Construction Billing: 10 Best Practices to Follow

Written by: Kelsey Hainley and John Meibers

The construction industry is known for its complex billing procedures, often involving various stakeholders, change orders and project milestones. Inefficient billing processes can lead to cash flow issues, delayed payments and disputes. However, these challenges can be overcome with the right construction accounting software in place, leading to improved efficiency, accuracy and profitability.

In this article, we will explore the types of construction billing as well as the key components, common challenges and ten best practices you should be following.

In this Article:

• What Is Construction Billing?
• Types of Construction Billing
• Key Components of the Construction Billing Process
• Common Challenges in Construction Billing
• 10 Best Practices for Construction Billing

Construction billing is the process of invoicing clients or customers for work done on a construction project. It involves creating and sending invoices to clients for services rendered, materials used and other expenses incurred during the project. Construction billing typically includes a breakdown of costs, payment terms and any other relevant information.

Effective construction billing is a key component of construction accounting and is essential for ensuring that a construction project is financially viable and profitable. It helps maintain good relationships with clients by keeping them informed about the costs associated with the project.

 

In the construction industry, there are several types of billing methods used to invoice clients for services rendered and materials supplied, depending on the type of construction project.

Here are some of the most common construction billing methods:

1. Lump-sum Billing: Lump-sum billing, also known as fixed-price billing, is one of the most common billing methods. It involves charging a predetermined, fixed amount for the entire project. The total project cost is agreed upon between the contractor and the client before the work begins. Lump-sum contracts are commonly used for smaller projects or projects with well-defined scopes of work.
2. Time and Materials Billing Time and materials, also known as T&M billing, is based on the actual time spent on the project and the materials used. Contractors bill clients for the labor hours worked by their team, often at an hourly rate, along with the cost of materials and any additional expenses incurred. This billing method is suitable for projects with variable scopes or where the final project cost is difficult to estimate upfront.
3. Cost Plus Billing: Cost plus billing, also known as cost-reimbursable billing, involves billing the client for the actual project costs incurred by the contractor plus a predetermined percentage or fixed fee as profit. Cost plus contracts provide transparency to the client, as they are responsible for the actual costs incurred. It is commonly used for projects with a high level of uncertainty or significant variations in scope.
4. Progress Billing: Progress billing is based on the completion of predefined project milestones or stages. Contractors bill clients for a portion of the total project cost as each milestone is achieved. The percentage of completion is usually agreed upon in advance, and invoices are generated accordingly. Progress billing helps maintain a consistent cash flow throughout the project and is commonly used for large or long-term projects.
5. Retainage Billing: Retainage, also known as retention, is a percentage of the contract value that is withheld by the client until the project is completed or certain milestones are achieved. Retainage billing involves billing the client for the remaining portion of the contract amount, excluding the retainage, as each milestone is reached. The retainage amount is released to the contractor upon project completion or the fulfillment of specified conditions.
6. Unit Price Billing: Unit price billing is based on the quantity of work completed or the number of units produced. Contractors bill clients based on predetermined unit prices for specific items or tasks. This type of billing is commonly used in projects with repetitive or standardized elements, such as road construction or utility installations.

Contractors need to select the appropriate billing method based on the project's nature, complexity, and contractual agreements. Some projects may require a combination of billing methods to accurately reflect the work performed and ensure fair compensation. Effective and transparent billing practices contribute to smoother project management, improved client relationships, potentially larger profit margins, and successful financial outcomes in the construction industry.

When it comes to construction billing, there are several key components that play a crucial role in the process. These components ensure accurate and transparent invoicing, effective financial management and successful project outcomes.

Here are some key components of the construction billing process:

1. Cost Estimation: Cost estimation involves determining the expected expenses for each component of the project. It includes labor costs, material costs, equipment costs, subcontractor costs, and other direct or indirect project-related expenses. Accurate cost estimation is essential for setting the correct billing amounts and ensuring profitability.
2. Progress Measurement: Progress measurement involves tracking and evaluating the completion status of various project activities. It enables the contractor to determine the percentage of work completed for each billing item or milestone. Progress measurement is crucial for generating accurate invoices based on the project's actual progress.
3. Change Order Management: Change orders often occur during construction projects due to modifications in the project scope, specifications or conditions. Effective change order management ensures that all additional work, costs and adjustments are properly documented and accounted for in the billing process. This component helps minimize billing disputes and ensures accurate and fair invoicing.
4. Billing Terms and Documentation: Billing terms and documentation outline the contractual agreements between the contractor and the client regarding billing frequency, payment terms, billing methods and any specific requirements. Clear and comprehensive documentation ensures that both parties have a shared understanding of the billing process and reduces the likelihood of misunderstandings or delays in payments.
5. Invoicing: Invoicing is the process of formally requesting payment from the client for the work completed. Construction invoices typically include details such as the billing period, description of work performed, quantities, unit prices, total amounts and any applicable taxes or discounts. Invoices may also include supporting documentation, such as timesheets, material receipts or change order documentation.
6. Payment Tracking and Collection: Payment tracking involves monitoring the status of invoices, ensuring timely receipt of payments and managing accounts receivable. Construction billing software often includes features that track payment due dates, send reminders to reduce the amount of late payments and provide visibility into payment collections. Effective payment tracking helps maintain a healthy cash flow and reduces the risk of delayed or unpaid invoices.
7. Reporting and Analytics: Reporting and analytics provide insights into the financial performance of the project and the overall business. Construction billing software offers features to generate reports on billing status, revenue projections, payment history, profitability analysis and other key performance indicators. These reports help in evaluating the financial health of the project, identifying trends, and making informed decisions.

Billing in construction can present several challenges that impact the process's efficiency and effectiveness. These challenges can lead to delays in payments, disputes and increased administrative burdens.

Here are some common challenges in construction billing:

1. Change Orders and Variations: Change orders and variations are a common occurrence in construction projects due to design changes, unforeseen circumstances or client requests. Managing and accurately billing for these changes can be complex, as it involves tracking additional work, adjusting costs and ensuring proper documentation.
2. Inaccurate or Incomplete Documentation: Incomplete or inaccurate documentation can significantly impact billing accuracy and delay payment processing. Missing or incorrect information, such as timesheets, material receipts or change order documentation, can lead to billing disputes and prolonged payment cycles.
3. Manual and Paper-Based Processes: Many construction companies still rely on manual and paper-based billing processes, which are prone to errors, time-consuming and lack efficiency. Manual data entry, paper invoices and physical document management can lead to delays, lost paperwork and increased administrative overhead.
4. Inefficient Communication and Collaboration: Ineffective communication and collaboration between project stakeholders can cause delays and errors in the billing process. Lack of real-time data and inaccurate information exchange between project managers, accounting teams and clients can result in discrepancies, misunderstandings and payment delays.
5. Complex Payment Terms: Construction projects often involve complex payment terms, such as retainage, milestone payments or percentage completion. Managing and accurately calculating these payment terms can be challenging, especially when dealing with multiple projects simultaneously.
6. Compliance with Regulations: Construction billing must adhere to various regulations, including tax laws, contractual requirements and industry-specific regulations. Ensuring compliance with these regulations requires knowledge, attention to detail and the ability to track and report financial information accurately.
7. Integration with Project Management and Accounting Systems: Lack of integration between construction billing software and project management or accounting systems can lead to data inconsistencies, duplicate entries and inefficiencies. Seamless integration between these systems is essential to ensure accurate and up-to-date billing information.

To ensure a smooth and effective construction billing process, construction businesses need to follow best practices that promote accuracy, efficiency and transparency.

Here are some key best practices for construction billing:

1. Establish Clear and Detailed Contracts: It is essential to establish clear and detailed construction contracts with clients. Contracts should include billing terms, payment schedules, milestones and any specific requirements or conditions. A well-defined contract helps prevent misunderstandings and disputes related to billing.
2. Accurately Estimate Costs: Properly estimating project costs is crucial for accurate billing. Take into account all labor, materials, equipment, subcontractor costs and overhead expenses. Regularly review and update cost estimates to reflect any changes or variations throughout the project.
3. Maintain Documentation: Maintain thorough, robust and organized documentation throughout the project. This includes timesheets, material receipts, change orders and any other relevant documents. Accurate documentation and detailed invoices ensure that billing is supported by proper evidence and can be easily audited if needed.
4. Follow the Billing Schedule: Promptly generate and submit invoices to clients as per the agreed-upon billing schedule. Delays in invoicing can lead to delays in payments and impact cash flow. Set up systems or software that automate invoice generation and streamline the billing process for timely payments.
5. Track Job Progress and Reporting: Regularly track the progress of the project and generate work in progress reports that align with the billing milestones. This helps ensure accurate invoicing based on the completed work. Provide detailed breakdowns and explanations of billing items to enhance transparency.
6. Manage Change Orders: Effectively manage change orders by documenting all changes in scope, cost and schedule. Obtain client approvals for changes and adjust the billing accordingly. Clearly communicate any changes to the client and ensure proper documentation to avoid billing disputes.
7. Reconcile Regularly: Perform regular reconciliations between billed amounts, received payments and project costs. This helps identify any discrepancies, outstanding invoices or payment delays. Timely reconciliation ensures accurate financial reporting and enables proactive action on any issues.
8. Communicate Transparently: Maintain open lines of communication with clients regarding billing matters. Address any client queries or concerns promptly and provide clear explanations of billing items. Transparency fosters trust and minimizes disputes.
9. Continue Training and Education: Stay up to date with industry best practices and changes in regulations related to construction billing. Invest in training for your billing team to ensure they have the necessary knowledge and skills to handle billing effectively.
10. Utilize Technology and Software: Construction software, like Deltek ComputerEase, is built specifically to meet the needs of contractors and can effectively help you manage the best practices above. By using job costing software, contractors can track the costs of materials, labor and overhead for each job and then use this information to create accurate invoices. This helps to ensure that the contractor is paid fairly for their work and that the client is billed accurately for the services provided.

By implementing these best practices, construction companies can optimize their billing processes, minimize errors and disputes and improve overall financial management. Efficient billing practices contribute to a strong cash flow, positive client relationships and successful project outcomes.

Improve your construction billing efficiency, accuracy and profitability with Deltek ComputerEase.