Typically, large contractor projects are complex, containing multiple steps that must be achieved before final completion occurs. As a contractor, it is in your financial best interest to invoice in a series of smaller payments.
Learn how phased or milestone billing can be a godsend for your company as you struggle to remain profitable in difficult times.
How phased billing works
Instead of a single lump sum payment upon completion of the job, payments align with the progress of the work based on the attainment of milestones or the percentage completed.
In other industries, business models tend to focus on receiving financial compensation only when a product or service is received. However, due to the high risk and costs involved in large contracting projects, a phased billing model makes more sense.
In this scheme, payments are made according to how the work is progressing. Frequently, a payment is triggered when a defined, specific, predetermined phase of a project has been finished.
This might be the completion of a foundation or framework, for example. Another option is to invoice for the percentage of the work that has been done during a given billing cycle.
For businesses that accept subscription payments, this would be the pre-set amount that is withdrawn from the customer’s account according to the defined agreement.
How to implement phased billing for your large contractor project
Putting phased billing in place involves a series of steps.
Define the project’s phases
Start by identifying details of the project, dividing it into distinct and measurable segments.
Within each phase, specify clear and measurable milestones that trigger a payment once they are achieved.
Create a schedule of values
This is a detailed document that assigns a monetary value to each phase. Then indicate what percentage of the total contract amount is allocated to each phase.
The sum of all values must equal the price of the total contract.
Create a contract
This document must include payment triggers that, once completed, will lead to an invoice and expected payment. Be sure to outline all payment terms, including the due date for each invoice and any late payment penalties.
If applicable, agree to allow the client to retain a percentage from each progress payment. This is withheld from you until the job has been completed to the customer’s satisfaction.
Implement accurate tracking
As the project progresses, be sure that you are accurately tracking and documenting every step. Use site inspection reports, daily logs, and project management software to track the work that is being completed.
Before submitting an invoice, be sure that you can verify that the work has been done according to contractual specifications.
Send each invoice on the scheduled date
On the preordained date for recurring billing and invoicing or when a milestone has been reached, send the bill immediately. Each invoice should be detailed and clearly reference the project, the current milestone or phase, and the percentage of that milestone completed.
It should also include the total amount billed to date, any retainage amount, and the new amount due.
Large contracting projects involve successfully juggling a seemingly infinite number of moving parts. With multiple goals and significant expenses on the line, it is vital that your payment processing for contractors' billing strategy is clear.
This allows you to treat the customer fairly while simultaneously providing your company with the cash you need throughout the various phases of the job.
North is a leading financial technology company that builds innovative, frictionless end-to-end payment solutions designed to simplify and grow businesses of all sizes. From the front door, to the back office, the developer world, and partnerships that expand the payments landscape, North offers proactive, comprehensive merchant services, in-house processing, and more.
