Progress billings are invoices submitted by a service provider (most commonly a contractor) that request payment for the portion of a long-term project completed to date. They let owners pay incrementally as work proceeds and let contractors fund ongoing expenses (labor, materials, subcontractors) without waiting until project completion. (Source: Investopedia / Theresa Chiechi)
Key takeaways
– Progress billings break a large contract into interim invoices tied to milestones or percentage complete.
– They typically use a schedule of values that assigns a dollar amount to each phase or task.
– Owners commonly withhold a retention (retainage) — often 5–10% — until final acceptance to protect against defects or incomplete work.
– Clear change-order procedures and documentation are essential to manage cost changes and avoid disputes.
Understanding progress billings
Progress billing is a contractual cash‑flow mechanism. Before work starts, the owner and contractor agree:
– contract price,
– payment schedule or milestone triggers (or method for determining percent complete),
– schedule of values (detailed value for each work element), and
– any retainage percentage and change‑order approval process.
When a milestone is reached or a percent complete is verified, the contractor issues a progress invoice showing the amount billed to date, what the client has paid, the percent complete for each line item, any changes, and the current payment due.
What’s included in a progress billing invoice
A complete progress billing typically shows:
– contract (original) amount,
– schedule of values (line items and values),
– percent complete per line item and total percent complete,
– cumulative amount billed to date,
– amount previously paid by the client,
– current amount due (after retainage, deductions, or approved change orders),
– description and approvals of any change orders, and
– signature or acceptance line (many owners require a signed approval or certificate).
Schedule of values
A schedule of values (SOV) allocates the total contract price across discrete tasks or phases (site work, foundation, structural, MEP, finishes, etc.). The SOV:
– supports milestone billing and percent‑complete calculations,
– provides transparency for routine progress reviews, and
– enables comparison of budgeted vs actual spend to surface overruns early.
Percentage retained (retainage)
Owners often withhold a portion of each progress payment — commonly 5–10% — to ensure completion and correct punch-list items. Retainage protects the owner but can create cash‑flow stress for contractors, so the retention percentage and release conditions must be negotiated and documented in the contract.
Who uses progress billings?
Common users:
– Construction contractors (general contractors, specialty trades),
– Long‑term industrial or infrastructure contractors (e.g., aerospace, defense),
– Large engineering, procurement, and construction projects.
Progress billing is appropriate whenever projects are large, multi‑phase, or extend over long periods.
Important procedural best practices
– Agree payment schedule and SOV before work begins.
– Define percent‑complete measurement method (physical measurement, cost‑to‑cost, milestones).
– Require written change orders (signed/initialed by the owner) for scope and price changes.
– Use lien waiver forms and retain copies of all payments and approvals.
– Require owner acceptance/signature on each payment application to reduce disputes.
– Build cash‑flow forecasts that incorporate retainage and expected payment timing.
Special considerations: factoring in cost changes
Long projects have higher exposure to cost changes. Manage them proactively:
– Include allowances or contingencies in the contract for predictable uncertainties.
– Maintain a clear, documented change‑order workflow: submit proposed change, estimate cost and schedule impact, obtain written owner approval before proceeding.
– Track actual costs vs SOV estimates to detect and negotiate overruns early.
– Consider price escalation clauses for materials or fuel on very long projects.
– If cash flow is tight, contractors can use accounts‑receivable factoring for progress invoices—understand fees and implications.
Practical steps — contractor checklist for setting up progress billing
1. Prepare a detailed schedule of values and submit it to the owner for approval.
2. Agree the billing method: milestone invoicing or percentage complete (and the measurement method).
3. Negotiate retainage percentage and release terms.
4. Include a written change‑order procedure in the contract.
5. Establish required supporting documentation for each application (photos, inspection reports, timesheets).
6. Issue each progress invoice with a clear breakdown: billed to date, amount due, retained amount, and required approvals.
7. Collect signatures and retain lien waivers and payment receipts.
8. Reconcile invoices with costs to monitor margins and cash flow.
Practical steps — owner/client checklist
1. Require an SOV and verify it aligns with project deliverables.
2. Set milestone acceptance criteria and inspect work before approving payment.
3. Use retainage to manage completion risk, but avoid excessive withholding that could jeopardize timely completion.
4. Insist on documented change orders and timely cost approvals.
5. Keep records of approved invoices, certificates, and completed work for future warranty or dispute resolution.
Example: ABC Construction (two‑year office build)
This analysis assumes that…
– Contract price: $1,600,000
– Estimated total job costs (materials, labor, subs): $1,000,000
– Expected profit: $600,000 (1,600,000 − 1,000,000)
– Retainage: 10% withheld from each progress billing
– Progress recognition method for accounting: cost‑to‑cost percentage complete
Year One (actuals)
– Costs incurred in Year 1: $600,000
– Percent complete by cost‑to‑cost: 600,000 / 1,000,000 = 60%
– Revenue to recognize (60% of contract): 0.60 × $1,600,000 = $960,000
– Profit recognized in Year 1 = revenue recognized − costs incurred = $960,000 − $600,000 = $360,000
Cash flow from progress billing (example billing schedule)
– Suppose the contractor invoices 60% of contract value in Year 1: billed amount = 0.60 × $1,600,000 = $960,000.
– With 10% retainage, the amount paid by owner on that invoice = $960,000 − ($960,000 × 10%) = $864,000; retained amount = $96,000.
Year Two (actuals)
– Costs incurred in Year 2: $400,000 (remaining)
– Percent complete at final: 100% → remaining revenue = $1,600,000 − $960,000 = $640,000
– Profit in Year 2 = remaining revenue − remaining costs = $640,000 − $400,000 = $240,000 (total profit across both years = $360k + $240k = $600k)
Final payments and retainage release
– Year 2 final billing = remaining contract value $640,000 (plus release of cumulative retainage $96,000) → owner pays $736,000 at final acceptance (assuming no other deductions).
– Contractor’s net cash receipts across both years equal invoiced amounts less retainage withheld until completion; final receipt includes release of retained funds.
Notes on accounting vs cash flow
– Revenue recognition (accounting) can differ from cash received: in the example, the contractor recognized $960,000 revenue in Year 1 but only received $864,000 cash (because of the 10% retainage).
– Contractors must plan cash flow to bridge timing and retained amounts.
Common causes of cost overruns and how to manage them
– Poor initial planning or incomplete scope: use a thorough SOV and walk the site.
– Unforeseen site conditions: include change‑order triggers and contingency budget.
– Material price increases: consider escalation clauses or early purchasing.
– Design changes requested by owner: require written change orders that include time and cost impacts.
Disputes and protections
– Require signed payment applications or conditional lien waivers with payments to reduce lien risk.
– Keep thorough documentation (daily logs, photos, RFI responses, change orders) to support invoices and claims.
– Use mediation or an agreed dispute‑resolution clause to handle withheld payments or disagreements quickly.
Summary
Progress billings are an essential tool for dividing long-term contracts into manageable payments tied to work performed. A clear schedule of values, agreed measurement of percent complete, documented change-order process, and an explicit retainage policy reduce disputes and improve cash‑flow predictability. Both owners and contractors should negotiate these details up front, maintain good documentation, and regularly reconcile billed amounts with actual costs and work performed.
Source
Investopedia, “Progress Billings” by Theresa Chiechi —
Continuing the ABC Construction example and expanding with practical steps, additional examples, and a concluding summary.
ExampleABC Construction (contract price $1.6M; profit $600k)
– Contract price (total billing to owner): $1,600,000
– Total estimated project costs (materials, labor, subcontractors, overhead): $1,000,000
– Estimated profit (contract price − estimated costs): $600,000
For this simple example assume:
– The contract runs two years.
– Payment is by progress billings tied to percent complete.
– Owner withholds 10% retainage on each progress payment until completion.
– The contractor uses the percentage-of-completion method for revenue recognition (common in construction under accrual accounting when estimates are reliable).
Year One — progress and billing
1. Work completed during Year One: assume 40% of the total project (measured by costs incurred or agreed milestone).
2. Costs incurred in Year One (40% of $1,000,000): $400,000.
3. Revenue to recognize in Year One (40% of $1,600,000): $640,000.
• This equals costs incurred ($400,000) + proportionate profit ($240,000).
4. Progress billing issued for work completed: $640,000.
5. Owner pays 90% now (10% retainage): payment received = $576,000 (90% of $640,000).
6. Retainage held by owner (10% of $640,000): $64,000.
7. Contractor cash flow in Year One: receives $576,000, pays suppliers/subcontractors from the $400,000 of costs and uses remaining to cover overhead, payroll, etc.
Year Two — completion and final billing
1. Remaining work: 60% of the project.
2. Costs in Year Two (60% of $1,000,000): $600,000.
3. Revenue to recognize in Year Two (remaining 60% of $1,600,000): $960,000.
• This equals Year Two costs ($600,000) + remaining profit ($360,000).
4. Progress billing for remaining work: $960,000.
5. Owner pays 90% up front = $864,000; retainage withheld = $96,000.
6. At project completion the owner releases all retainage ($64,000 from Year One + $96,000 from Year Two = $160,000).
7. Total cash collected by contractor across both years: $576,000 (Y1 payments) + $864,000 (Y2 payments) + $160,000 (released retainage) = $1,600,000 (the full contract price).
8. Total costs paid = $1,000,000 → total profit realized = $600,000.
Accounting note (high level):
– Under percentage-of-completion, the contractor recognizes revenue and gross profit in proportion to the percentage complete (costs-to-date / total expected costs).
– Progress billings create an invoice/receivable balance against which the owner remits cash (less retainage); timing differences between revenue recognized and cash collected are common and tracked on the balance sheet (e.g., “Construction in Progress,” “Billings on Construction Contract,” accounts receivable, and retainage receivable).
Practical steps to implement progress billings (for contractors and owners)
1. Agree contract terms up front
• Define contract price, payment schedule or milestones, retainage percentage, certification process, payment terms (e.g., net 30), and remedies for late payment.
2. Prepare a schedule of values
• Break the project into line items/phases (site work, foundation, framing, MEP, finishes, etc.) and assign dollar values that sum to the contract price.
• Use the schedule of values as the basis for measuring percent complete by line item and for drafting periodic invoices.
3. Establish measurement and certification procedures
• Determine how percent complete will be measured (physical completion, costs incurred, milestones achieved, third-party inspection).
• Define who certifies completion (owner rep, architect, engineer) and what documentation is required (inspection sign-offs, photos, daily logs).
4. Invoice preparation and documentation
• Each progress billing should show schedule of values, percent complete for each line item, cumulative amounts billed, retainage withheld, and supporting attachments (change orders, lien waivers, test results).
• Require sign-off on each payment application to avoid later disputes.
5. Handle retainage and final acceptance
• Specify retainage release timing (upon substantial completion, final acceptance, after punch-list items completed). Consider staged retainage release for large contracts.
6. Manage change orders
• Document any scope changes with signed change orders that adjust contract price, schedule, and subsequently the schedule of values.
• Agree on the pricing method for changes (time & materials with cap, lump-sum, unit price adjustments).
7. Protect cash flow
• Plan for the effect of retainage and partial payments on working capital. Consider subcontractor lien waivers tied to payment, and negotiate payment terms with subs.
• If necessary, consider invoice factoring or project financing to cover periods where cash shortfall is expected.
8. Keep good records
• Maintain cost ledgers, time sheets, material receipts, subcontractor invoices, daily logs, and photos to support percent-complete assertions and defend against disputes.
Special considerations and risk points
– Retainage impact: Retainage can significantly strain a contractor’s cash flow. Negotiate realistic retainage percentages and staged releases tied to substantial completion of major milestones.
– Cost changes and overruns: Include contingency or allowances in the budget and clearly define who bears unanticipated cost increases. Use prompt change-order procedures to keep billings aligned with actual scope.
– Disputes and certifications: Slow or contested certification of percent complete can delay cash collection. Use independent third-party inspectors if certification disputes commonly occur.
– Liens and waivers: Protect both parties by requiring conditional lien waivers tied to payment while protecting owners from hidden claims.
– Tax and regulatory issues: Consider VAT/sales tax on progress billings where applicable; check local rules for revenue recognition for tax reporting.
– Financing and bonding: Lenders and sureties may have requirements about invoicing, retainage, and progress reporting; ensure contract terms don’t conflict with bonding/loan provisions.
– Factoring: Contractors can sell eligible progress invoices to a factoring company to accelerate cash, but factoring reduces net proceeds and may require owner notification/agreement.
Additional examples
Small renovation contractor
– $50,000 kitchen remodel, 30% upfront deposit, progress billing at 50% completion, final on completion.
– Schedule of values: demolition $5k, cabinets $18k, plumbing/electrical $7k, counters/finishes $20k.
– If owner withholds 10% at the 50% milestone, contractor should confirm which line items are considered 50% complete and supply evidence (photos, material receipts). Manage subcontractor payments so subs aren’t unpaid due to owner retainage.
Aerospace/defense multi-year contract
– Large, multi-year program often uses progress billings tied to milestones or cost reimbursement schedules. Contracts may allow cost reimbursement plus fee; invoicing and revenue recognition must follow contract-specific rules and sometimes government accounting standards (e.g., FAR rules in the U.S.).
– For contractors on government work, strict documentation, audits, and indirect cost allocations are key to getting progress payments approved.
Best practices — checklist before issuing or approving a progress billing
– Is there an agreed schedule of values and signed change orders included?
– Are percent-complete measurements supported by documentation?
– Have lien waivers (conditional/unconditional) been prepared for subcontractors paid to date?
– Does the progress billing reconcile cumulative amounts billed to date and remaining contract balance?
– Have retainage amounts been correctly computed and explained?
– Is the certification required by contract attached and signed by the authorized party?
Concluding summary
Progress billings are a practical, widely used invoicing method for long-duration, high-value projects—especially in construction and major industrial programs. They allow contractors to receive payment as work is performed, while owners pay incrementally and may withhold a retention amount to protect against incomplete or defective work. For progress billings to succeed, parties must agree on a clear schedule of values, a reliable method for measuring percent complete, prompt and documented certification procedures, and procedures for handling change orders and retainage. Good documentation, transparent invoicing, and careful cash-flow planning protect both contractors and owners and reduce the likelihood of disputes.
Source: Investopedia — “Progress Billings” by Theresa Chiechi (adapted and expanded)