Construction billing is vital in the construction industry but often becomes confusing and overwhelming for contractors and clients. Billing in the construction industry looks different from other industries because construction projects are complex and often include sudden changes that alter the billing process.
With all the changes that can occur in construction billing, construction professionals need a solution that can streamline the billing process and meet this industry’s specific needs for a seamless transaction. But what is construction billing, what different billing methods are available, and why do they matter? Read more to find everything you need to know about construction billing.
What is Construction Billing?
Construction billing encompasses invoicing clients for services provided by a construction company. Invoices include the cost of materials used, labor, and other services rendered to guarantee that a construction company receives proper and prompt payment. Billing is a critical part of construction accounting.
There are numerous key components of construction billing:
- Invoice details
- Itemized charges (labor, equipment, materials, subcontractor, and miscellaneous costs)
- Quantity and unit of measurement
- Rates and prices
- Subtotals, if available
- Terms and conditions
- Payment instructions
Construction Billing Methods
Construction billing is undeniably essential to how the industry operates. There are several construction billing methods that construction companies use to navigate the payment process. Here are a few of the most common construction billing options.
Time and Materials Billing
Time and materials construction billing bills the client for the labor, time, and materials used during the project, meaning the total cost is undetermined until the scope of the work is understood. Clients and contractors work together to define a project’s end goal, set milestones, and establish the cost of materials, labor, and price markups.
This billing method is ideal for projects where the terms and requirements are subject to change and require ample flexibility. Still, some clients might worry about not knowing the total cost throughout the project’s timeline. However, this method also benefits clients by giving them complete visibility into the project’s cost breakdown.
Fixed Price Billing
Also known as lump-sum billing, fixed price billing occurs when a client and contractor agree on an upfront, set price for a construction project. Unless the contractor receives change orders throughout the project, the price will remain the same, no matter the materials and labor used.
While fixed-price billing is a simple process, it doesn’t come without its risks. Because the price doesn’t change, contractors have to carefully estimate the total cost of projects and prepare a feasible budget to complete the project. Without careful planning, this method can quickly lead to profit loss.
Unit Price Billing
Unit price billing charges the client for individual units of work completed – for instance, the contractor would charge the client per hour or square foot. This method is also excellent for clients who want ample cost transparency. Unlike fixed-price billing, it also provides more room to add to the project and change its scope.
With this billing method, contractors must divide work into units and estimate the cost each unit will incur for materials, equipment, labor, and additional costs. If the project exceeds its initial scope, the contractor can bill more units as necessary. However, determining the final cost of unit price billing can be challenging until late into the project, leading to some confusion for clients.
This billing method is similar to the structure of time and materials billing. In cost-plus billing, contracts are paid a sum for all expenses and a percentage markup beyond the initial costs. It provides flexibility for contractors and is often more profitable than a fixed-price method – however, it’s not a method that clients always favor because of the markups. This method is typically used in projects with an undefined scope to ensure contractors get paid a fair amount for their work.
Progress billing lets contractors submit invoices during different stages of the project’s lifecycle, such as billing once a specific percentage of the project is completed. This method ensures contractors maintain a positive cash flow during projects and gives clients visibility into milestones completed.
Contractors who use progress billing usually follow an American Institute of Architects (AIA) billing method, as the AIA provides standardized invoicing forms to navigate the progress billing process:
Why Construction Billing Matters
Construction billing is important for several reasons, and finding the right billing solution and method can transform your company’s operations. Among the many reasons why construction billing matters include:
Financial management: Construction billing helps companies manage their finances to guarantee that the company or contractor receives the payment necessary to cover costs and make a profit.
Profitability: Proper billing ensures that all costs are allocated to specific projects and outlines information about how the contractor will receive payment, ensuring the profitability of each project.
Budget monitoring: Construction billing allows for real-time tracking of construction costs compared to the overall budget, allowing professionals to identify errors and potential cost overruns to make necessary adjustments.
Transparency: Proper budgeting promotes transparency between contractors and clients, ensuring that clients are comfortable with how much they’re paying for the work. This transparency also helps with dispute resolution to resolve problems efficiently.
- Record keeping: Accurate billing creates a record of transactions for a construction project, and these records are invaluable for financial analysis and audits and can prove incredibly useful in the future.
How Sage Intacct Construction Simplifies Construction Billing
Construction billing is crucial to any company, no matter the size, but because of the numerous variables when billing for construction projects, professionals often need help navigating the billing process. By understanding the different types of construction billing and the importance of this process, you can ensure your projects run as smoothly as possible.
Additionally, you can turn to Sage Intacct Construction to streamline and simplify the billing process. Sage Intacct Construction is the only AICPA-preferred cloud accounting system and the industry-leading construction financial management solution.
Don’t wait to find the construction billing solution you need. Request your free Sage Intacct demo to see it in action.