Billing in the construction industry is very different from traditional invoicing. Unlike standard businesses that issue a single invoice upon delivery of goods or services, construction projects often span months or even years, involve multiple stakeholders, and require detailed progress tracking. This complexity has led to the development of specialized construction billing methods designed to align payments with project progress, manage risk, and ensure compliance with contract terms.

In this post, we’ll explore the most common construction billing methods, how they work, and their impact on financial reporting and cash flow.

Why Construction Billing Is Unique

Construction projects typically involve:

• Long durations with multiple phases
• Progress-based work rather than a single deliverable
• Complex contracts with retainage, change orders, and allowances

Because of these factors, billing must reflect work completed to date, materials stored, and contract terms—not just a flat invoice amount. Understanding the different billing methods is essential for accurate revenue recognition and cash flow management. The billing method used often depends on your contract type.

Common Construction Billing Methods

1. Progress Billing (Percentage-of-Completion)

What It Is: Progress billing is the most widely used method in construction. It involves billing the client based on the percentage of work completed to date. This percentage is typically determined by comparing costs incurred to total estimated costs or by assessing physical progress.

How It Works:

• The contractor submits a schedule of values (SOV), which breaks down the contract amount by phases or cost codes.
• Each billing cycle, the contractor reports the percentage of each line item completed.
• The invoice reflects the total earned to date, less previous billings and retainage.

Example:

• Contract Value: $1,000,000
• Work Completed: 30%
• Earned to Date: $300,000
• Less Previous Billings: $200,000
• Current Invoice: $100,000 (minus retainage)

Impact on Accounting:

• Revenue is recognized using the percentage-of-completion method.
• Requires accurate job costing and forecasting to avoid overbilling or underbilling.

Pros:

• Aligns billing with actual progress.
• Provides transparency for owners and lenders.

Cons:

• Requires detailed documentation and regular updates.
• Disputes can arise over progress measurement.

2. Time and Materials (T&M) Billing

What It Is: Under a T&M arrangement, the contractor bills for actual labor hours, materials, and equipment costs, plus an agreed-upon markup for overhead and profit.

How It Works:

• Labor is billed at hourly rates.
• Materials and equipment are billed at cost (or cost plus markup).
• Invoices include detailed backup, such as timesheets and receipts.

Example:

• Labor: 100 hours @ $50/hour = $5,000
• Materials: $10,000
• Markup: 15% = $2,250
• Total Invoice: $17,250

Impact on Accounting:

• Revenue recognized as costs are incurred.
• Requires meticulous recordkeeping and documentation.

Pros:

• Flexible for projects with uncertain scope.
• Reduces contractor risk of underestimating costs.

Cons:

• Less cost certainty for the owner.
• Heavy administrative burden for tracking and reporting.

3. Unit Price Billing

What It Is: Unit price billing charges the client based on actual quantities of work completed multiplied by agreed-upon unit prices (e.g., per cubic yard of concrete, per linear foot of piping).

How It Works:

• The contract specifies unit prices for each type of work.
• The contractor measures completed quantities each billing cycle.
• Invoice = Quantity Completed × Unit Price.

Example:

• Excavation: 1,000 cubic yards @ $20/yard = $20,000
• Concrete: 500 cubic yards @ $100/yard = $50,000
• Total Invoice: $70,000

Impact on Accounting:

• Revenue recognized as units are completed.
• Requires accurate quantity measurement and verification.

Pros:

• Useful for projects with repetitive tasks or uncertain quantities.
• Provides flexibility for scope changes.

Cons:

• Requires precise measurement and documentation.
• Disputes can arise over quantity verification.

4. Milestone Billing

What It Is: Milestone billing involves invoicing the client when specific project milestones are achieved (e.g., completion of foundation, framing, roofing).

How It Works:

• The contract defines milestones and associated payment amounts.
• The contractor bills upon completion of each milestone, regardless of actual costs incurred.

Example:

• Foundation Complete: $100,000
• Framing Complete: $200,000
• Roofing Complete: $150,000

Impact on Accounting:

• Revenue recognized when milestones are achieved.
• Simpler than progress billing but less precise for cost tracking.

Pros:

• Easy to administer.
• Provides clear payment triggers.

Cons:

• May not align with actual cash outflows.
• Risk of disputes over milestone definitions.

5. AIA Billing (G702/G703 Forms)

What It Is: AIA billing is a standardized form of progress billing widely used in the U.S. It uses AIA G702 (Application for Payment) and G703 (Continuation Sheet) to detail work completed, stored materials, and retainage.

How It Works:

• The contractor completes the G702 summary and G703 breakdown by line item.
• The architect or owner reviews and certifies the application before payment.

Impact on Accounting:

• Integrates with percentage-of-completion revenue recognition.
• Requires accurate SOV and documentation.

Pros:

• Industry standard, widely accepted by owners and lenders.
• Provides detailed transparency.

Cons:

• Can be time-consuming to prepare.
• Requires strict adherence to format and documentation.

Impact on Cash Flow and Financial Reporting

Billing method affects:

• Cash Flow: Progress billing and milestone billing provide predictable inflows; T&M and unit price can fluctuate.
• Revenue Recognition: Percentage-of-completion is common for progress billing; T&M and unit price recognize revenue as costs or quantities are incurred.
• Job Costing: All methods require accurate cost tracking, but T&M and GMP contracts demand the most detailed documentation.

Best Practices for Construction Billing

1. Understand the Contract Terms: Billing must comply with the contract and any legal requirements.
2. Use a Schedule of Values: For progress billing, ensure the SOV is accurate and approved.
3. Track Costs in Real Time: Accurate job costing supports timely and correct billing.
4. Automate Where Possible: Construction accounting software can streamline billing and reduce errors.
5. Communicate with Stakeholders: Keep owners, project managers, and accounting teams aligned on billing status. Strong financial oversight is critical.

Final Thoughts

Construction billing is more than just sending an invoice—it’s a structured process tied to project progress, contract terms, and financial reporting requirements. Whether using progress billing, T&M, unit price, milestone billing, or AIA forms, understanding these methods is essential for maintaining cash flow, ensuring compliance, and supporting accurate financial statements.

‍