How to Align Billing Methods With Your Construction Contracts

Choosing the right construction billing methods can make or break your cash flow. It’s not just about how you prefer to bill—it’s about aligning the method with your contract type, client expectations, and project risks. As a construction bookkeeping professional, I’ve seen contractors lose money, delay payments, or even get into legal disputes simply because their billing didn’t reflect the contract they signed.

This guide walks you through how to choose and apply billing methods that fit your contracts—and help you get paid faster and more reliably.

Understanding Billing Methods

In the construction industry, billing methods directly impact how contractors get paid and how projects are financially managed. Selecting the correct billing method is essential not just for getting paid on time, but also for ensuring that your cash flow remains healthy throughout the life of a project.

Each construction contract may require a different approach to billing, depending on factors like project scope, duration, and financial terms. Let’s take a closer look at some of the most commonly used billing methods and their applications:

1. Cost-Plus Billing

Cost-plus billing is a popular method for projects where the scope is uncertain, or the design is not fully completed. This method allows contractors to bill the client for the actual costs incurred, plus a fixed percentage for profit. The main advantage of this method is that it protects the contractor from financial risk if project costs increase unexpectedly. However, it’s important to have clear documentation and regular progress billing to keep the client informed.

2. Fixed-Price Contracts

Fixed-price contracts are one of the most common types in construction, especially for projects with well-defined scopes and deliverables. Under this arrangement, the contractor agrees to complete the project for a set price, regardless of actual costs. Contractors using this method should be meticulous in job costing and manage unexpected expenses efficiently. While these contracts help provide a predictable budget for the client, they place the risk on the contractor if costs exceed expectations. Managing timely payments and adhering to the terms of the contract payment schedule are key here.

Read more: Cost-Plus or Fixed-Price Contracts, Which Is Better?

3. Progress Billing

Progress billing is often used for long-term projects where work is completed in stages. As each stage or milestone is finished, the contractor submits a bill for that portion of the work. This method helps ensure consistent cash flow throughout the life of the project, which is particularly important for contractors managing multiple projects at once.

4. Unit Price Contracts

Unit price contracts are based on predefined prices per unit of work (e.g., per square foot, per ton of material). This method is commonly used for projects that involve a lot of repetitive tasks or materials, such as road construction or excavation. It allows flexibility and easy adjustments if the quantity of work changes during the project.

Choosing the Right Billing Method for Your Project

Choosing the right billing method for your construction contracts depends on several factors, including:

• Project Type: Consider the complexity of the work. Projects with well-defined scopes tend to be suited for fixed-price contracts, while projects with variable costs might benefit from cost-plus billing.

• Contract Terms: Make sure to align the billing method with the contract payment terms. If the contract specifies progress payments, you must implement progress billing to stay compliant with the agreement.

• Cash Flow Management: If your business operates with tight cash flow, using progress billing or cost-plus billing might be beneficial, as they allow you to receive payment in phases throughout the project.

• Change Orders: Be prepared for the possibility of change orders during the project. If you are using cost-plus billing, change orders will typically result in a change to the contract price, which can be easily tracked. For fixed-price contracts, change orders may require renegotiation of the contract terms.

Read more: How Does Construction Change Order Relate to Your WIP Report?

How to Implement Billing Methods for Your Contracts

Once you’ve determined the right billing method for your project, it’s time to implement it efficiently. Here's how you can do that:

1. Set Clear Payment Schedules

   Ensure that you define payment schedules clearly in your construction contracts. Include key milestones and corresponding payment terms. This ensures both parties know when payments are due, which prevents confusion down the line.

2. Document Progress and Costs

   Whether you're using progress billing or cost-plus, documentation is critical. Keep detailed records of the work completed and the costs incurred. This is especially important for cost-plus billing, as it helps verify the amount being billed and justifies the contractor’s mark-up or profit.

3. Job Costing

   For any billing method, accurate job costing is essential. By properly tracking your expenses against the contract, you can ensure that you’re making a profit and avoid potential financial discrepancies.

4. Invoicing and Retention Fees

   Consider incorporating retention fees into your invoices, especially for larger projects. These fees are typically a percentage of the contract value withheld until the project is completed satisfactorily. Clearly outline retention terms in the contract to avoid confusion when final payments are made.

Common Challenges and How to Overcome Them

Aligning your billing methods with construction contracts comes with its share of challenges. Common issues include delayed payments, disputes over billed amounts, and managing change orders. Here’s how to tackle them:

• Delayed Payments: To combat payment delays, ensure that your contracts have clear payment terms and penalties for late payments. Sending reminders for upcoming bills and ensuring invoices are accurate and detailed can help prevent delays.

• Change Orders: Handle change orders proactively by documenting them as soon as they arise. Make sure to adjust billing accordingly and communicate changes to your client to maintain transparency.

• Scope Creep: Sometimes, clients may ask for additional work outside of the original scope. Ensure that your contract allows for adjustments in billing if the scope expands. Having clear language about how changes will be priced helps avoid confusion.

Consider Outsourcing Your Bookkeeping

Managing billing methods and construction contracts can quickly become overwhelming, especially when you have multiple projects running simultaneously. To ensure accurate invoicing, track timely payments, and manage complex job costing, consider outsourcing your construction bookkeeping to a professional service.

At Construction Cost Accounting, we specialize in helping contractors and construction businesses align their billing methods with their construction contracts. Our expert team understands the nuances of construction project accounting, from progress billing to managing retention fees, and ensures that your finances are always in check.

Outsourcing your bookkeeping can save you time, reduce errors, and improve cash flow management. Instead of struggling with manual record-keeping, let us handle your financials so you can focus on growing your business.

Conclusion

Aligning billing methods with your construction contracts is essential for maintaining a healthy cash flow and ensuring project success. By understanding the different billing options available and how to implement them, you can avoid payment issues, improve cash management, and keep your clients satisfied. Consider working with professionals like Construction Cost Accounting for added convenience, accuracy, and efficiency in managing your construction project finances.