Keep all the reports and information you need for invoicing in an organized space so you can easily find them. If you have to hunt everywhere for timecards, receipts, and cost reports, you’ll get frustrated and things will take twice as long. Learn how a design-build GC dramatically cut billing time and improved invoicing accuracy.
Though it sounds straightforward, the construction payment process can get messy.
Progress billing is a method of invoice that bills customers/clients at each stage of the project along the way, with the invoice reflecting the amount of work that has been completed. If there is a payment issue and you are billing as you go, you can stop the work until the payment issue is resolved. Owners don’t want their projects delayed for any reason, even if it is their own lack of payment.
Unit price contracts
Here we’ll look at how progress payments in construction work, and how things like retainage factor in. Retainage, or retention, contribution margin is a practice where a portion of each progress payment is withheld until the project is completed. This amount serves as a form of security for the owner, ensuring the contractor finishes the work to the agreed standards and resolves any outstanding issues before receiving the final payment.
How to Manage Progress Billing and Retainage Effectively
When you move beyond spreadsheets to embrace end-to-end billing management platforms, you can handle the billing process effectively and have greater insights into your construction firm’s profitability. The costs for progress payments on construction contracts can be offset against the construction in progress accounting. This would be reported in the current liability section of the balance sheet.
How retainage affects progress billing
From there, supporting documentation must be created detailing why the change is needed and what the exact change is. Ensure there is a clear understanding of what the change is, why it’s needed, and how it impacts the overall scope of work and cost of the project. There will be a section to record retainage percentage information when using AIA-style documents. Per the contract, contractors should note the amount of retainage and ensure this amount is calculated correctly for every invoice. Contractors must closely monitor their “total earned less retainage” (total amount of money earned for completed work minus the retainage percentage). Other Partnership Accounting times, contractors can’t pay their costs, have no money coming in and need to close their doors – either until money comes in, or permanently.
- A payment application is a type of construction document that prime contractors and first-tier subcontractors use to request payment from the hiring party.
- There could be situations in which a contract utilizes a variable retainage.
- The frequency of progress billings can vary depending on the nature of the project and contract terms agreed upon by all parties involved.
- This comprehensive work list represents the entire construction project and the entire contract price, from beginning to end.
- When utilizing billings on construction in progress, the contractor submits the final invoice upon project completion.
- For progress billings to work, the client and contractor must agree to a payment schedule when invoices will be submitted for payment.
- Retainage is the amount of money held back until a project is completed, whereas retention is the actual act of withholding the money.
- A schedule of values is common in the construction industry whereby owners and contractors work together to determine how much will be spent on each phase of the project.
- In construction, smooth project billing is essential because it’s how contractors get paid.
- Many of the challenges with progress billing are related to the paperwork and communication required for accurate payments.
- Project owners use retainage as an insurance policy should the job fall short of expectations.
- During the progress billings process, a value is assigned to each phase as part of the schedule.
Additionally, there could be different retainage percentages for specific phases, materials, or requirements. Retainage is the long-standing practice of withholding a small amount of money from each payment. The amount is typically a set percentage taken out of every payment and set aside until the end of the project.
- Once your payment application and backup documentation is sent, then you wait to get paid, then rinse and repeat.
- The pay application includes sections to sort out all the information the owner needs to make a payment.
- Once the work begins, and the milestones are achieved, the contractor can start to submit invoices to the client.
- And then, we’ll go over my seven favorite tools to help you send invoices and manage other administrative parts of your business.
It is tempting to wait until the end of the job and only submit one invoice, but on larger projects, this often isn’t financially feasible. You just have to bite the bullet and take the time each month to put together your progress billings. Time and material contracts (T&M) are based construction billing methods on the actual hours worked and the materials purchased for the job during the time you are billing for.
She shares fundamental green building strategies and techniques in her book, Green Building Design 101. There were so many pieces of information flying back and forth that were not approved on paper, that things got lost. When we finally took all of the change orders to the owner’s rep, some of them were denied. We were out of pocket on those sub change orders that we paid for that didn’t officially get approved. Learning new software systems can be a bit overwhelming for teams, especially if they know another system inside and out. Make sure that you leave plenty of time to schedule comprehensive training sessions for all team members, where you can address any questions or concerns.