7 Construction Billing Methods & Best Practices

construction billing process

Include a clear description of each service, the date it was performed, and the corresponding charge. This might range from labor and materials to equipment use and any subcontracted work. Before drafting your invoice, compile all necessary project details, including the client’s information, project description, dates of service, and any contract or agreement https://www.bookstime.com/ numbers. This step ensures that your invoice is comprehensive and grounded in the specifics of the project. Several billing methods are used in the construction industry, each with advantages and disadvantages. If you are wondering about how to bill your clients for your construction business, then here we will walk you through the 7 best methods for it.

  • However, depending on the project, it may be better to set clear payment schedules coinciding with project milestones or specific work stages.
  • If your invoices are regularly being sent out late, perform a quick audit to identify why that is.
  • Talking it out should always be the first option when it seems like a payment issue might be oncoming.
  • Plus, there is on-time payment to construction companies or professionals.
  • Fortunately, you can improve your cash flow processes by learning about the best construction billing methods.

What Is an AIA Application?

There are different ways to bill for progress, depending on the type of contract used for the project. Lump sum, time and materials, unit price, a guaranteed maximum price, and cost plus are all likely to use progress billing. However, the type of contract does define how that progress billing would be performed. Therefore, before taking on a new construction project, you’ll need to understand how each billing method will impact your operations and cash flow. With proper job costing and planning, however, you can take more control of your profitability no matter the method used. Fixed price (sometimes referred to as lump sum billing) helps facilitate the bidding process since the total contract price is visible from the beginning.

  • Often, there are multiple downstream schedules of values that roll up into the prime schedule of value for the owner.
  • Contractors who fail to communicate clearly from the beginning will be a lot more likely to have discrepancies or disconnections when it comes to project billings.
  • The inherent flexibility of cost-plus billing allows for adjustments to be made with relative ease.
  • Be sure that the information lines up with the information in the contract documents.
  • Inaccurate invoices can result from lost or misplaced time tracking sheets that were then estimated for invoicing purposes or when tracking job details manually by pen and paper.

Guaranteed Maximum Price (GMP)

Many owners — especially for residential projects — don’t fully understand how retainage is handled when it comes to billing. A contractor can bill a commercial land owner for 100% completion and still have retention held. Retention allows the owner to hold on to 10% of the project cost while verifying that all punch list items are done and through the closeout process.

Construction Billing Methods & When to Use Them

Coming up with the right methods for managing your construction financials can be overwhelming, especially under the pressure of upcoming deadlines and client meetings. Still, the success of your project may greatly depend on this very decision. Alternatively, builders can bundle labor, material, equipment, markup, and other details into a single unit and charge by it.

Financial Management

If the subcontractor has any issue and can’t complete the job, or if the owner denies the change order, the contractor can wind up paying for the work out of pocket. Each and every bill that a contractor issues involves a lot of paperwork. Let’s examine the scenarios to use progress billing on a project, benefits, challenges and best practices for progress billing in construction. Although flexible, the ambiguity of unit pricing makes it challenging to properly budget and plan.

Other times, subs and suppliers may attempt to use invoice sleight of hand. They might bank on the fact that construction offices are inundated with paperwork, hoping for a quick glance and approval of their invoice. Keep a close eye on the description of the work claimed to be performed, and the line item dates. Typically, invoices provide for 30 days of credit, though some larger companies even go as high as 120 days.

construction billing process

How to Create Construction Invoices: A Step-by-Step Guide

If this is not accounted for in the initial construction contract, vendors may end up working for free in order to complete the project. Some contracts allow for a contingency fund to be set aside to cover unexpected costs throughout the project. By using a contingency fund, the contractor can cover the costs of some changes to the original scope of work. Consider offering discounts for payment within a short time frame or even instantly online.

Use The Right Construction Billing Methods

  • If you’re already a pro and want to jump straight to finding the right tool – check out our recent look through the runners and riders for the best construction invoicing software.
  • The best way to avoid this type of friction is by moving all project tracking online.
  • It can demonstrate what work was agreed upon, what was completed, and how much was charged, providing a solid basis for any necessary negotiations or resolutions.
  • Ask what backup documentation is required for something like change orders, which can be very complicated to bill.
  • Keep reading to learn How to Build a Construction Payment Schedule to protect your cash flow.

The answer is, it depends on the type, scope and time length of your projects. Most construction companies earn revenue and pay job costs throughout construction invoice the duration of each project. They record income and expenses using the Percentage of Completion method of accounting, which provides…

It goes beyond mere preference; it’s about understanding the balance between ensuring timely payments and maintaining the financial health of the project. Once you know all the steps that have to be performed in order to complete the billing process, you can start splitting the process up to make it more streamlined. For example, project managers could review costs and bill their own projects. And accounts payable could be responsible for tracking lien releases as they come in.

construction billing process

Longer payment terms lead to higher debt ratios which can be fatal to a company’s finances. Many small to medium sized businesses are using 7 days to help maintain consistent cash flow. Progress billing allows those who are billing (usually contractors) to get paid in regular intervals as the project progresses. That means that contractors are out-of-pocket for shorter periods of time. Rather than exhausting their reserve funds on labor and materials, progress billing helps to top-up reserves and keep financials healthy.

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