7 Construction Billing Methods & Best Practices

It is favored by contractors who value simplicity and predictability in financial management and clients less experienced with construction projects. They may benefit from the straightforward nature of a single, fixed cost. However, this method can pose significant financial risks for very large or complex projects due to the potential for cost overruns and the competitive pressure in the bidding process.

Tips to Improve Payments

These challenges can lead to delays in payments, disputes and increased administrative burdens. Here are some of the best practices that you should consider for your construction projects. Getting everyone together to discuss billing at the beginning of a project is enormously helpful. Ask to meet with all stakeholders, from the owner to the lender to the construction manager to fully understand what each requires.

Type #7: Earned value report

• There are several billing methods available, each with its advantages and disadvantages.
• Accurately predicting total costs can be challenging, adding complexity to the contractor’s financial management.
• Because you’ll be recording income and expenses in separate accounting periods, making it extremely challenging to understand your true financial position.
• You’ll hear this concept referred to as the “matching principle.” This principle solves the biggest problem from cash basis accounting, which is the misalignment of revenues and expenses.
• You must trust that vendors, suppliers, general contractors, and project owners will pay their debts on time and in full.
• This financial tool measures how well a construction company manages and generates cash to pay its debt and fund operating expenses.

In effect, unpaid bills or future payments are only recognized when those funds physically transfer hands. Under cash basis accounting, you’ll have to report that income in the earlier year to reflect when that transaction took place. Project-based accounting is the technical term for the style of accounting https://www.bookstime.com/articles/cash-dividends-and-stock-dividends used in construction. It treats each construction project independently, complete with a budget, as well as detailed revenue and expense tracking. In order to do this well, you and your accountant must be meticulous when it comes to revenue recognition and expense tracking on a per project basis.

Disadvantages of Unit Price Billing

Accrual accounting requires careful tracking of accounts payable, receivables, and concepts like deferred revenue and payroll accrual. Unless you were a CPA in a past life, this means you need to hire an accountant to manage this for you. You must fall under the IRS threshold and have the understanding that you’ll eventually need to replace this method with something more robust as your business grows. If you meet these criteria, the cash basis method can be a great jumping-off point as you ramp up your business. Similar to progress-based billing, this is another way of spreading costs and payments over a project. This post covers the certified payroll requirements for contractors working on federal construction projects.

• However, the proper construction billing software can help overcome these challenges by enhancing efficiency, accuracy, and profitability.
• Similarly, percentage of completion is always a trustworthy option for long-term projects.
• Clients must review and approve these documents before funds are released, which can be time-consuming and lead to large volumes of paperwork.
• You can create customized invoices with Moon Invoice that reflect your business’s brand and style.

The primary advantage of cost-plus billing is its transparency, allowing clients to see exactly where their money is going. This model is particularly suitable for complex projects with variable scopes, where predicting exact costs is challenging. It also allows for flexible adjustments during the project, such as when material and labor costs increase unexpectedly. Some contracts may include a “Guaranteed Maximum Price” clause to cap spending, which helps control the budget from the client’s perspective. Another major disadvantage is that since profit is predetermined, there is no way to increase profitability by cutting costs or working more efficiently. This lowers the amount of profit a construction company can make since profit is obviously tied to your total project cost.

Effective billing practices help build trust between the construction company and its clients. The construction company can demonstrate its professionalism and commitment to transparency by providing detailed invoices and clear payment terms. Effective construction billing is crucial for managing a construction construction billing methods project’s finances and ensuring profitability. It also plays a vital role in maintaining positive client relationships by transparently communicating the project costs. The construction industry often deals with complex billing that involves multiple stakeholders, change orders, and project milestones.

The progress billing method is ideal for major construction projects that are lengthy and typically have big budgets. It’s important to read and fully understand the requirements for each billing to maintain good financial health on the project. Unit pricing is a method contractors can use to boil down project prices into blocks of work and then charge for each block (or unit) they complete. Unit pricing can be used in combination with any other billing method to get really granular with costing by detailing hours of work, cubic footage of concrete, and the equipment used. Time and materials billing is used for small contracts and self-perform work.

With proper job costing and planning, however, you can take more control of your profitability no matter the method used. This blog will discuss the most common billing methods in construction, list the pros and cons to each, and when they are the best approach. We will also cover the best practices for construction billing that are guaranteed to speed up payments, increase invoice accuracy, and satisfy all project stakeholders. To ensure accurate billing and maintain finances, the construction company must track all expenses and bill the client accordingly. Choosing the right billing method is essential to ensure accurate billing, reduce disputes, and maintain profitability. If you struggle with your construction billing processes, you may be driving up costs and hurting your ability to satisfy customers.

The primary benefits of this method include its standardized approach, which brings clarity and professionalism to the financial management of a construction project. It allows for consistent cash flow, reducing the financial strain of waiting until project completion for payment. Additionally, integrating this billing method with modern construction management software can significantly streamline the process, making it quicker and reducing the likelihood of errors. Lump-sum billing, or fixed-price billing, is a method where the contractor and the client agree on a total price for a project before any work starts. In this arrangement, the contractor charges the client a predetermined amount, typically invoiced at regular intervals like monthly or at specific project milestones. Unlike other billing methods, lump-sum does not usually require the contractor to present detailed cost breakdowns or profit margins, simplifying the paperwork and administration involved.