5 Construction Billing Methods & When to Use Them

The straightforward AIA forms often eliminate the need to customize or deviate from standard templates. Efficient construction billing and payment processes allow contractors to keep their operations lean as they juggle various short- and long-term obligations. The project management and financial tools behind these processes have evolved into standard formats that benefit contractors as well as project owners. AIA billing has become the method of choice to safeguard these essential processes. Complete customer forms for payment applications, including progress billing forms such as the AIA G702 and G703.

Cost-plus billing method

For example, a cost-plus contract would indicate both expenses and potential profits. With the progress billing or arrears methods, contractors can measure changes in their profit margins as the project continues. This allows workflows to be streamlined in real time and tasks that typically require hours worth of work—like reentering data from one disconnected software program to another—to become automated. One way to ensure petty cash payments is to file a mechanics lien against the project.

Subcontractors Perform A Portion Of Their Work

This method allows for adjustments without complex contract renegotiations. Because clients have greater visibility into project costs, they can see exactly what they’re paying for in labor and materials. This allows contractors to minimize the risk of underestimating project costs upfront as they can adjust labor hours as needed.

Use The Right Construction Billing Methods

The Pay Application must include several critical supporting documents to be considered complete and valid. These documents typically include an updated Schedule of Values showing cumulative progress to date and copies of all approved Change Orders. Furthermore, the package must contain conditional and unconditional Lien Waivers from the contractor and all major subcontractors and suppliers. The owner pays the actual, audited costs, thereby shifting the risk of cost overruns to the owner. A Guaranteed Maximum Price (GMP) is often incorporated to cap the owner’s exposure. The contractor’s profit component is clearly separated and billed alongside the incurred costs, ensuring construction invoice consistent payment for work performed.

Features to look for in construction billing tools

These upfront costs are often billed as fixed fees, time, and materials, or based on project milestones. Using digital tools like Planyard can streamline billing for construction projects by automating calculations, tracking expenses, and ensuring accuracy. Contractors should understand all of the stakeholders involved on a construction project.

Construction Billing Best Practices

It also means you bill your clients about the value you are adding by building whatever is demanded. Like many other processes in the industry, construction billing must adhere to various legal regulations and standards. This can often present a challenge as some of these regulations can be overlooked and cause issues later. Therefore, it is recommended that effort and resources be put into ensuring the contract is entirely legal.

Progress Billing

This lump sum billing method is often used in repetitive or modular construction projects. Contractors using construction management software are often incentivised to complete the project early and may face penalties for delays. This method simplifies contract administration and provides cost certainty for clients but requires accurate initial estimates and detailed planning​​. The time and materials construction billing method is similar to cost plus in that the final cost is left undetermined. Under a time and materials contract, the client and contractor will agree on the goal of a project and specify the final outcome.

Use construction invoicing software and technology

This method is prevalent in large and complex projects where the construction timeline extends over a long period. Contractors can bill for completed work and stored materials at regular intervals, utilizing the progress payments supported by AIA contract billing. Progress payments also benefit clients by allowing them to assess the quality of each task before proceeding to the next. The AIA billing process creates a standard framework that enables all contractors and project owners to maintain consistency in their billing and payment practices across various projects. Standardization also makes it easier and faster to process payment applications or compare and consolidate billing documents over time.

Tips for invoice review & approval procedures

Typically, the party making payment requires the party receiving payment to sign a lien waiver. Daily reports, which many consider one of the more important aspects of successful project management, document the daily activities on a project. Including daily reports in a pay application can help prove the completion and timing of work, potentially speeding up the pay app approval process. Catch Up Bookkeeping Payment applications and invoices are both a part of the invoicing process in a construction project.

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• Contractors rely on prompt payments to fund ongoing operations, pay employees, and purchase materials.
• This can lead to confusion or delays when clients attempt to interpret cost codes from contractors with different naming conventions.
• This approach creates a simpler accounting process and brings tax deferral benefits.
• The final, remaining balance is usually remitted to the contractor once the project has been completed, and the client is satisfied with the work.
• These are typically a bundle of documents with all the relevant information to support the release of payments.
• This might range from labor and materials to equipment use and any subcontracted work.

What is the difference between invoicing and billing?

• Indirect costs help run the overall project without being tied to specific construction tasks.
• The General Contractor will first double check subcontractor invoices before submitting them to the Owner for review.
• Helpful reports include estimated cost vs. actual cost, cash flow by job and work in progress reports which include how much money is left to spend on each job.
• Looking to reduce time to payment, improve risk management, and attract more customers?
• Construction companies just need specialized knowledge and tools that go beyond basic bookkeeping.

Many small to medium sized businesses are using 7 days to help maintain consistent cash flow. Just last year, only 8% of contractors said that their customers consistently paid them on time. Be sure to send your invoices as quickly as possible (while still being reasonable).