Many businesses undertake lengthy projects with substantial budgets, and struggle to find the best way to invoice customers. Most clients are not keen to make significant payment before work is completed but if they pay nothing until the end the supplier’s cash flow can be seriously compromised. The answer could be progress billing.
Progress billing is well-suited to the construction industry.
When you adopt progress billing, you incrementally bill customers at each stage of the project, with the invoice reflecting the amount of work that has been completed. A single progress invoice is used to show the total value of the contract, the balance paid to date, the percentage of activity completed, the amount currently outstanding – and of course the amount immediately due.
As each milestone is attained, a new progress invoice is issued until the project is almost over – let’s say 5% to 10% from completion. At this stage, a final balancing invoice will be issued on completion of the task.
Why progress billing is good for you
Put simply, progress billing can remove a huge amount of strain from your cash flow problems. If you bill only on completion, you will have to spend significant sums on staff and raw materials months before your customer pays you. Adopt progress billing and payments should only be a few weeks in arrears, giving you working capital to invest in the next phase of the project. This is particularly important if you are using freelance talent to complete the assignment and need to be paid before you can pay their invoices. The most gifted and in-demand people simply won’t wait months to receive payment.
Why progress billing is good for your customers
Traditional billing on large, lengthy projects often involves a 50% deposit upfront, with the remaining 50% payable upon completion. If the total budget is the hundreds of thousands (let alone the millions) of pounds, the deposit can be huge and many customers can be reluctant to pay it. It’s not so much that your customers may suspect you of trading fraudulently: it’s that even well-run businesses can go bust if their market conditions suddenly worsen.
With progress billing, payments are made in bite-size chunks for work already completed, giving the customer a greater degree of confidence. The customer would still face problems if the supplier went out of business, leaving the project partially completed, but they do not risk paying 50% in return for little or no work. And of course, progress billing is a strong initiative for the contractor to hurry up and finish the project – they don’t get paid until they reach the next milestone.
Which industries benefit most from progress billing?
Progress billing is a positive step for suppliers and customers alike in almost any industry where long timescales and large budgets are the norm. These sorts of projects most commonly occur in the construction sector (which also requires large purchases of raw materials upfront, straining suppliers’ cash flow if there is conventional billing and no deposit), the defence and aerospace industries and web design (no material costs, but often very long timeframes).
How to implement progress billing
If you wish to introduce progress billing, you will need to secure the buy-in of the customers concerned. When tendering for new business, you can make progress billing a condition of appointment, or you may wish to make it a negotiable issue for a crucial contract. At this stage, you and your customer should agree on the project milestones at which invoices will be issued and the proportion of the total cost that those invoices should represent.
Having agreed the methodology, you should create and agree a project timeline. This will involve breaking the job down into meaningful and measurable steps and identifying the people, raw materials, information and time required for each step.
Once the framework is in place, you simply need to issue the invoices. These will be rather more detailed than conventional invoices, as they will need to contain quite a bit more information:
- The total contract value (both as originally agreed and as updated, if changes have been made)
- The percentage of work completed, including details of what has been done
- The balance paid to date
- The current outstanding balance
- The balance remaining to be invoiced
It is particularly important that you and your customer are clear about the milestones; any ambiguity can lead to invoices being rejected or payment delayed. Equally, it goes without saying that the project manager must check that all work has been fully completed to the customer’s satisfaction before it is billed.
Similarly, if customers change the scope of the project (and particularly if they add to it) the costs for doing so must be agreed upfront and fed into all future invoices. Should this also entail changes to the billing stages, these should be clearly agreed so there can be no disputes when invoices are issued.
As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl continues an ethos of working with distressed businesses to help them overcome their financial problems.