What Are Progress Billings and How Do They Work?

Progress billing is an invoicing method used for large-scale, long-term projects, allowing for a regular payment schedule as work is completed. This approach is common in industries like construction, aerospace, and defense, where projects can span months or even years and involve substantial budgets. By invoicing incrementally, contractors can maintain a steady cash flow to cover ongoing expenses such as labor and materials. This method benefits clients by allowing them to fund the project in stages rather than providing a large upfront payment.

Establishing the Billing Framework

Before any invoices are sent, a clear and detailed framework for billing must be established and agreed upon by both the contractor and the client. This initial setup is a preventative measure against future disputes over payment amounts and project progress.

A component of this framework is the Schedule of Values. This document breaks down the total contract price into a detailed list of specific work items or project phases. Each line item is assigned a value, and the sum of these values equals the total contract amount. The contractor prepares a preliminary draft of the Schedule of Values for the client and architect to review and approve before the first payment application is submitted.

Another element established in the initial contract is retainage. Retainage is a percentage of each progress payment, often between 5% and 10%, that the client withholds. This practice provides the client with a form of financial security to ensure the contractor completes the project to the specified standards and corrects any identified defects. The withheld funds are released to the contractor upon the final completion and acceptance of the project.

The Progress Billing Invoice

The progress billing invoice is the document used to request payment for work completed during a specific period. Its structure and content are directly derived from the pre-approved Schedule of Values. Standardized forms, such as the AIA G702 Application and Certificate for Payment and its G703 Continuation Sheet, are widely used in the construction industry to ensure consistency and clarity.

The invoice details the financial progression of each line item from the Schedule of Values. For every task, the invoice shows the original scheduled value. It then lists the total value of work that was completed and billed in previous periods. The next column quantifies the value of work performed during the current billing cycle.

From the total value of work completed in the current period, the contractually agreed-upon retainage is calculated and subtracted. The invoice also accounts for any previously approved change orders that alter the original contract sum. After deducting retainage and factoring in previous payments received, the form calculates the final amount due for the current invoice.

Recording Progress Billings in Accounting

The way progress billings are recorded in a company’s accounting system is specific and designed to accurately reflect the financial position of long-term projects on the balance sheet. This involves the use of specialized accounts that track the relationship between costs incurred and amounts billed.

Two primary accounts are used: Construction in Progress (CIP) and Billings on Construction in Progress. The CIP account is an asset account that accumulates all the direct costs, such as labor and materials, incurred on a project to date. Conversely, the Billings on Construction in Progress account is a contra-asset account, meaning it has a credit balance and offsets the CIP account. This account tracks the cumulative total amount that has been invoiced to the client.

The comparison between these two accounts reveals the project’s billing status. When the “Billings on Construction in Progress” account balance is greater than the “Construction in Progress” account balance, it results in an overbilling situation, reported as a current liability on the balance sheet called “Billings in excess of costs”. This signifies that the contractor has billed for more than the costs incurred.

If the CIP account balance exceeds the billings account, it is an underbilling situation, reported as a current asset called “Costs in excess of billings,” indicating that the contractor has incurred more costs than have been invoiced to the client.