Accurate and timely construction invoicing is essential for every financially healthy construction company. Prompt construction billing helps contractors thrive in an industry that is notorious for its high overhead costs as well as for slow payments. If you can’t keep ahead of your invoicing, you risk running into a serious cash crunch that can damage your ability to keep your business running.
In this blog we’ll discuss different types of construction billing, best practices that will help you keep your customers paying on time (and what to do when payments are late). We’ll also address the complexities of project retainage.
What is Construction Invoicing?
A construction invoice provides an account of the work completed and materials used for a particular job or time period. Construction companies, contractors, and suppliers issue invoices when payment is due for completed work. Invoices are not the same thing as purchase orders.
–> To read more about Purchase Orders and other terms used in Construction Accounting.
What are the Different Types of Construction Invoicing?
Construction invoicing is unique because the construction industry is project based and projects may extend for months or even years. Contractors use various billing methods depending on the size and type of jobs they do the most.
Progress Billing or AIA Billing
Progress billing or AIA billing means issuing a series of invoices throughout the duration of a large project. Invoices are generally triggered by the completion of predefined milestones. This method of construction billing provides ongoing funding for supplies and labor, which is critical for longer term projects. AIA billing is widely used in the United States, which means there are standardized forms and processes. AIA documentation can be customized to include specific terms for a particular project such as: an agreed-on retainage rate, or the interest rates for late payments.
Fixed Price Billing
Also known as a lump sum contract or standard price contract, fixed price billing means the contractor invoices when the service is delivered. This type of construction invoicing can be risky for contractors if the project includes items that are out of the original scope of work.
Cost Plus Billing
In this form of construction billing, the contractor calculates the total cost of materials used for the project, total project hours, and adds a percentage for profit. Cost plus billing is best for construction work that is repetitive or has fewer variations such as homebuilders.
Time & Materials
This method of construction invoicing includes the cost of materials plus standard pay rate for the duration of the job.
Project Retainage Guide for Contractors
Retainage is standard practice within the construction industry. Retainage refers to a specific percentage of the contract price held back by the client, known as withholding, until the completion of contracted work.
Here are four things to know about project retainage:
- It is stipulated by the project contract and agreed by both contractor and client.
- It applies to subcontractors as well (contractors withhold same percentage when paying their subcontractors).
- It’s typically held until the end of the project or substantial completion.
- Laws regarding retainage are different in different jurisdictions and vary by the type of project.
Managing Project Retainage
Tracking withholding amounts is critical for construction companies because project retainage can impact cash flow in an industry that’s already cash poor. Here are some ways to protect your cash flow.
- Find out how the laws in your state affect retainage for government and private projects. The way that retainage is handled, such as whether retainage earns interest or is kept in escrow, is also governed by local laws.
- Negotiate with your customers. If you have a solid reputation and a history of successful projects, your customers may be willing to negotiate a lower rate of retainage, or they may permit a surety bond to stand in for retainage.
- Plan to preserve your cash flow. Ensure your estimates are rock solid and that your project includes a cash flow forecast so you know you’ll still have access to the cash necessary to bring the project to completion.
- Learn about liens. If you become concerned about your customer’s intention to pay, you can exercise your right to use a Mechanic’s Lien, which is essentially a guarantee of payment for builders, contractors, and construction firms.
Construction Invoicing Best Practices
If you are looking for ways to improve your processes around construction billing, here are some guidelines for best practices in construction invoicing that may improve your ability to keep your cash flow flush and healthy.
- Send your invoices promptly so that you can be paid sooner.
- Include sufficient detail so your customers can clearly understand the services they are paying for.
- Add short and meaningful payment terms so customers know when the funds are due.
- Consider incentives for early payment and penalties for late payment.
Four Ways to Make Sure Overdue Construction Invoices Don’t Hurt Your Business
Late payments can be difficult, but they don’t have to turn into a catastrophe. Here are four ways to minimize any disruption from overdue construction invoices.
- Communication. Open, honest communication is the best way to resolve any invoicing problems. Be proactive. Build positive relationships with your customers, which makes it less likely an overdue invoice will go unpaid or unrecognized. Call your customers as soon as the invoice is overdue, rather than compounding the problem by waiting. Often, customers don’t pay because they can’t. And the sooner you can create new payment terms to address their difficulties, the sooner you’ll see some form of payment.
- Every contractor should have a credit policy procedure, which is a set of guidelines for how everyone in the business interacts with customers. These guidelines should include directions about how to handle disputes and how to manage any overdue construction invoices.
- Always include clear payment terms as part of your quoting, contracts, and invoicing.