Having to wait for payment until a project is completed can put a strain your cash flow, especially when the work spans weeks or months. Progress billing, also known as progress invoicing or milestone billing, may offer more peace of mind.
In this guide, we’ll explain what progress billing is, and when it could make sense for your business. We’ll also cover how it works in practice, as well as some cases where it may not be a good fit.
What is progress billing?
Progress billing is a method of invoicing where you bill a client in parts over the course of a project, rather than a lump sum payment upon completion.
You can, for instance, negotiate an agreement with your client to send invoices when:
- A calendar month in a project closes
- When you complete a percentage of a project
- When you complete other agreed-upon stages
At the end, the total amount will reflect the full price of the project.
For the right project, progress billing can also make sense for the customer since the smaller amounts may be more manageable for them, while you don’t have to worry about going for long periods without payment.
When billing in stages makes sense
It goes, perhaps without saying, that progress billing is a method that makes the most sense for projects of a certain size, scope and timeline:
- Long-running projects (weeks to months)
- High value projects
- Projects that you otherwise deliver gradually due to their nature
- Projects that are cost-heavy up front
Some concrete examples include:
- Construction and contracting work
- Consulting and advisory services
- Software development projects
- Design and marketing retainers
- Custom manufacturing or fabrication
Turning project progress into invoices
While the details vary by business and industry, progress billing usually follows the same basic structure:
- Agree on terms upfront
You and the client agree on how and when you will invoice them. - Define what progress means for this project
This could be based on time periods, milestones, or percentage completion. - Send partial invoices at the agreed-upon points of progress
Each invoice covers a portion of the total project cost. - Keep close track of what you have billed already
It’s absolutely vital that you keep a tally of what has been invoiced, so you don’t over- or underbill the client and cause issues down the line. - Send a final invoice upon completion.
The final invoice typically covers the remaining balance and anything else that makes sense to include on it (for example, additional costs within agreed-upon limits).
This method requires clear communication. Both you and the client need to know where the project stands, and it’s important to stick to the agreed terms.
Common ways to structure staged payments
Typically, you agree with the client to invoice them based on one of these progression models.
Time-based billing
You send invoices at regular intervals, such as weekly or monthly, based on time spent. This is a model frequently used by consultants, freelancers, and other professionals.
Pros:
- Simple to understand, very common
- Predictable schedule
Cons:
- Less tied to actual deliverables
- Requires a level of trust and transparency
Milestone-based payments
You send invoices at predefined reached milestones. This is great for agencies, development projects and structured deliverables.
Pros:
- Easy for clients to follow and verify
- Clear scope definitions
Cons:
- Cashflow depends on milestone completions
- Defining milestones can be difficult and cause delays
Percentage-based invoicing
You invoice based on a percentage of project completion. This method can be beneficial in construction and other larger, more complex projects.
Pros:
- You and the client can track progress on a granular level
- Flexible, open to adjustments
Cons:
- Requires accurate documentation, more work
- Can result in disputes if estimates were not clear enough
Progress billing vs milestone billing
They’re related, but there are differences. Where progress billing usually means continuous or periodic invoicing as work progresses, milestone billing has a focus on specific deliverables upon which an invoice is sent.
Some businesses may go for a hybrid model where milestones are combined with regular billing cycles. It’s all about what you and the client agree upon beforehand.
Why businesses choose progress billing
Aside from the all-important cashflow, this model of invoicing offers a number of advantages.
By sending invoices periodically, you minimize risk in case of delays or cancellations. You still got paid for the work done so far!
From the client’s perspective, it’s also easier and more manageable to pay in smaller amounts. Not only is your cashflow positively impacted, it can also do the same for them.
Finally, you get a better alignment of work being completed and payments, making it easy to look back and plan ahead further. It can even let you make more informed decisions about scoping in the future.
Common risk factors
No model is perfect, and you should be aware of some specific challenges that can come with progress billing, in order for you to avoid them.
Unclear agreements
Make sure you have clearly defined billing terms, intervals and estimated totals – in writing.
Scope creep
The ever-present threat of scope creep means that projects can balloon out of control and out of scope, unless you have set terms for adjusting billing expectations should the need arise.
Client misunderstandings
When you create the invoices, make sure to show exactly what you’re invoicing for and be sure to keep them abreast of what remains.
Poor tracking
Keep a clear, verifiable record of of previous invoices and deliverables.
By being aware of these pitfalls you can also prevent client disputes and make sure the projects goes smoothly.
What to include on a progress invoice
A good progress invoice should clearly reflect how it fits into the overall scope or timeline of the project. Aside from everything else an invoice should include, a progress invoice should also include:
- Project total amount
- Amount(s) previously billed
- Remaining balance
- Info about the billing period, milestone, or completion percentage
- Description of work completed
This makes it easier for clients to understand what they’re paying for and how the project is progressing financially.
You can of course use Conta to generate these invoices, and even include project documentation as attachments!
How to decide if it’s right for your business
Now that you hopefully have a clear picture of what progress billing entails, the question remains: Is it right for me?
If the work you perform for your clients is ongoing, project-based or delivered over time, progress billing can absolutely prove beneficial.
However, if your business activity mostly consists of short, fixed-price services or sales of products or goods, single invoices may be a better fit.
Final thoughts
Progress billing isn’t about being able to charge more, and for longer. It’s about aligning your invoices with the work you’re doing, not to mention reducing your risk and keeping cashflow predictable.
As we’ve shown, it can also help your client’s cashflow and a progress billing model is usually something a client will be interested in for that reason alone.
As long as you make informed estimates, and you keep clear lines of communication with your client, there’s no reason why progress billing couldn’t work for you.
You can create all your invoices with ease using Conta. Get started with invoicing here.
