Progress Invoicing: When Should One Use It?

Progress invoicing is an entity that is most commonly utilized by contracting businesses. With the growth of a contracting business, the size and scale of their projects also increase. As your business grows projects can go from small tasks that take only a few days to complete to long-term missions that take a week, month, or even a year to reach completion. When these larger projects become the new normal, your contracting business can no longer run on the bill-as-you-go system.

In fact, when your projects become larger and longer, getting paid altogether and managing finances can become an excruciatingly difficult endeavor. That’s when progress invoicing comes along with its convenient and easy-to-manage payment system. Progress invoicing also known as progress billing is the topic of discussion for this article. Let’s dive into the what’s and how’s of progress invoicing and explore how you can use this method to improve cash flow.

Progress Invoicing – Definition

Project invoicing is an invoicing method that conveniently breaks down the fee of a project into smaller increments. This method divides the entire project into milestones and at each milestone, the customer pays a portion of the overall fee to the business. This means that instead of getting paid for the project altogether in one go, businesses go for multiple partial payments that are easy to manage and keep track of. How these milestones are identified depends on the nature of your business and project.

Like, take bathroom remodeling as an example. This project will be divided into milestones like demolition, framing, drywall, insulation, and finishing. When it comes to milestones, and payments, businesses and clients sit together to devise a project timeline, along with the milestones and how much payment will be made at each increment. If, for example, the total bathroom remodeling fee comes out to be $35,000 you can divide the project into six installments structured like in the table given below:

With progress invoicing, you can seamlessly pay for the material, labor as well as subcontractors as you work. Moreover, clients can also benefit from progress invoicing because they do not have the pay the full amount for the project at once and can pay once the milestones are reached.

Difference between Progress Invoicing and Other Types of Invoicing

With progress invoicing, one gets a middle ground between writing a sales invoice for everything upfront and waiting to bill until the completion of the project. Upfront billing is the payment process where the customer pays the money in advance. This kind of billing is quite useful in some cases for example if you are working with a client who has poor credit or is someone you do not know that well. On the other hand, billing upon completion of a project means that you carry all the costs until the invoice is paid. Billing upon completion is a common method for projects that are short-term or those that do not require the purchase of supplies or materials. However, for multistage projects, progress invoicing is considered appropriate as it helps maintain a healthy cash flow.

When is Progress Invoicing Used?

Progress invoicing is most commonly used for lengthy projects or the ones that require the purchase of expensive materials. With progress invoicing not only can business improve their communication with clients but are also provided with a framework for keeping cash coming at pre-planned intervals. As the client and business both set the milestones and the payment schedule, both parties know what to expect. In the end, progress helps foster trust and avoid misunderstandings among businesses and clients. 

Which Industries Use Progress Invoicing?

Progress invoicing is most commonly used by contractors in the construction industry such as general contractors, drywallers, electricians, framers, painters, plumbers, welders, finish carpenters, as well as masons. Businesses dealing with building trades are not the only ones to benefit from the process of progress invoicing. In fact, people who deliver high-value services like freelance services, interior design, and web development can also benefit greatly from progress invoicing.

Steps for Using Progress Invoicing

If you are using progress invoicing for the first time, you will have to do some work in advance. However, once you have set up progress invoicing for one client, you will be able to easily follow that model for future projects. Given below are the steps that you can follow for progress invoicing:

Step 1: Identify Project Milestones – The milestones you set will vary depending on the industry and project. To identify your project milestones, consider creating a project estimate.

Step 2: Determine How Many Payments You Will Require – The cost and the length of the project dictate the right number of milestone payments. To determine the milestone payments, start by looking at the total fee of the project. Afterward, identify the milestone that will trigger the invoice. From there, you can decide if you want to break up the payments either by percentages of the total or by flat amounts.

Step 3: Review the Proposal with Your Client – Once you have determined the milestones and the payment schedule, review them with your client. The client will either agree with the proposal or negotiate changes. Afterward, apply any modifications needed and then get the signature of the client on the final proposal.

Step 4: Invoice According to the Payment Schedule – Use an invoice generator like Invoicegenerate.com to draft invoices according to the payment schedule.

What Elements Does a Progress Invoice Include?

Progress invoice consists of all the elements harbored by a standard invoice along with incremental billing details that correspond with the agreement you have with your client. Given below are the elements that are included in the progress invoice:

Basic Information - The name address, and contact information of the contractor or business, name and information of the client, invoice number, and the date of the invoice. 

Goods Delivered or Word Performed – Pricing along with the description of materials or products used for the project, and description of any labor or service performed.

The Total – Total price of the items/services, and applicable sales taxes.

Progress Invoicing Details – Original contract amount, a total of progress billings to date, the balance that is paid to date, work percentage completed, and the remaining balance of the total project. 

Payment Information – Due date of payment, terms of payment, and method of payment used like credit card, cash, or check.

Benefits of Progress Invoicing

Better Cash-Flow Management – In case you are a business that deals in large projects and struggles with cash flow, progress invoicing can benefit you in three ways. First, by getting an upfront payment, you will be able to easily pay for materials. Secondly, as with progress invoicing, you will know when incremental payment will come in, and you will be easily able to manage cash flow.  The third benefit of using progress invoicing is that you will be alerted if a client is facing financial problems. In case, they fail to make a payment as agreed, you can halt the project until they make the payment.

Better Tracking of Expenses and Project Management - As progress invoicing involves milestones, you and your team have an incentive to keep work moving and complete it on time if you wish to receive timely payments. These milestones not only aid in project management but also help you track finances.

Enhanced Accountability and Transparency – With progress invoicing, clients can monitor your progress. Moreover, it also shows the clients how you will be accountable for delivering what you committed to.

Enhanced Customer Satisfaction – With progress invoicing, clients get more financial flexibility. Moreover, they can also avoid surprise billing with progress invoicing. Furthermore, paying incrementally lowers financial risk for clients and also minimizes disputes because both parties know what to expect.