Construction projects can be very lengthy with substantial budgets involved.
How are you supposed to pay for all the materials and labor the whole time?
You can use numerous credit cards and lines of credit, but that would just lead to late payment fees, interest and bank fees. And most subcontractors wouldn’t want to wait for months to get paid.
Most clients are also not keen to make significant payment before work is completed but if they pay nothing until the end, your cash flow can be seriously compromised.
The answer is progress billing.
Progress billing and payments should only be a few weeks in arrears based on the project’s progress, giving you working capital to invest in the next phase of the project.
Let’s look at the basics of this billing system.
1. Contact negotiation with your customer
At this stage, you and your customer should discuss the milestones, contract cost, payment frequency, estimated completion period of the project. You should show them the benefits of using this payment method. To make sure that there are no problems in the future, project managers must keep open communication with the client, to ensure everyone is aware of the project’s status and bills are sent for the proper amounts. Nowadays, it became way easier to keep customers in the loop by using project management software.
2. Establish the schedule
Estimates are perfect to use in this situation. Break down the project into each scope of work. You need to identify the amount of material, subcontractor workers, concept and design, site work, inspection, time required for each step and their associated cost. Identifying the percentage of completion helps to compute the payment frequency.
3. Once the framework is in place, you simply need to issue the invoices. The information that you would generally put into the invoice is:
· The total contract value
· The percentage of work completed
· The balance paid to date
· The current outstanding balance
· The balance remaining to be invoiced
The client issues the invoice payments according to the information related to the percentage of work completed, the milestone of project achieved and materials purchased.
Frequently, large contracts experience changes to the initial scope of work, it could be unplanned difficulties, nature affects or even the customers constantly changing their minds. Change orders can affect the expenses and/or timing of a project. This requires updated timeline or milestone to be agreed to and the new invoice would reflect that change.
Progress invoicing is a great way to avoid unnecessary overhead costs, it helps keep track of change orders and keep a positive cash flow. Customers stay in the loop about their project and they don’t have to come up with the whole amount of money at one time or pay a huge deposit upfront.