Pros & Cons of Progress Billing


There are lots of ways to bill for work on
a construction project. You can bill at the end of the project, at
the beginning, or as you go along. Progress payments are made while the project
is ongoing, and they are made as a result of progress billing. In this video, we’ll talk about what progress
payments are, the pros & cons, and how retainage affects progress payments. What is progress billing? Simply put, progress billing is sending an
invoice or payment application that requests payment for the percentage of the work that
you’ve completed so far. Instead of waiting until the end of the job
to bill, with progress billing it is possible to bill incrementally as the job goes along. On many projects, progress billing is done
on a monthly basis, but they may also be sent at certain percentages of completion. For example, you might bill when the job is
30% complete, again when it’s 60% complete, and finally when it’s 100% complete). The type of billing and when you should bill
are generally determined by your contract. You can request a progress payment using a
payment application or an invoice, depending on what you and the hiring party agreed on. A payment application is basically a packet
of information that contractors commonly use to request payment.  Progress billing with a pay application Filling out a pay application correctly will
generally require a clear schedule of values, or SOV.  The SOV contains a line-item list of all of
the work you will complete on the job, and the value of each item. The scope of work in the contract is the basis
for the schedule of values. Two of the most common standardized payment
application forms for subcontractors are the AIA G702 and ConsensusDocs 710. Both allow for progress billing. You can also create your own. The contract should give you guidance on what
type of pay application is acceptable. Subcontractors or prime contractors using
progress billing should submit their application to the hiring party according to the contract
timeline. It may be on a monthly basis, or when a certain
percentage of the work is completed. Again, look to the contract for guidance on
timing. Benefits of progress billing
Progress billing provide benefits to everyone up and down the payment chain. They allow owners and/or prime contractors
to review the subcontractors’ work before it’s complete, and resolve potential disputes
before the project is over.  We’ll cover four advantages in this video:
Get paid as you go, avoid debt, spot payment problems, and stop work if you’re not paid.  For subcontractors, one of the best reasons
to use progress payments is that you don’t have to wait until the end of the job for
payment. A regular payment schedule makes cash flow
much easier to predict and control. It is especially helpful for small businesses
that don’t have large cash reserves to wait for lump-sum payments after the project is
done. Subcontractors can pay expenses on a job as
they go. If you have cash flowing in throughout the
project, then you can pay your employees and bills on time. You don’t have to wait until the end to
pay everyone (if they’ll even let you wait that long), and you’re less likely to go
into debt to make ends meet. Also, if you are billing as you go, it will
be easier to spot a payment problem. For example, if the first couple of payments
are really prompt, and then they start to take longer and longer as you go along, it
could be a red flag that the project is experiencing financial issues. If you wait until the end of the project,
you won’t know whether the owner has the money set aside or not. By that time, it is too late, and your only
remedies may be filing a mechanics lien or pursuing a lawsuit. If there is a payment issue and you are billing
as you go, you may have the power to stop the work until the payment issue is resolved. Many contracts stipulate your ability to do
this to resolve disputes. Using this tactic is very effective in securing
payment. Owners don’t want their projects delayed
for any reason, even if it is their own lack of payment. And if it is a GC that isn’t paying you,
stopping work will get the owner’s attention quickly. Drawbacks of progress payments
In general, there aren’t really many drawbacks to using progress billing. We’ll talk about a few aspects of progress
billing that might cause a problem for you, and what you can do to fix them.  The main drawback to progress billings is
time. It can take time to put together a payment
application multiple times during a project. Some projects may only take a few minutes
to invoice, but others, depending on the payment application requirements, can take significantly
longer. If you need to collect lien waivers or other
documentation from suppliers and subs, it can be difficult and confusing. It is tempting to wait until the end of the
job and only submit one invoice, but on larger projects this often isn’t financially feasible. You just have to bite the bullet and take
the time each month to put together your progress billings. There are a couple of things you can do to
speed up the billing process. One is to establish a billing process that
you follow diligently every time. Make a checklist of documents you need for
your payment application each month, and who is responsible for collecting each one. You can download a free pay application checklist
from Levelset – check the video description below for the link.  With a clear billing process,  everyone knows
what they must do. Set deadlines to make sure each person completes
their task in time. Keep all the reports and information you need
for invoicing in an organized space so you can easily find them. If you have to hunt everywhere for timecards,
receipts, and cost reports, you’ll get frustrated and things will take twice as long. Staying organized is the key. Another drawback to progress billings relates
to disputes about how much of the work has actually been completed. On a project with progress billing, these
disputes can lead to work delays, since they might come up in the middle of the job.  The general contractor or owner may want to
cut your invoice down because they think you’re only 40% complete when you billed for 50%. If a contractor is desperate for the work,
they may not fight the dispute, especially if it’s only for a percentage of the whole
contract.  Some contractors are tempted to overbill in
case of a dispute. In other cases, you might want to overbill
on one progress period because you know you have higher expenses coming up in the next
few weeks. We’ll give you two words of advice: DON’T
OVERBILL. Overbilling can damage your relationship with
the hiring party. And even if you overbill and the progress
payment gets approved, it can cause cash flow problems later on in the project.  The final word
Overall, progress payments are great for everyone on the construction project. For owners and prime contractors, progress
billing allows them to see subcontractors’ progress clearly. Applications for progress payments can bring
quality or work issues to light before they become a bigger problem. Progress billing gives more control to subcontractors
as well. It allows them to get paid on a regular schedule
as they complete their work. Progress payments help control cash flow and
can allow contractors to pay employees and suppliers on time. While putting payment applications together
can be time consuming at first, establishing a regular process makes the work easier. We hope this video has been helpful. If you have any other construction payment
questions, head over to levelset.com to get payment help from lawyers or live chat with
one of our payment experts. If you want to see more construction payment
videos, be sure to subscribe to our channel. And remember, payment help is here.

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