completed. Frequently, projects can be delayed due to weather, permitting, etc. Progress billing assures your clients and vendors that, despite these delays, the work will get completed.
Understand the challenges of progress billing and how to avoid them
While incremental billing is extremely beneficial and oftentimes crucial to a contractor’s success, it does have its challenges. Progress billing can occasionally lead to disagreements between parties that are related to their views of the percentage of completion at the time of billing. These disagreements can lead to delays in payment, as payment isn’t sent until the dispute is resolved.
One way to eliminate the chance for disagreement is to have strong, visible project managers who keep a finger on the pulse of a contract. These project managers must also keep open communication with their accounting department and with the client, to ensure everyone is aware of the project’s status and bills are sent for the proper amounts.
Another challenge involves changes to a project’s scope of work. Frequently, large contracts experience changes to the initial scope of work. Change orders can affect the expenses and/or timing of a project, and they can be the result of identifying work that wasn’t planned before the project started (perhaps the need to move a wall to accommodate new pipes), nature affecting a planned task (like a roof collapsing due to a snow storm), or even something as simple as the job owner changing his or her mind. In order to better manage these change orders, best practice is for both parties to agree to an updated timeline or milestone. Once the updated timeline or milestone is agreed to, the progress billing can be adjusted as necessary.
Are you using progress billing in your construction practice?
Poor billing practices are likely to result in jobs being underbilled or overbilled. (Underbilling indicates that a job’s progress exceeds its billing, and overbilling indicates that the job is billed out further than the progress to date.) While underbillings and overbillings are common, and at times warranted, significant billing fluctuations are red flags to lenders and bonding companies.
Maintaining billing on par with the progress of a job allows the contractor to better recognize the job’s profit throughout the life of the job and not just once the job is completed. Consider your own billing practices. How are you doing? Does your accounting department have a good handle on the status of each of your projects and are they billing accordingly? Or are your billings late, and as a result, you’re financing some of your jobs through other means, instead of accessing funds from the current job? Progress billing can help you keep your billing in check and make your job finance itself.
For additional discussions surrounding maintaining cash flow, see our previous article entitled “Tips for Sustainable Construction Cash Flow”. Or, for more immediate assistance, contact our construction accounting experts directly.