Construction Billing: Full Guide Bauwise Construction Management Software

For example, a construction company may need to move equipment and labor every few days or weeks from site to site. To account for these expenditures, contractors typically reference them as pre-contract costs to prepare a job site before the contract implementation starts. In summary, retainage billing is widely used in construction and other project-based industries to ensure quality and fulfillment of contractual obligations. It helps manage risks for the client while encouraging contractors to adhere strictly to project specifications. Under retainage billing, the client and contractor agree upon a fixed percentage of the total contract amount to be withheld during the project. As the contractor completes various stages or milestones, they invoice the client for the value of the work minus the agreed-upon retainage amount.

Essential Elements of the Construction Billing Process

Margins are tighter than ever in this industry, and it shouldn’t take discounts and incentives to be paid fairly. As for penalties – they can be a great tool to encourage timely payment. As with everything else, the use of discounts and penalties will make a lot of sense in some situations, but they aren’t a blanket solution. Every construction business has its own invoicing practices, and everyone knows what works best for them. They serve as a record of the customer’s order and are used as part of the approval process, while invoices are a record of the receipt of the products or services and the payment terms. Of course, every construction business handles their invoicing differently, plus the relevant information on an invoice will change quite a bit depending on the work that’s being performed.

Unit Price Billing

• With hundreds of clever digital tools out there, it’s not advisable to keep an analogous schedule for a busy construction team.
• Progress billing is when the contractor bills the client at certain milestones in the project, such as after a specific phase or after a certain percentage of work is completed.
• Maintaining open communication with your clients and reminding them about a due payment before it’s late can be extremely helpful for construction accounting.
• Meet a Knowify expert on a video screenshare, get your questions answered, and ensure you’re set up for organized, profitable projects with Knowify.
• It’s also advisable in scenarios where project specifications are expected to evolve, requiring a degree of adaptability in budgeting and execution.

Virtually every public company follows GAAP, including most construction companies, contracting businesses, or independent contractors that release financial statements. When it comes to recognizing revenue, classifying expenses, or reporting results, accountants rely on GAAP. Let’s assume you pay for all the materials, build the fence, and receive payment in cash, all within the same day. Under cash basis accounting, you will record the $2,000 in revenue and $1,000 in expenses for this job on the same day.

Disadvantages of AIA-Style Progress Billing

Fixed price contracts, will see a contractor and a client agree to a set price for all services before the project begins. If it’s decided that a project will cost $20,000, you can expect the final project cost to amount to $20,000 (unless altered by change orders). A back charge, sometimes https://www.bookstime.com/articles/mark-to-market-accounting referred to as a right to set-off, is an offset for unexpected costs incurred on a construction project. These costs can be offset by a number of different things including defective work or materials, damage to a job site, clean-up requirements, or unexpected or forced use of equipment.

Owners may offer contractors financial incentives to keep costs low to minimize the uncertainty of cost-plus contracts. In the construction industry, your best bet is to use percentage of completion. While there are exceptions where cash basis is okay, accrual is a reliable option for companies of any size. Similarly, percentage of completion is always a trustworthy option for long-term projects.

Talking it out should always be the first option when it seems like a payment issue might be oncoming. Plus, that might help identify the source of the delay, how long you can expect to wait for payment, and what next steps might become necessary. It might be construction billing methods a good idea to follow-up on an invoice a few times before taking more drastic action. By submitting a conditional waiver, no rights are waived until payment is made. At the same time, once payment comes, lien rights for that payment are permanently waived.

• For instance, homebuilding contractors often use the completed-contract method because they build in line with specifications and only recognize their income once they sell the house.
• And one of the reasons behind this is the lack of awareness of the various construction billing methods.
• And to do that, you need to get to grips with how to create a construction invoice.
• Any accountant’s job would be far more productive and easy if they used time and billing software suited for the construction industry.

List of major billing methods in construction accounting

• If not done correctly, contractors who operate in multiple jurisdictions can become subject to double taxation of their workforce.
• This method is helpful because it allows the contractor to bill for the work as they go, especially when they have multiple ongoing projects.
• Efficient billing practices contribute to healthy cash flow, positive client relationships and successful project outcomes.
• Fortunately, each method can handle various payment types, including traditional checks, credit cards, electronic fund transfers, and online payments.
• Every construction business has its own invoicing practices, and everyone knows what works best for them.

Billing method #1: Fixed-price billing