The way a company bills customers can have a significant impact on its cash flow and profitability. It can also enhance — or diminish — customer relationships, especially for companies with project-based revenue streams. The longer and more complicated the project, the more challenging project billing becomes and the more important it is to get right. The best project billing systems can help drive successful and profitable projects. Here's how to get there.
What Is Project Billing?
Some businesses, such as retailers, earn money by selling goods or services through a large volume of one-off transactions, each concluding with a payment. Others engage with customers for particular, planned projects that have specific outcomes and deliverables, usually completed over a predetermined period of time. Project revenue is common in the professional services, construction, engineering, defense and technology industries, and across companies of all sizes. Project billing is the process of invoicing and collecting payment from customers for project-based revenue.
What Is Project Profit?
Companies in project-based businesses monitor and analyze each project's profitability. Project profit is the project revenue from the customer — which is the aggregate of the project's billing — minus any expenses incurred to complete the project. Project expenses can be less straightforward, because they include direct project expenses plus allocated expenses from shared resources.
Project Billing Explained
Projects can sometimes take weeks, months or years to complete. Because of this, it's advantageous for the providing company to get paid throughout the course of the project, rather than solely at a project's end. The faster a project provider collects cash from its customer, the lower its risk of nonpayment. On the other hand, customers tend to prefer paying when projects are completed and accepted, to reduce their risk. To relieve these opposing objectives, the involved parties develop and document a project billing scheme that presents a compromise scenario.
For example, projects might be billed in installments as predetermined milestones are reached. For a construction project, such milestones might occur when the foundation is poured, internal Sheetrocking is completed, the certificate of occupancy is obtained. For projects that rely heavily on labor, such as consulting or professional services, a project contract may allow monthly project billing based on activity reports. Project billing can be customized in any way the two parties agree.
It's important to note that project billing is not the same as project revenue recognition. Project billing is the process of generating and sending customer invoices and collecting payment. Unless a business uses the cash method of accounting, project revenue is recognized when it is earned using Generally Accepted Accounting Principles (GAAP) standards like percentage-of-completion, installment basis or completed contract. Project billing and project revenue recognition are processes that run in parallel over the course of a project.
It's important to note that the project billing process is a shared responsibility between project managers and project accountants. Project invoices are generated, distributed and collected by the accountants, who also handle revenue recognition. Project managers oversee project deliverables and handle the customer-facing parts of project billing, such as bid creation and change orders. Additionally, project managers are tasked with monitoring the overall profitability of the project, part of which is analyzing the project billing to make sure it matches the reality of the project.
Project Billing Types
There are two common project billing types — flat-fee and time-and-materials — that can be embedded within each of three typical stages of project billing: target revenue, actual billing and estimate at completion (EAC). Large projects are often billed in those stages so that project managers can better monitor their profitability, as described in the preceding section.
- Flat-fee: The first project billing type, flat-fee, is where a project fee or rate is set at the beginning of a project. Customers tend to regard the simplicity of this type as a plus. In addition, it is the least risky for customers because they are not responsible for project overruns. From the project provider's perspective, taking on the risk of overruns is a disadvantage of this approach, especially if a project isn't closely monitored. However, flat-fee projects can also provide an opportunity for higher-than-anticipated project profit in cases where a provider can deliver the project more efficiently than originally expected.
- Time-and-materials: The second project billing type is based on time and materials, meaning that the customer pays for all the actual labor hours and materials needed to complete the project. Some customers prefer this method because they believe having a direct connection between project activity and fee outweighs any potential risk of project overruns. Project providers regard the shift in risk to customers as a big advantage of time-and-materials project billing, although it can sometimes make forecasting target revenue (and project profit) more difficult, which can be a disadvantage.
Project managers consider both billing types when determining which to embed within each of the three stages in the life cycle of project billing:
- Target revenue: Target project revenue is the first stage. Typically used to budget project profit when a bid is developed for a customer, it represents the full amount of customer billings for a project. Either project billing method, flat-fee or time-and-materials, can be used to estimate and set target revenue.
- Actual billing: Actual billing refers to the running total of the project invoices to date, based on the agreed-upon project billing scheme. For example, in this second life cycle stage, the actual project billings for a fixed-fee project that has met two out of three equally valued milestones should be approximately 67% of the target revenue. By contrast, in the case of a time-and-materials project, actual billings would represent the total labor hours charged to the project at the agreed-upon billable rate, plus the costs of materials used. Project managers monitor actual project billings to be sure they make sense in relation to the progress on a project in the field, especially with regard to revenue leakage or project changes.
- Estimate at completion: EAC project billing is a prediction of current total revenue for the project, an important project management metric. EAC billing represents the actual amounts already billed to the customer, plus an estimate of future billings necessary to complete the job. EAC helps a project manager forecast how profitable a project will be before it's finished. In an ideal flat-fee project, EAC will match the amount on the original target revenue prediction. For time-and-materials projects, EAC would ideally be greater than or equal to the estimated target revenue. EAC is a critical step in the project billing process, since it provides forward-looking insight into profitability and improves the bid process for future projects. Unfortunately, many companies aren't set up to measure and track EAC accurately.
Benefits of Project Billing
One of the most significant benefits of project billing is that it gets cash in-house from the customer on a regular basis. In turn, this cash flow boost helps the project provider purchase supplies, distribute payroll and pay other resources like subcontractors over the course of the project.
- Project billing also diminishes collection risks for the provider, since partial payments are made periodically, rather than in a lump sum at the conclusion of the project.
- Because project billing requires continuous project monitoring, it can indirectly keep projects on track.
- Together with EAC billing, regular comparisons to project budgets can prevent unfavorable surprises at the end of a project. It also helps future project bids become more accurate and profitable.
Project Billing Challenges
An overarching project accounting challenge is the need to identify revenue and costs by project, not just by type as with basic financial accounting. This additional dimension can require an extra layer of administration to ensure that each project's transactions can be identified and tracked, including the project billing.
- Project billing can quickly become complicated and cumbersome, since every project can have its own project billing scheme. This is especially true for companies that bill manually or have rigid billing software.
- Tracking labor hours and other billable expenses also can challenge the accuracy and timeliness of project billing. Typically, professional staff members must fill out timesheets indicating the number of hours worked for each project. Revenue leakage — that is, billable hours that are unbilled or underbilled — is more prevalent in companies using spreadsheets to track time and materials.
- Furthermore, having to manually input data into timesheets, and/or timesheets into billing software, increases the potential for errors, including incorrect entering of project codes.
- Another project billing challenge may lie in allocation of shared costs. For example, office costs and supplies or technology that support the entire organization may not be easily associated with specific projects but should be spread across projects in a systematic way and included in project billing.
7 Key Tips to Improve Project Billing
The goal of project billing is to get the company paid promptly and accurately. These seven tips can help achieve that goal by streamlining and improving project billing processes:
- Be consistent. Create a project bid with an associated project billing scheme and bill payment terms for every project. This establishes consistent expectations for both provider and customer.
- Document changes. Ensure that all project change orders and their impact on project billing are documented and approved by the customer. This keeps provider and customer on the same page.
- Course-correct often. Calculate EAC often to compare it to the project bid. This helps detect project profit variances, possibly caused by project billing errors, to facilitate early intervention.
- Automate project accounting. Integrate and automate accounting software systems for timely billing, especially for project billing based on time and materials. Automation reduces potential for manual errors and sends invoices to customers more quickly, which can also lower days sales outstanding — the time it takes to get the customer's payment in-house. Choose billing software that automatically reconciles project billing with project revenue recognition methods to reduce staff workload and provide real-time awareness of project revenue.
- Use mobile apps. Utilize mobile apps — e.g., for timesheets — so workers in the field can fill them out while their memory is fresh. Doing so can lead to improved accuracy and more timely submission.
- Define administrative time. Develop company guidelines for how to track "administrative time" such as checking email and attending meetings. This may help reduce revenue leakage and increase revenue.
- Provide detailed invoices. Use customized, detailed invoices that provide a customer with the right project-specific details so that they're more comfortable remitting their payment on time.
Improve Project Billing Accuracy With NetSuite
Project billing is a highly visible process, so it needs to be accurate. It should also be efficient and timely, to support good cash flow. And since it also needs to be scalable, project billing is no place for manual practices. Improved project billing comes from automating and connecting project activity with billing and accounting systems. NetSuite SuiteProjects accomplishes all this with a flexible billing environment that can be customized for every project and customer. This video demo of NetSuite SuiteProjects shows how its multidimensional drill-down capability and automated dashboards help project managers more easily analyze actual project billings and the associated revenue and compare it with target revenue in project budgets and EAC. That makes forecasting easier and future project bids smarter — and, ultimately, more profitable.
Efficient and effective project billing can increase revenue collection, which in turn increases cash flow and enhances the relationship between project provider and client. However, many organizations, from midsize professional services companies to large aerospace contractors, are challenged by project billing and project accounting because of the multiple dimensions that must be tracked for both project-specific and allocated costs. Regardless of the challenges, getting project billing right is crucial, because it initiates getting cash in-house and it's highly visible to customers. Consider the seven key tips above, as well as adding strong, flexible software to help improve your skill at project billing.
Project Billing FAQs
What is the process of billing?
There are multiple parts of the billing process, including maintaining customer data, creating invoices to send to customers and ensuring invoices are accurate and collectable.
How do you make a project bill?
Project bills are often made in installments at predetermined project milestones or monthly intervals based on activity reports. Project billing is the process of invoicing and collecting payments from customers for project-based revenue — in other words, planned work with specific outcomes and deliverables, usually performed over a period of time. A customized project billing scheme is developed and documented in any way agreed upon by the two parties, based on their business arrangement.
What are the types of billing?
Billing types usually reflect the nature of the underlying sales transaction. Milestone billing and progress billing are common mechanisms for contracted projects. Billing on completion happens at the end of a transaction, for the entire value of a sale. Recurring billing is associated with ongoing services, such as software subscriptions.