Cash is king. Getting it in-house from customers can be a challenge, though, especially if you’re working with long-term projects and extended billing cycles. This issue, which is endemic in the construction, aerospace and defense industries, is also pervasive among small to medium-sized businesses across many industries where cash-flow issues are behind 90% of business failures. Progress invoicing, also called progress billing, can benefit both the provider and the customer.
What Is Progress Invoicing?
Progress invoicing is a billing approach where customers are invoiced incrementally over the life of a project. It’s an alternative to up-front billing or to billing when a contract is completed. When using progress invoicing the total amount owed on a contract is broken down into smaller pieces and invoiced periodically, giving customers the ability to “pay-as-you-go.” For the providing company, it’s a way to receive influxes of cash throughout a project’s duration. In many ways, it’s a win for both buyer and seller. Further, it is the industry standard for some industries, as with the American Institute of Architects (AIA) standards for billing in the construction business.
- Progress invoicing is a billing approach where customers are invoiced periodically based on the portion of the project completed.
- Progress invoicing is an alternative to up-front and back-end billing schemes and is advantageous because of its cash-flow benefits.
- Industry practices and other factors can make progress invoicing complicated and labor-intensive.
- Billing software that is flexible and integrated with accounting can keep the cons of progress billing from outweighing the pros.
Progress Invoicing Explained
Progress invoicing is a way to bill customers with the intent to accelerate cash collection over the course of a project. It is a cash flow management tactic and is separate from revenue recognition methods on a company’s books; project milestones and completion percentage drive revenue recognition, not invoicing schedule. Progress billing can be customized and documented in a project’s contract, as long as the customer and provider agree. Typically, however, the timing of each progress invoice is based on the percent of progress achieved on the project or the completion of a specific deliverable.
How Progress Invoicing Works
The total price of a project is established in the contract or estimate and agreed upon by both the providing company and the customer at the inception of the project. As the project continues, invoices are periodically sent to the customer. The amount of each invoice is based on an estimated percentage of the project that has been completed or by a more detailed schedule of value (SOV). SOV is an AIA form that itemizes the work in a contract and is used to track the percentage of completion and any cost overruns for each item.
It’s common for a predetermined percentage of the contract, such as 5% or 10%, to be held back until the end of the contract to ensure that everything has been delivered satisfactorily. When such provisions, called retainage, exist in the construction industry, progress billings are based on the amount of the contract minus the withheld amount.
Other items that can potentially complicate progress billing include change orders, cost overruns, billing disputes, partial payments by the customer, other disputes and contractual penalties.
What’s the Purpose of Progress Invoicing?
The primary purpose of progress invoicing is to get cash from the customer to help sustain the project without waiting for the entire assignment to be completed. It reduces cash-flow strain on the provider and reduces the need for them to finance a client’s long-term project. Progress invoicing helps cover costs like labor, subcontractors and materials, and this progressive approach to invoicing also helps a company manage its overhead costs and other obligations.
Who Uses Progress Invoicing?
Progress invoicing can be used in any industry for a project of any length if both the providing company and the customer agree. Most often, it is used for large-value, long-term projects, and it is commonly associated with construction and aerospace industries. Other applications, such as web development and design projects, typically issue progress invoices as work is completed over the course of months. The manufacturing, engineering and government defense industries often use progress invoicing.
Business Benefits of Progress Invoicing
Progress billing helps both the company providing the service and the customer. And when a business helps its customer, other benefits typically follow. Certain advantages are direct and immediate, while others provide value indirectly. Some of the rewards of progress billing are:
It enables the providing company or contractor to get funds in-house to support operations and the next steps of the project. Examples include buying materials for upcoming project stages and paying subcontractors as their work is completed.
Progress invoicing bills a larger number of smaller amounts, which may be easier to collect from the customer. Rather than chasing a single lump-sum payment from a customer, a business’s collection team may be more successful collecting on smaller payments. The smaller amounts may also allow a wider variety of payment options to be offered to customers.
It can motivate partners and subcontractors who get paid as the work is completed. The direct connection between progress on the project and payment may help keep third parties like electricians, plumbers, web developers or freelancers on schedule.
It forces regular communication with a customer, helping to keep both parties on the same page regarding the status of the project. In cases where SOVs are used, many project stakeholders review the percentage completion of each task.
Progress invoicing can make budgeting and forecasting easier. Because it requires close monitoring of project completion, it can help inform estimates on future revenue, expenses and profit.
It provides a potential strategic advantage for winning new customers by lowering their up-front costs and reducing their risk of working with a new provider. New customers may be hesitant to pay for projects up front without a proven relationship. The alternative, payment at the end of the project, squeezes cash flow for the project provider. Progress billing reduces risk on both sides.
Progress billing improves customer retention through transparent billing. The documentation and direct connection to deliverables that are part of progress invoicing can provide a level of comfort for customers who want to know what they are paying for. Studies show that customer attrition is reduced when there is a level of clarity and comfort in the billing process.
4 Steps of Progress Invoicing
At a high level, there are four steps involved in progress invoicing for a project. In practice, each of these steps may have several components, may be iterative and may require multiple tasks. Financial management software — particularly when it’s integrated with other areas of your company such as customer relationship and project management using enterprise resource planning (ERP) tools — can help you create accurate estimates, automate invoicing and track when payment is received. The four steps in progress invoicing are:
Sign the contract. Within the overall project agreement that sets forth the responsibilities for both the provider and the customer, there should be agreement on the use of a progress invoicing method and on billing frequency. Billing terms should be spelled out, such as acceptable payment methods, payment terms, discounts, penalties and contacts.
Set up the schedule. Determine the project’s schedule, because that forms the basis for the progress invoicing timeline. This will require breaking down the project into smaller pieces, both from a deliverable and a financial perspective. This can be achieved via an SOV or through supporting schedules and estimates.
Measure progress. Using the SOV or pre-established milestones, measure the progress of completion on the project. Based on the contracted billing frequency, determine when invoices should be generated given the actual work performed. For example, one project may indicate that invoices should be generated in intervals of 5% completion (i.e., 5%, 10%, 15% and so on). Another project may dictate specific milestones of completion that trigger a progress invoice, such as completion of all building framing.
Issue invoices. Generate the progress invoice, including appropriate information, send it to the customer and begin collection efforts.
What Is Included in a Progress Invoice?
Invoices should always be informative and clear. Progress invoices share many of the same basic elements of other invoices, including invoice date, due date, acceptable payment methods, early pay incentives and late fees. Beyond the basics, progress invoices will feature specific details, such as:
- The original contract amount and any amendments, if applicable.
- Cumulative value of progress billings as of the invoice date.
- Balance paid to date.
- Percentage of completion of the project.
- Balance of the contract amount yet to be paid.
Progress Invoicing Example
Here’s a hypothetical example of progress invoicing in the construction industry, which illustrates how the process works and highlights the cash-flow benefits.
A hypothetical customer named SKSN Enterprises negotiates and signs a contract with Acme Construction to build an office building for their growing business. An SOV is included in the contract, showing the itemized deliverables over the expected two-year period. The contract includes the following terms:
- Total contract price — $8 million
- Project term — 2 years
- Billing frequency — quarterly (4x/year)
- Retainage — 10% upon completion
At the end of the first three months, SKSN and Acme review the status of the project and agree that the items of the SOV are on track and that the project is about 12.5% complete. Acme sends progress invoice #1 to SKSN for $900,000, which is 12.5% of $7.2 million (the amount of the original contract minus the 10% retainage both parties agreed to “take off the top”). SKSN makes the progress payment promptly. Every three months a similar review is done, an invoice is generated and SKSN pays. In the beginning of the second year, a snowstorm causes construction to slow, so that quarter’s progress is only 8%, reflected in invoice #5. Because of the good relationship Acme has with its workers and subcontractors, it makes up for the missed time during the next quarter (invoice #6) and puts the project back on schedule. At the end of the project, SKSN is delighted with the building, the punch list of outstanding items is completed by Acme and the final invoice (for the retainage deducted at the outset) is paid.
Acme’s progress invoicing for this scenario over the life of the project is as follows:
In total, Acme invoiced $3.6 million in the first year of the project and the remaining $4.4 million in the second year — highlighting the positive impact that progress billing made on Acme’s free cash flow (or the amount left over after subtracting operating costs and capital expenses).
Free Progress Invoicing Template
To help a business new to progress billing visualize all the elements required in a progress invoice, a free downloadable progress invoicing template is provided in PDF form. Naturally, the look and feel of a progress invoice can be anything the business desires. But good progress invoices should always include all the elements in the template, and the language should be clear and precise so that there is no room for misinterpretation.
Manage Progress Invoicing With Accounting Software
Occasionally, invoicing complications may arise that make progress billing seem to be more trouble than the problem, unless you have flexible billing software that can make progress invoicing smoother. These include change orders, stored materials, unanticipated cost changes and disagreements about completion percentages, among other potential issues.
The two most helpful tools for progress invoicing are AIA G702/G703 forms and an accounting system that has a flexible, integrated billing function. Progress billing can become complex and time-consuming even for small projects. It’s not uncommon for large, multiyear projects to require hundreds of invoices. Although worthwhile given the cash-flow benefits of progress invoicing, keeping track of billing schedules, contract balances, project changes and project status can be an enormous undertaking. Invoice and billing management software can help your business manage the volume and complexity in a more accurate, faster and more efficient way. Additionally, when accounting software is integrated with an ERP solution, manual reentry of invoice data is eliminated, and progress billings and revenue recognition can be reconciled more easily.
Cash allows a company to pay its operating expenses, keep projects on track and fund opportunities for growth. Progress invoicing is a useful tool for keeping cash flowing into a business during a long-term project. It’s an approach used by many industries, especially those with high-value, lengthy projects, but it can get complicated and labor-intensive. Robust accounting software can help keep the pros ahead of the cons.
Progress Invoicing FAQs
What is a progress invoice?
A progress invoice requests partial payment for a project based on its percentage of completion or more specific deliverable milestones. It is a common method of billing for long-term projects in many industries, especially construction, aerospace and defense.
What does progressive billing mean?
Progressive billing is another term for progress invoicing, which is an approach to billing a customer at predetermined stages, as work on a project is completed. It’s an alternative method to upfront billing or billing when projects are completed.
How do I implement progress billing?
A company establishes a frequency for progress billing as part of the project contract they negotiate and sign with a customer. A schedule of value (SOV) may be part of the contract and used to itemize the details of the tasks to be performed. Progress invoices are periodically sent to the customer at the contracted frequency for an amount that correlates to the percentage of work completed, using either the SOV, certain milestones or other estimation methods. Because this process can become complicated and labor-intensive, many companies use billing software that is flexible and integrated with accounting systems to help make progress billing easier.