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Progress Billing for Construction

So far, we have been learning a lot about job cost, committed cost, and overhead costs. But you may be wondering when construction companies make their money. So, today we are going to focus on how construction companies bill their customers. 

Construction companies deal with different types of jobs that require different types of billing. The first type of billing we’ll focus on is called time and material billing

Now, time and material billing is pretty similar to how it sounds. You are billing a customer for your time and the material costs that you incur. So in this case, we are going to bill the customers for the cost of materials we incurred working on the building. But when it comes to labor and equipment, we are going to use an agreed upon fixed dollar amount. In this case it's $200 an hour. This is how construction companies make money on a time and material billing. They recapture their overhead and profit in these fixed labor and equipment rates that they use. 

Now, let’s move on to the next billing type, cost plus billing. The cost plus billing method is fairly similar to a time and material billing with one very large distinction. That is you do not have marked up rates for labor and equipment. You bill for whatever costs are incurred, including labor. 

So instead of using a flat rate of $200 an hour, we are going to be very transparent about our costs when billing customers. Our people cost us this much per hour. Our bills from Bay lumber and our subcontractor are here. These are all the costs that we’ve incurred, totalled to create a cost plus billing. Finally, to be very transparent, we show how much overhead and profit we are putting on this invoice.  Then, the customer pays the bottom line of $29,000. 

Now, let’s take a look at what is called a progress billing. 

A progress billing is the standard and most common billing type. It's an invoice for just that portion of a project that has been completed so far. This type of billing is great for long projects, because it allows construction companies to cover their expenses during the course of the project. 

Next, we’re going to take a look at all of the different forms used for progress billing.

Let's start by looking at the industry standard form for progress billing, which is something called an AIA document. There are two forms; AIA document G 702 and AIA document G 703. Together, these two forms make up a payment application. Whether it’s referred to as an AIA document or a progress billing, it's essentially the same thing. So what is on this billing document? 

Here's an example of a G 703 that has been completed. You might hear this called a continuation sheet, a schedule of values, or simply a G 703. Each time you bill against the contract, or each application, this document gets updated. First, you can see we have a description of the work. These are the line items that we're going to be billing out on the whole contract. Here's the total scheduled amount we'll be billing. This column here shows how much we billed so far in previous applications. We are looking at application number two. In application number one we billed for some electrical work. This application will cover what you see in this column. 

Materials presently stored is an interesting concept. In small companies, you don't see this very much. But large companies might need to build their customers for material costs that they've incurred for material that they're not going to install for a long period of time. Let’s look at the common example of steel. Steel can be very hard to come by, and many times contractors will order that steel far in advance of actually needing it to be on the job site and installed. Those materials show up in this column. Here is the total for work completed and stored to date. Here we can see exactly how much percentage wise and how much on a dollar-basis we billed on each of these line items. Finally, here's the retainage that is being held on each item. No matter how progress billing is done, any continuation sheet or schedule of values will also break down how retainage is being held.

Retainage is an agreed upon portion of the contract price that is deliberately withheld until the work is substantially complete. This leverage helps to assure that the contractor or subcontractor will satisfy their obligations and complete a construction project.

Let's go back to the first page and look at the G 702, or the cover page of the application. This is a summary of everything that we saw on that continuation sheet. It contains some additional information such as who we're billing, the project information, and the architect. But this is the piece here that is really important to pay attention to: the summary of the original contract price, what the dollar value of approved change orders are, and the total amount completed and stored to date. We can see the retainage broken down based on our continuation sheet. Here's the total amount due on this application, and the dollar amount that's left to be done. 

Now, let’s take a closer look at retainage. Based on our progress billing, we actually completed $44,000 worth of work. We have to pay our people, and We have to pay the bills that we got from our subcontractors and our material suppliers. We have earned that money but our customer is not going to give us all of that. Because retainage is being held to ensure we do a good job, they are only going to pay us $40,000. We agreed in our original contract that they would hold that remaining amount until the job is completely done. In this case, retainage is 10%. 10% and 5% are very common percentages for retainage. Now, knowing that margins are tight in the construction industry, and knowing that we're only getting paid on 90% of the work that we've completed, we can see why it is so very important to understand overhead, so that it is taken into consideration when we are billing customers. 

Now, we can begin billing customers for the work that’s been done, and begin to earn money!

Progress billing, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.

Trimble Construction One is a connected suite which connects your office to the field to streamline these workflows with the industries’ leading solutions to give you the right data for your projects. Check out what Trimble Construction One can do for you.