Pros & Cons of Progress Billing - YouTube

There are lots of ways to bill for work on a construction project.

You can bill at the end of the project, at the beginning, or as you go along.

Progress payments are made while the project is ongoing, and they are made as a result

of progress billing.

In this video, we’ll talk about what progress payments are, the pros & cons, and how retainage

affects progress payments.

What is progress billing?

Simply put, progress billing is sending an invoice or payment application that requests

payment for the percentage of the work that you’ve completed so far.

Instead of waiting until the end of the job to bill, with progress billing it is possible

to bill incrementally as the job goes along.

On many projects, progress billing is done on a monthly basis, but they may also be sent

at certain percentages of completion.

For example, you might bill when the job is 30% complete, again when it’s 60% complete,

and finally when it’s 100% complete).

The type of billing and when you should bill are generally determined by your contract.

You can request a progress payment using a payment application or an invoice, depending

on what you and the hiring party agreed on.

A payment application is basically a packet of information that contractors commonly use

to request payment. 

Progress billing with a pay application

Filling out a pay application correctly will generally require a clear schedule of values,

or SOV. 

The SOV contains a line-item list of all of the work you will complete on the job, and

the value of each item.

The scope of work in the contract is the basis for the schedule of values.

Two of the most common standardized payment application forms for subcontractors are the

AIA G702 and ConsensusDocs 710.

Both allow for progress billing.

You can also create your own.

The contract should give you guidance on what type of pay application is acceptable.

Subcontractors or prime contractors using progress billing should submit their application

to the hiring party according to the contract timeline.

It may be on a monthly basis, or when a certain percentage of the work is completed.

Again, look to the contract for guidance on timing.

Benefits of progress billing Progress billing provide benefits to everyone

up and down the payment chain.

They allow owners and/or prime contractors to review the subcontractors’ work before

it’s complete, and resolve potential disputes before the project is over. 

We’ll cover four advantages in this video: Get paid as you go, avoid debt, spot payment

problems, and stop work if you’re not paid. 

For subcontractors, one of the best reasons to use progress payments is that you don’t

have to wait until the end of the job for payment.

A regular payment schedule makes cash flow much easier to predict and control.

It is especially helpful for small businesses that don’t have large cash reserves to wait

for lump-sum payments after the project is done.

Subcontractors can pay expenses on a job as they go.

If you have cash flowing in throughout the project, then you can pay your employees and

bills on time.

You don’t have to wait until the end to pay everyone (if they’ll even let you wait

that long), and you’re less likely to go into debt to make ends meet.

Also, if you are billing as you go, it will be easier to spot a payment problem.

For example, if the first couple of payments are really prompt, and then they start to

take longer and longer as you go along, it could be a red flag that the project is experiencing

financial issues.

If you wait until the end of the project, you won’t know whether the owner has the

money set aside or not.

By that time, it is too late, and your only remedies may be filing a mechanics lien or

pursuing a lawsuit.

If there is a payment issue and you are billing as you go, you may have the power to stop

the work until the payment issue is resolved.

Many contracts stipulate your ability to do this to resolve disputes.

Using this tactic is very effective in securing payment.

Owners don’t want their projects delayed for any reason, even if it is their own lack

of payment.

And if it is a GC that isn’t paying you, stopping work will get the owner’s attention

quickly.

Drawbacks of progress payments In general, there aren’t really many drawbacks

to using progress billing.

We’ll talk about a few aspects of progress billing that might cause a problem for you,

and what you can do to fix them. 

The main drawback to progress billings is time.

It can take time to put together a payment application multiple times during a project.

Some projects may only take a few minutes to invoice, but others, depending on the payment

application requirements, can take significantly longer.

If you need to collect lien waivers or other documentation from suppliers and subs, it

can be difficult and confusing.

It is tempting to wait until the end of the job and only submit one invoice, but on larger

projects this often isn’t financially feasible.

You just have to bite the bullet and take the time each month to put together your progress

billings.

There are a couple of things you can do to speed up the billing process.

One is to establish a billing process that you follow diligently every time.

Make a checklist of documents you need for your payment application each month, and who

is responsible for collecting each one.

You can download a free pay application checklist from Levelset - check the video description

below for the link. 

With a clear billing process,  everyone knows what they must do.

Set deadlines to make sure each person completes their task in time.

Keep all the reports and information you need for invoicing in an organized space so you

can easily find them.

If you have to hunt everywhere for timecards, receipts, and cost reports, you’ll get frustrated

and things will take twice as long.

Staying organized is the key.

Another drawback to progress billings relates to disputes about how much of the work has

actually been completed.

On a project with progress billing, these disputes can lead to work delays, since they

might come up in the middle of the job. 

The general contractor or owner may want to cut your invoice down because they think you’re

only 40% complete when you billed for 50%.

If a contractor is desperate for the work, they may not fight the dispute, especially

if it’s only for a percentage of the whole contract. 

Some contractors are tempted to overbill in case of a dispute.

In other cases, you might want to overbill on one progress period because you know you

have higher expenses coming up in the next few weeks.

We’ll give you two words of advice: DON’T OVERBILL.

Overbilling can damage your relationship with the hiring party.

And even if you overbill and the progress payment gets approved, it can cause cash flow

problems later on in the project. 

The final word Overall, progress payments are great for everyone

on the construction project.

For owners and prime contractors, progress billing allows them to see subcontractors’

progress clearly.

Applications for progress payments can bring quality or work issues to light before they

become a bigger problem.

Progress billing gives more control to subcontractors as well.

It allows them to get paid on a regular schedule as they complete their work.

Progress payments help control cash flow and can allow contractors to pay employees and

suppliers on time.

While putting payment applications together can be time consuming at first, establishing

a regular process makes the work easier.

We hope this video has been helpful.

If you have any other construction payment questions, head over to levelset.com to get

payment help from lawyers or live chat with one of our payment experts.

If you want to see more construction payment videos, be sure to subscribe to our channel.

And remember, payment help is here.