Construction Billing: Full Guide Bauwise Construction Management Software

construction billing methods

Ask what backup documentation is required for something like change orders, which can be very complicated to bill. While some owners manage all the project billing on their own, others will bring in architects or a construction manager who will handle billing for them. A third party reviewing the billing may necessitate an onsite review of the work done to date. A set contingency fund creates a sort of mixture of a fixed price contract, but with wiggle room for the unexpected. Meet a Knowify expert on a video screenshare, get your questions answered, and ensure you’re set up for organized, profitable projects with Knowify. Overall, it’s not a method that you should rely on as your first choice.

construction billing methods

Lump Sum Billing

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The big difference is that you don’t charge for the hours worked, you instead add a set or percentage fee – usually based on the size or value of the property. And to do that, you need to get to grips with how to create a construction invoice. The trick is to make sure your back is covered before the construction project starts. With a proper dispute resolution clause in place, contractors, subs, and suppliers can avoid taking their disputes into litigation.

Revenue recognition method #1: Cash-basis method (CBM)

  • These invoices are usually accompanied by documentation and progress reports to justify the claimed percentage completion.
  • When done properly, job costing helps construction managers and accountants predict costs and assess project budgets more precisely.
  • It won’t set your company up for long-term growth and will limit the amount of actionable information you can gain from your financial data.
  • Lump sumSometimes known as fixed price, lump sum billing sets a single cost for an entire project based on a detailed estimate.
  • Contractors should understand all of the stakeholders involved on a construction project.

Next, we explore the second method to recognize revenue with a different way of recording expenses and income — the completed-contract method. It’s also true that this method is flexible and simple, leading to less confusion in financial construction billing methods statements. In construction accounting, financial experts typically use software, general ledgers, and specialized methods as one system. That’s in contrast to how regular bookkeepers might handle workflows — at least for the most part.

common billing methods in the construction industry

  • Contractors might face financial losses if the project exceeds the budget unless they can negotiate change orders to cover these unforeseen expenses.
  • Project-based accounting is the technical term for the style of accounting used in construction.
  • As with everything else, the use of discounts and penalties will make a lot of sense in some situations, but they aren’t a blanket solution.
  • As a result, this will require additional paperwork to properly document what work is being performed and what additional costs are expected.
  • That’s in contrast to how regular bookkeepers might handle workflows — at least for the most part.
  • As we have learned, keeping record of all costs is essential in construction projects because contractors bid for new projects all the time while implementing ongoing projects.

For example, the cupcake shop may be able to predict the cost of sugar and other ingredients fairly regularly for months. And even if changes do happen, they are unlikely to affect the cupcake business’s financial bottom line. Also, check out our blog post about construction billing basics, where we discuss the essentials of construction billing. Changes in schedules and timelines will also come with a changing scope of work. As a result, this will require additional paperwork to properly document what work is being performed and what additional costs are expected. The lack of a standardization, can lead to confusion on terminology, terms, and conditions within the contract.

In the construction industry, there are several types of billing methods used to invoice clients for services rendered and materials supplied. There is a lot of admin work involved in billing, especially when using cost-plus and T&M billing methods. Contractors should establish a documents process to collect backup materials for every billing and organize them together. Without a solid system for managing receipts, photos, and drawings, office staff can become overwhelmed and miss payment application deadlines, which can seriously impact project finances. Contractors and owners should always ensure they fully understand the contracts they sign.

Benefits of Cost-Plus Billing

  • With unit-price billing the contractor doesn’t charge the customer for the total amount at once.
  • You can add your logo, include detailed project descriptions, and break down costs by labor, materials, and other expenses.
  • For instance, all of the income of the partnership needs to be reported as it was distributed to the partners.
  • When in doubt, work with a certified professional accountant to set up the accounting system that will work best for your business.
  • Software like Knowify turns this otherwise lengthy task into a process that takes just a few clicks.

Additionally, clients have more visibility into the project’s cost and can see the actual costs incurred. Construction billing helps ensure the construction company receives a timely lump sum payment for its work. Without effective billing practices, a construction company may experience cash flow issues, adversely affecting operations. AIA progress billingThis common construction billing method uses American Institute of Architects (AIA) standardized forms for progress billing. The contractor invoices the customer based on the percentage of work completed for that billing period.

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construction billing methods

To ensure you receive payment on time and in the right amount, include payment terms in your contracts and give these details in your invoices. One significant advantage for contractors using lump-sum billing is the potential for increased profits. For example, if a contractor agrees to a $100,000 deal with a client but manages to complete the project with only $80,000 in expenses, the $20,000 surplus becomes direct profit.

Common Billing Methods in the Construction Industry

Construction accounting payroll #2: Local union