Progress billing is a type of invoice structure that allows a company to bill a client progressively during the life of a large or long-term project. This method of invoicing is common in industries like construction, architecture, and any industry where projects may take weeks or months to complete, requiring substantial upfront costs.
Rather than waiting until the completion of the project to invoice the client for the full amount, the company will invoice the client for portions of the project cost at different milestones or stages of completion. These milestones are usually predetermined and outlined in the initial contract. This allows the company to maintain cash flow during the course of the project and also helps to mitigate the financial risk of non-payment after the project is complete.
Progress billing can be structured in several ways, such as:
- Percentage of Completion: The client is billed based on the percentage of the project that has been completed at the time of billing.
- Milestone: The client is billed when specific milestones or stages of the project are completed.
- Schedule: The client is billed on a regular schedule, such as monthly, regardless of the amount of work completed.
In many cases, progress billing will also include an upfront payment or deposit before work begins. This allows the company to cover initial expenses and provides some level of assurance that the client is committed to the project.
Example of Progress Billing
Let’s consider a hypothetical example. Imagine a construction company, BuildIt Co., has been hired to construct a new office building for a client, OfficeSpaces Ltd. The total cost of the project is estimated to be $500,000 and is expected to take 10 months to complete.
Given the large cost and lengthy timeline, BuildIt Co. and OfficeSpaces Ltd. agree to a progress billing structure. They decide on a milestone-based structure with the following terms:
- Initial Deposit: OfficeSpaces Ltd. will pay a 10% deposit ($50,000) at the start of the project to help cover initial costs.
- Milestone 1 – Foundation Complete: OfficeSpaces Ltd. will pay 20% of the total cost ($100,000) once the foundation of the building has been completed.
- Milestone 2 – Framing Complete: OfficeSpaces Ltd. will pay 30% of the total cost ($150,000) when the building’s framing and basic structure are completed.
- Milestone 3 – Building Enclosed: OfficeSpaces Ltd. will pay 20% of the total cost ($100,000) once the building is fully enclosed, with roofing and walls in place.
- Final Completion: Upon completion of the project, OfficeSpaces Ltd. will pay the remaining 20% of the total cost ($100,000).
This progress billing structure allows BuildIt Co. to maintain cash flow throughout the project, reducing financial strain and risk. Meanwhile, OfficeSpaces Ltd. can spread out its payments over time and have assurance that it’s paying for completed work. It also gives both parties clear expectations about when payments will be made, which can help avoid disputes or confusion later on.