Traditionally, in business relationships, a client requests products or services, and the servicer or contractor immediately invoices for the total value of that product or service.
This works great in industries where costs aren’t extremely high, right?
But what happens when that product or service costs tens of thousands — or even hundreds of thousands — and could last well over a year?
Unfortunately, contractors can’t afford to wait until the end of a project to get paid and payment processes can be confusing.
Cash flow during construction projects is vital. In order to maintain that cash flow, contractors have to know the best way to bill for their services.
In this guide, we’ll walk you through maintaining a cash flow through construction in-progress billing, how it works, and why it can be so beneficial to your business.
What are Construction In-Progress Billings
In-progress billings are common in a number of industries, like, plumbing, roofing, painting, etc.
Projects that can easily last for more than a year, that require large capital, like those in the construction industry, benefit from the cash flow involved in construction in-progress payments.
In-progress billing involves incrementally invoicing clients with the intent to obtain a payment for the portion of the project that’s already been completed.
This type of billing is necessary to ensure contractors can maintain an adequate level of cash flow throughout the duration of the project they are working on. Especially on large projects with large budgets.
How Does Construction In-Progress Billing Work?
In-progress payments are typically based on the percentage of a project's completion.
Payments are divided up as a construction project progresses based on the timelines and/or milestones originally set out in the contract by the contractor and the client.
In-progress billings prevent clients from having to pay for projects up front, but construction billing processes aren’t quite as simple as preparing an invoice and sending it off to the client.
Although beneficial, in-progress billing can be challenging, as it may involve contracts containing:
- Payment applications
- Change orders
The first step to creating an in-progress billing system with a client is to negotiate a billing method in the project’s contract. Contractors and clients should agree on:
- Frequency of billing
- Timelines and milestones for billing
- Acceptable payment methods
- Any exceptions to payment terms
Timelines and Milestones
It is of particular importance that the contractor and the customer are clear about the milestones to avoid any delays in payment or invoices being rejected completely.
An example of setting up milestones for payments looks like this:
Tabitha, a hotel chain owner, agrees to pay her contractor 20 percent of the total amount of her upcoming remodel upfront. Once the contractor has completed the first milestone — 50 percent of the project as agreed upon in their contract— Tabitha pays another 40 percent of the bill.
Once the hotel remodel was completed, Tabitha paid the contractor the final 40 percent of the bill.
Some customers may even require a retainer to be calculated into your in-progress billings.
With a retainer, a specific percentage of payment may be withheld by the owner until the project has been completed and they are satisfied with the work. This amount can vary anywhere from five to ten percent of the entire project’s cost, or per milestone.
This money is held in reserve in case there are any issues during the project. Retainers help protect owners from any issues with the contractors or subcontractors — giving them an incentive to complete the project proficiently.
For contractors, retainers can cause problems with cash flow. Construction in-progress payments help reduce the risk of the contractor not having enough money to pay for:
To avoid any other issues with retainage, the owner and the contractor should come up with an agreed-upon retainer prior to starting the construction project.
Applications and Forms Needed
Unlike many other industries, construction jobs require payment applications — a payment “package” containing a group of documents explaining the scope of the project and how the contractor will be paid.
These applications help reduce the possibility of error and expedite payment processes. Documents and forms required can vary from project to project and state to state, but some of the most common documents are:
- General forms:
- AIA Forms — G702 Application and Certificate for Payment
- ConsensusDOC 291 Application for Payment (GMP)
- ConsensusDOC 292 Application for Payment
- ConsensusDOC 293 Schedule of Values
- Application for Payment — components of the application for payment have several basic components, including:
- Overview of the project
- Schedule of values
- List of subcontractors
- A project schedule
- Daily reports
- Lien waivers
- Photo documentation
Change orders are documents that notate any changes in the:
- Scope of the project
- Conditions of the construction site
- Timeline or milestones
Because change orders can put a contractor’s payment at risk, contractors and customers must look over the initial contract to ensure that they understand the terms and conditions that have already been agreed upon about change orders.
Just like payment applications, every state and every project has different forms that will need to be completed. Some of the most common forms needed to complete a change order include:
- AIA G701
- Consensus DOC 202; or
- Consensus DOC 795
A word of advice, whenever a change order occurs do not continue with the work until the order has been approved. Choosing to work without a change order can increase your liability as a contractor and put you at risk of not receiving a payment.
Instead of trying to juggle all the forms, learn the terminology from state to state, and try to remain productive, let Flexbase take care of the tedious parts.
Flexbase is your one-stop payment automation platform.
Use Flexbase to…
- Streamline your billing processes
- Send the correct applications — with little effort
- Fill out forms and applications for you
- And more
… at almost no cost to you.
What’s the catch?
No catch here. No monthly subscription fees, Flexbase is a commission-based company — for every payment you receive we’ll take a small commission of 0.5%.
If you don’t get paid, neither do we.
What Details Are Included on Construction In-Progress Bills?
In-progress bills aren’t like typical invoices, but what should be included in them? The following information is typically found on an in-progress bill:
- The total amount of money due for the entire project
- Approved changes/adjustments to the amount owed
- The total billed up until the point of billing
- The most up to date project completion percentage
- The remaining balance owed for the completion of the project
How Are Progress Billings Determined?
In-progress payments are typically made when a percentage of the work is completed or when specific milestones are hit, based on what has been agreed upon between the contractor and the customer.
Occasionally, a contractor — or the customer — may request to set up monthly billing as a way to ensure that the project is being paid for efficiently.
Why Should You Use Construction In-Progress Billings?
Construction in-progress billing can benefit both customers and contractors. In the following sections, we’ll discuss the different benefits and how to easily increase your cash flow with construction in-progress billings/payments.
Maintaining a Cash Flow: Construction In-Progress Billing Benefits
Understanding the Construction in-progress payments can help contractors:
- Avoid disputes and review work
- Get paid as you go — cash flow becomes more regular, allowing contractors to pay employees on time and offset labor costs.
- Avoid debt
- Prevent payment problems, such as:
- Financial issues
- Liens; and
- Quickly stop work if you are not being paid
How In Progress Billing Benefits Customers, Too
It’s no surprise that customers are often reluctant to pay fifty percent of the total cost of a construction project upfront.
With in-progress billing, customers can make bite-size payments for work as it is completed, leaving them feeling confident that the project is going smoothly — and that their contractor will meet their milestones within the timeline specified.
While problems can always arise, in-progress billing prevents the risk of paying a 50 percent deposit for work that isn’t completed or has been done poorly.
Ensure You Get Paid Using In Progress Payments
Unfortunately, it’s not uncommon for in-progress billings to get rejected by a lender or an owner because of several mistakes, like:
- Incorrect completion percentages
- Unsatisfactory or insufficient proof of work performed
- Incorrect math
- Applications sent in too late
- Forgetting to submit lien waivers
- Leaving change orders unaccounted for
- Lack of payroll records
As a contractor, you could be working on projects in six different counties or states. It becomes easy to let something slip, resulting in delays in both project and payment.
Let Flexbase Make Construction In-Progress Billings Easy
At Flexbase, we never want to see a contractor miss a payment because of a mistake that could have been easily avoided.
As an automation platform, we make billing easy. We’ll take care of:
- Sending and completing forms and applications
- Lien waiver requests
- Tracking projects
- Sending legal notices for late payments
- And more
Cash Flow Concerns? Flexbase Can Help
Construction projects can take a massive toll on your cash flow. Are you worried about depleting the cash flow from paying for…
- Legal fees
…during a specific project?
Or maybe you need funding for new equipment but are worried about interest rates and loan approvals?
As part of your subscription to Flexbase, our lending partners are able to offer...
- Preferred interest rates
- Instant pre-approval for equipment loans
- No down-payments
- And more
...from our lending partners. And we take care of all the paperwork for you.
Reduce the risk of human error — and lack of payment — by streamlining your processes with Flexbase, today.