Progress vs. Milestone Billing in Construction: Protect Your Cash Flow
- Cost Construction Accounting
- 4 days ago
- 5 min read
Cash flow problems kill more construction businesses than bad bids ever will. The difference between waiting 90 days for payment and getting paid every two weeks isn't just convenience, it's the margin between making payroll or laying off your crew. Your billing structure determines whether you're funding your client's project with your own money or maintaining healthy cash reserves throughout the job.
Table of Content: |
Why Your Billing Structure Matters More Than You Think
Your construction billing structure directly impacts working capital by dictating how and when money flows into your business. Poor billing choices tie up funds in unpaid work, forcing you to cover labor, materials, and equipment expenses out of pocket while straining your financial position.
The wrong construction payment terms often lead to disputes over completion, delayed payments, and even legal battles that erode profits. Selecting between progress billing and milestone billing isn't just administrative, it's a strategic decision that safeguards your construction cash flow. Let's explore both contractor billing methods to help you choose wisely.
What Is Progress Billing?
How Progress Billing Works
Progress billing involves invoicing based on the percentage of work completed during set periods, typically monthly or bi-weekly. Contractors use a Schedule of Values (SOV) a detailed breakdown of the project into tasks with assigned dollar values to track completion percentages for accurate billing.
Real-World Progress Billing Example
Imagine a $500,000 commercial renovation spanning 6 months. Your SOV divides it into phases: demolition ($50,000), framing ($150,000), electrical ($100,000), plumbing ($100,000), and finishing ($100,000).
In month 1, you complete 20% and invoice $100,000. Month 2 at 40% yields another $100,000. This pattern continues monthly, ensuring steady payments every 30 days that match your cash outflows.
Advantages of Progress Billing
Consistent cash flow throughout the project keeps your accounts balanced and eliminates long payment gaps.
Aligns payments with actual expenses, reducing the need for expensive bridge loans or lines of credit.
Easier to manage subcontractor payments as funds arrive incrementally.
Reduces financial risk on long-term projects by spreading receivables over time.
Disadvantages of Progress Billing
More administrative work and documentation to verify completion percentages.
Requires detailed cost tracking systems for accuracy and credibility.
Potential disputes over completion percentages can slow approvals.
Retainage policies still apply, typically holding 5-10% until project closeout.
What Is Milestone Billing?
How Milestone Billing Works
Milestone billing ties payments to specific project achievements outlined in your contract. These are predetermined checkpoints like completing the foundation or installing HVAC systems. It's an all-or-nothing structure: no payment until the milestone is fully met and approved.
Real-World Milestone Billing Example
Using the same $500,000 renovation, your contract establishes milestones: 10% at contract signing ($50,000), 30% after demolition and framing ($150,000 at month 2), 30% post-MEP installation ($150,000 at month 4), and 30% at completion ($150,000 at month 6).
The problem: You receive nothing during months 1, 3, or 5, despite actively working and incurring daily expenses. You're essentially financing the client's project during these gaps.
Advantages of Milestone Billing
Simpler invoicing process with fewer bills to prepare.
Clear payment expectations upfront for all parties.
Less paperwork and documentation compared to monthly progress tracking.
Works well for smaller, shorter projects with clearly defined stages.
Disadvantages of Milestone Billing
Creates extended periods without payment, disrupting steady operations.
Increases financial strain and risk during gaps when you're covering all costs.
You're essentially financing the client's project until milestones hit.
Disputes over milestone completion can be costly and delay funds for weeks.
Side-by-Side Comparison: Which Protects Your Cash Flow Better?
Factor | Progress Billing | Milestone Billing | Cash Flow Impact |
Payment Frequency | Regular (monthly/bi-weekly) | Irregular, tied to achievements | Progress provides steadier inflow |
Administrative Burden | High (detailed tracking) | Low (fewer invoices) | Milestone eases paperwork but risks gaps |
Financial Risk | Lower, spreads exposure | Higher, due to payment delays | Progress minimizes borrowing needs |
Best Project Types | Long-term, complex jobs | Short, phased projects | Progress suits ongoing work |
Working Capital Required | Moderate, with consistent receipts | High, during wait periods | Milestone demands stronger reserves |
Which Billing Method Is Right for Your Project?
Choose Progress Billing When:
Projects last over 6 months with continuous work
High complexity requires frequent progress checks
You need steady construction cash flow to pay subs promptly
Government or large contracts mandate percentage-based billing
Your team has software for accurate SOV tracking
Financial risk must be minimized on big budgets
Choose Milestone Billing When:
Short projects under 3 months with clear phases
Strong client relationships ensure quick approvals
Simplicity is key to reduce admin time
Fixed milestones align with low-risk deliverables
You have ample reserves to bridge payment gaps
Smaller jobs where disputes are unlikely
Hybrid Approaches
A hybrid combines both: Start with a milestone for initial mobilization (10-15% upfront), then switch to progress billing for the bulk. On a $1M build, take 15% at foundation complete, then monthly progress billing until handover. This balances upfront security with ongoing flow.
5 Steps to Implement Your Chosen Billing Structure
1. Review your contract terms carefully
Include clear definitions of milestones or SOVs, payment timelines (e.g., "invoices due within 5 business days, paid within 30 days"), and approval processes to avoid ambiguity.
2. Set up your accounting system
Use construction software like QuickBooks or Procore for real-time tracking of costs, percentages, or milestone proofs. Configure your chart of accounts to match your SOV line items.
3. Communicate expectations with all stakeholders
Inform clients, subs, and lenders about billing schedules and documentation needs from day one. Hold a pre-construction meeting addressing payment procedures.
4. Document everything meticulously
Maintain photos, daily reports, delivery tickets, and written approvals for every billing period. Store everything in cloud-based systems with timestamps.
5. Review and adjust as needed
Monitor mid-project and amend via change orders if delays or scope shifts affect billing. Your billing structure should serve your business, not constrain it.
Common Billing Mistakes That Destroy Cash Flow
Vague contract language: leads to endless disputes over what's "complete."
Poor documentation: weakens invoice approvals and invites rejections.
Ignoring retainage terms: delays final funds, tying up capital.
Infrequent invoicing: cash gaps even in progress setups.
Not tracking costs: over- or under-bills, eroding trust and profits.
Skipping stakeholder buy-in: surprises and payment holds.
Failing to adapt: sticking to a method unfit for project changes.
Protect Your Payment Rights: Essential Contract Language
Your contract language affects whether you get paid on time. Include these key provisions:
Pay-When-Paid vs. Pay-If-Paid: Negotiate for "pay-when-paid" to ensure timely payment, regardless of the general contractor's payment status. Avoid "pay-if-paid," which can leave you unpaid if the owner defaults.
Retainage Limits: Limit retainage to 5-10% with clear release terms upon substantial completion. Include a clause for retainage reduction to zero once the project hits 50%.
Invoice Submission: Define invoice formats, documentation, methods, and deadlines. For example, “Invoices by the 5th will be paid by the 30th.”
Dispute Resolution: Require mediation before litigation for payment disputes and specify that undisputed amounts must be paid. Include provisions for attorney fees and interest on late payments.
The Bottom Line: Your Billing Structure Is a Business Decision
Progress billing offers superior construction cash flow protection through regular, predictable payments that align with your expense cycle. Milestone billing prioritizes administrative simplicity but creates dangerous payment gaps. Choose based on project duration, complexity, and your financial reserves never default to what's easiest without considering cash flow impact. The right contractor billing methods prevent you from becoming an involuntary lender to your clients.
Ready to optimize your construction payment terms?
Construction Cost Accounting experts help contractors implement billing structures that maintain healthy cash flow and eliminate payment disputes. Schedule your free billing structure consultation today because waiting 90 days for payment shouldn't be your normal. Contact CCA now to protect your bottom line with smarter construction billing practices.
