Progress Billings: Definition, Purpose, Benefits, and Example

Progress billings are invoices issued periodically during a long-term project to request payment for work completed to date. They enable contractors to receive incremental payments as milestones or percentages of work are achieved rather than waiting until project completion.

Why use progress billings?

• Preserve client cash flow by avoiding full upfront payment.
• Allow contractors to cover ongoing expenses (materials, labor) and manage cash flow.
• Provide a transparent, milestone-based payment framework for large or multi-year projects.
• Reduce financial risk for both parties when combined with documented approvals and retainage.

How progress billings work

• Client and contractor agree on a payment schedule (milestones or percentage-complete basis) before work begins.
• Contractor submits progress invoices according to that schedule, typically showing percentage complete and amounts due.
• Payments are made as work is verified; the final balance is paid after project completion and client acceptance.
• It’s best practice to obtain client sign-off or documented approval each time a payment is remitted.

What a progress billing typically includes

• Total contract amount.
• Any approved changes or change orders and the adjusted contract value.
• Cumulative amount billed to date.
• Current percentage of project completion and amount for the current billing period.
• Remaining balance due at project completion.
• Reference to the schedule of values (see below).

Schedule of values

A schedule of values breaks the contract into component tasks or phases and assigns a dollar value to each. It:
* Serves as the basis for calculating progress billings (e.g., percent complete of each line item).
* Helps track cost performance versus estimates and identify overruns.
* Promotes transparency by showing owners what has been paid and what remains.

Retainage (percentage retained)

• Owners sometimes withhold a retainage—commonly 5–10%—from each progress payment to cover defects, incomplete work, or contractor default.
• Retainage protects the owner but can strain contractor cash flow; the amount and terms should be agreed in advance.

Handling cost changes and overruns

Project costs can change for many reasons:
* Owner-initiated scope changes or additional work.
* Unforeseen site conditions (damage, mold, structural issues).
* Design errors or planning omissions.
* Labor or material price fluctuations on long projects.
Use written change orders and formal approvals to document scope and cost adjustments. Contractors may include a price allowance or contingency percentage in the contract to cover minor variances.

Who uses progress billings?

Common in industries with large, long-duration projects:
* Construction (general contractors, subcontractors such as roofers, plumbers, electricians, painters).
* Aerospace and defense projects with multi-year timelines.
* Any project where phased delivery and significant upfront costs are typical.

Example

Contract: Build an office building for $1,600,000 over two years. Total costs are $1,000,000 and profit $600,000.

Year 1
* Project 40% complete.
* Bill to client: 40% × $1,600,000 = $640,000.
* Recognized profit for year 1: 40% × $600,000 = $240,000.

Year 2
* Project completed (remaining 60%).
* Bill to client: 60% × $1,600,000 = $960,000.
* Recognized profit for year 2: 60% × $600,000 = $360,000.

Key takeaways

• Progress billings enable staged payments tied to verified work completion, improving cash flow and transparency.
• A clear payment schedule, a detailed schedule of values, and documented change-order procedures are essential.
• Agreeing on retainage and how to handle cost changes up front reduces disputes and financial strain.