Types of Construction Billing & Best Practices

Building trust and a collaborative relationship with your customer will help on the path toward securing better terms. It’s a good idea to provide enough information to support the requested payments, but not https://www.bookstime.com/articles/what-is-an-invoice-number too much where the invoice becomes illegible. Invoice requirements might differ somewhat from project to project, but having a basic format and uniform method of labeling work or products helps everyone.

• Furthermore, this can lead to accelerated project timelines, as contractors are motivated to complete the work efficiently.
• If you miss a measurement or have to go back and recalculate, your estimates can be severely off the mark.
• Construction companies can streamline the billing process, reduce errors, and improve cash flow using reliable and efficient invoicing software, such as Moon Invoice.
• Any changes in labor hours or materials costs will not affect the client but will instead impact you as the contractor.
• As you can see, construction billing methods come in many different shapes and sizes; each method has pros and cons that will work better for specific use cases.
• At the same time, once payment comes, lien rights for that payment are permanently waived.
• In this article, we will break down the five of the most common construction billing methods, taking a look at the advantages and disadvantages of each.

Types of Construction Billing & Best Practices

Construction billing can be complex and time-consuming, but the very health of a construction project depends on getting it right. Remember that you must pass the gross receipts test to use cash basis or completed contract methods. So if you’re a large company or growing business with your sights set on growing even more, we suggest you steer clear of cash basis accounting. It won’t give you the tools you need to manage your business in a way that facilitates long-term growth. When in doubt, work with a certified professional accountant to set up the accounting system that will work best for your business. As mentioned, the completed contract method is somewhat similar to the percentage of completion method, but it’s a very simplified version that requires much less admin work.

Billing method #2: Time and material billing

Equipped with these bank accounts, you can significantly increase the performance of your construction business. Apart from these, the accounts payable aging report should consist of the vendor’s name and payment terms. Parties — the customer and contractor — have to agree ahead of time when control transfer happens (over time or at a specific point in time).

Construction billing methods & best practices

Contractors need to select the appropriate billing method based on the project’s nature, complexity, and contractual agreements. Some projects may require a combination of billing methods to accurately reflect the work performed and ensure fair compensation. Effective and transparent billing practices contribute to smoother construction billing methods project management, improved client relationships, and successful financial outcomes in the construction industry. Because accrual accounting lets you recognize revenue and expenses in the same accounting period, it’s one of the best ways for a construction company to understand its true financial position.

• If a contractor’s job costs consistently and uses historical data to create accurate estimates, the more room they can leave themselves for job-level profit.
• Contractors can ensure accurate billing, reduce client disputes, and maintain profitability using the right billing methods.
• This invoicing practice can be risky for the stakeholders in charge of the project.
• For better clarity, here are all the billing methods with short explanations of how they work in everyday operations.
• However, most contractors will accept non-branded forms as long as they follow the same layout and structure of official AIA documents.

As the name implies, this method recognizes revenue only after you’ve completed the contract (or reached substantial completion). In practice, this means you won’t record any expenses or revenues as the project progresses, even if you buy materials or receive compensation from the project owner. The biggest reason GAAP doesn’t allow cash basis accounting is inaccuracy. Since cash basis records income and expenses in different periods, it opens the door for mistakes. Instead, GAAP requires accrual accounting, as it does a better job of accounting for a company’s genuine financial standing.

Easy Construction Billing Methods For Contractors & Entrepreneurs

Projects should have a clearly defined scope to minimize the financial risk for the contractor. Westerman Construction provides complete project management services, working with owners and architects from the earliest stages of a job’s conception until the project is fully realized. You’ll accumulate all billing and related costs in a balance sheet using a percentage of completion or construction in progress account. Let’s say you wanted to analyze how profitable you were in July of last year (during your busiest time of the year). There will be a timing difference between revenue and expense recognition using cash basis. You may not get paid for all completed work in July until August or even September.

If your invoices are regularly being sent out late, perform a quick audit to identify why that is. If so, look into a paperless option for managing construction invoices to help speed things along. Advanced billing in construction is a method where payments are finalized before a project begins — usually in the form of a lump sum payment. To ensure a smooth and effective construction billing process, it’s important to follow best practices that promote accuracy, efficiency and transparency. Guaranteed maximum price contracts are good for projects that the contractor knows well and has experience with.

• But even if you fall under this threshold, most trades are far too complex to get by using the cash basis method.
• Contractors can complete it within the first 2 weeks, 3 months, or any other time they see fit.
• In that case, unit pricing can be highly beneficial since contractors can expand projects and tasks midway through the project and keep their rates consistent from the start.
• Cost plus percentage billing can benefit contractors, while guaranteed maximum price billing provides greater transparency and reduces the risk of cost overruns.
• Construction billing helps ensure the construction company receives a timely lump sum payment for its work.

Guaranteed Maximum Price (GMP) billing is a method in which the contractor agrees to a fixed cost for completing a project but with an established ceiling on the total price. This cap ensures that any cost savings below the agreed maximum benefit the client rather than the contractor. This is a departure from the traditional lump sum billing, in which the contractor would retain these savings. GMP is a compromise between lump sum and time and materials billing, providing some predictability while offering cost control. Time and Materials (T&M) billing is a payment model in which clients are invoiced based on the labor hours worked and the cost of materials used in a project. This approach includes a profit margin built into the hourly rates and materials costs provided to the client.