Types of Construction Billing & Best Practices
In a perfect world, construction billing would be correct, quick, and easy. Not the terms that come to mind when you think of your process? Construction accounting is undeniably complicated and unwieldy, yet you need it to ensure your construction business gets paid accurately and on time. Fortunately, you can improve your cash flow processes by learning about the best construction billing methods.
The top construction billing methods are: Advanced, Progress, Arrears, Time and Material, and Fixed Price.
Advanced Billing
Advanced billing occurs before a project begins. While advanced payment is often made as a single lump sum, it can be broken into smaller installments. Construction companies often use advanced billing to protect themselves from unforeseen expenses which might arise during the project.
Upfront payment provides several advantages to contractors since they know they will have the necessary funds before a project begins. However, if there are any unanticipated expenses, they can be left covering the costs themselves since the client has already paid.
Progress Billing
This billing process occurs alongside the project, either based on a payment schedule (i.e., weekly, monthly) or project milestones. There are several reasons why your company may want to bill based on progress, including more direct funding of project costs, such as equipment, labor, and subcontractors during work-in-progress.
Most contractors prefer this method when dealing with large, long-term projects to ensure that some form of payment is regularly received. In addition, you gain some protection against clients who may pay late or not at all.
Since this payment method depends on a project’s progress, it is also beneficial to clients who can make their payments as they see changes in progress at the job site. They can enjoy greater flexibility by breaking up lump sum payments into more manageable, periodic payments over the course of the project. However, late payments impact this billing method the most, as contractors can halt construction jobs until the funds are received.
Arrears Billing
Arrears billing occurs after the completion of a project and, like advanced billing, is often collected as a lump sum payment. Construction contracts will indicate what counts as “completion,” as this may vary based on the project type.
This method allows contractors to adapt job costs as the project progresses. Invoice markup can indicate exactly why more payment is expected at any point, such as the scope of work increases since the start of the project or increased material costs.
Time and Material Billing
The time and material billing method is self-explanatory, allowing the contractor to bill the client for the time it takes to complete the project and the equipment and materials used. To use this method effectively, the contractor must keep highly detailed records of the man-hours and materials used, so the client receives an accurate bill.
This method best suits projects that need an open-ended timeline, have an unclear end goal, or have an uncertain end cost. Multiple changes to the order can be made during the construction process when using the time and material method. Depending on the contract, a contractor may choose to mark up the cost of the materials to increase their profit margin.
Fixed Price Billing
The fixed price billing method is when a contractor establishes a contract for a construction project with a single fixed price to be paid at predetermined milestones or upon project completion in a lump sum. This method is best for projects with a very well-defined scope and when there are no expected fluctuations in the cost of labor or materials.
Depending on the contract, the contractor may incur charges for exceeding the agreed deadline and may receive incentives for completing the project early. Therefore, when using this method, it is important to anticipate any possible changes that fall within the scope of the contract but may extend the hours of labor needed to complete the project on time.
Tips to Improve Payments
1. Generate Job Costing Reports
Accurate job costing is a must when dealing with construction billing. Before a project begins, you need a clear idea of what labor, equipment, and material costs you’ll encounter along the way. Ongoing projects benefit from job cost reports, which will track expenses and help you generate accurate estimates and bills.
Other important factors to consider with your billing process include:
Construction billing should cover all of the above.
2. Create Detailed Invoices
Billing disputes can happen, but you can avoid them by ensuring that your invoices offer as much detail as possible. Detailed invoices start with maintaining detailed records of the money spent on labor and materials. Online and digital tracking tools can help you to keep clear, consistent, and legible records instead of doing them manually on pen and paper, which are subject to the writer’s handwriting and can cause discrepancies.
3. Establish Clear Payment Terms
To ensure you receive payment on time and in the right amount, include payment terms in your contracts and give these details in your invoices. Establish consistent payment terms such as fees, costs of labor and materials, the timing of invoices, proof of expenses, payment method, and the timeframe of when the client must make the payments.
4. Follow up on Invoices
Invoices can get lost or forgotten, and following up with an email or a quick phone call helps remind clients of upcoming or missed due dates. Software with invoicing tools can help you track payment due dates, which will help you determine the best times to contact clients to remind them to make payments.
5. Use Construction Billing Software
If you struggle with your construction billing processes, you may be driving up costs and hurting your ability to satisfy customers. Software can automate your billing process, from the initial estimate and job costing to the final invoicing and payment collection. Invoice templates allow you to send professional, customized bills to clients with precise cost details and payment due dates.
But the good news is that once you’ve tackled your billing practices with the right construction software, you’ve acquired a significant competitive advantage–especially when you consider the general reluctance among your industry peers to strategically invest in IT. Software makes it possible to meet critical business objectives:
- Save administrative time
- Reduce errors
- Decrease AR cycle time
- Eliminate scheduling delays
- Coordinate better resource access
- Improve communication with customers and subcontractors
- Provide more accurate job estimating.
Take control of your construction billing cycle with the right construction accounting software and reap the business benefits that come with automation with several different functional modules:
FAQ
Q: Why is Construction Billing so Complicated?
A: Construction billing is ultimately very complex and highly specialized. For instance, a project’s cost might be determined by fixed price, time and material, unit price, and tax rate. Some contractors treat each of these as separate billing methods, though they are primarily categorized as job cost factors under each of the three main payment methods.
Once payment is received, general contractors can release the lien waiver to the client proving payment has been made. Without clear payment terms, there can be disputes between the client and the construction company over who is responsible for covering all costs. For instance, the total amount of payment might cover anticipated costs but not unexpected delays. A clear contract can show clients exactly what they may or may not owe in the event of changes to the project timeline.
Q: Which Method is Best?
A: The method you use will largely depend on the scale of your projects. Both arrears and advanced billing methods are preferred for short-term construction projects since there is a shorter turnaround between completion and payment. Progress billing is usually reserved for larger projects which will need a regular influx of cash to cover all expenses.
Other than the scope of the project, the billing method primarily depends on your preferences. For example, a cost-plus contract would indicate both expenses and potential profits. With the progress billing or arrears methods, contractors can measure changes in their profit margins as the project continues.
Fortunately, each method can handle various payment types, including traditional checks, credit cards, electronic fund transfers, and online payments. Even cash can be accepted, though, for legal reasons, there are usually limitations on how much can be given and in what context.
There are also financial regulations to consider when selecting a billing method. For instance, the American Institute of Architects (AIA) created a standardized methodology of progress billing. Construction accounting software that conforms to AIA billing standards includes two key forms: G-702 and G-703.
