Progress billings

Progress billings
See also
Contract costing Staged payments Accrued income Firm fixed price contract Prepaid income Lump-sum contract Unearned premium reserve Unearned revenue Unearned Premium

Progress billings are type of invoices that are used in projects that need longer time and high investments, e.g. in construction business as a part of Percentage of completion (PoC) accounting method of evaluating of progress in the project. The customer receives invoices, that he has to pay, in predefined stages of the project, e.g. after each phase. The progress billings show how much work has been done. Usually progress billings cover less than 100% of payments, e.g. 20%. In case of additional costs in the project, the contract has to be updated and since then progress billings can be increased. The progress billings are calculated on accumulative-to-date basis. Progress billings represent a function of project completion (in percentage) multiplied by the contract sales price. The amount of tehse billings are often specified in the contract agreement. The final invoice is received by the customer after the project has been finished. Progress billings are a contra-asset account and can be used interchangeably with the terms like:

1. Billings on long-term contracts
2. Billings on construction contracts

What differs progress billings form the other type of invoices is:

• The adjusted total contract amount
• The cumulative amount of progress billings to date
• The percentage of completion of the project
• The total amount remaining to be billed

Progress billings application

Progress billings are most commonly used in constructions projects, but it is not the only industry that takes advantage from that billing method. It has also a great value for industries like aerospace, defence or some scientific development projects. Such projects usually have enormous budgets and could take years to complete. These type of invoices are also willingly used by many labor workers like:

• Roofers
• Plumbers
• Painters
• Electricians
• Gardeners

The main reasons of using progress billings in these projects are cost of raw material, labor and potential delays. In some construction project, few percents of the sum are kept by the customer to secure guarantee (e.g. total billings are for 95% of investment and final 5% is paid 1-2 years later)

Progress billings on accounts

Progress billing amounts should be debited to Accounts Receivable and credited to deferred account Progress Billings on Construction Contracts which acts as an offset to the inventory account - Construction in Progress. Progress billing on Construction Contracts is offset against the construction in progress account. The excess of the billings exceeding the construction costs would be reported in the Current Liability section in the balance sheet.

Examples of Progress billings

• In construction projects, the contractor submits periodic billings to the owner, which show the work that has been completed up to that point. The owner pays the contractor in phases, according to the progress of the project. The contractor typically submits progress billings at the completion of each major phase of the project.
• In software development projects, the customer may request periodic billings to track the progress of the project. The customer pays the contractor in phases, according to the progress of the project. The contractor typically submits progress billings at the completion of each major phase of the project.
• In research projects, the customer may request periodic billings to track the progress of the project. The customer pays the contractor in phases, according to the progress of the project. The contractor typically submits progress billings at the completion of each major phase of the project.

Advantages of Progress billings

Progress billings provide many advantages for both sides of the business contract, such as:

• A better cash flow management for the supplier, as payments are received in stages of the project.
• A better financial planning for the customer, as payments are spread over the project timeline.
• A better project progress monitoring, as it is clear when and how much money has been already paid.
• A better risk management, as the customer is not obliged to pay the whole sum at once.
• A better motivation of the supplier, as the customer recognizes and rewards the progress.

Limitations of Progress billings

• One of the main limitations of progress billings is that they are prone to errors and discrepancies due to the complexity of the project.
• The accuracy of the progress billing is dependent on the accuracy of the project measurement, which can be difficult to assess.
• The progress billings can be difficult to modify or update if the project scope or timeline changes.
• The progress billings are based on the predefined stages of the project, so there is a risk of an incomplete project if the stages are not accurately estimated.
• The progress billings may not include all costs associated with the project, such as labor, materials, or overhead expenses, which can lead to unexpected costs for the customer.
• There is also a risk that the progress billing could be misused to increase the price of the project without informing the customer.

Other approaches related to Progress billings

In addition to Progress billings, there are several other approaches used for projects with long-term investments and high costs. These include:

• Cost Plus Contracting: In this approach, the customer pays for the project based on the cost of materials and labor plus a predetermined fee to the contractor. The customer has no control over the cost of the project and the contractor is responsible for any cost overruns.
• Time and Materials Contracting: This approach involves the customer paying for the project based on the time taken to complete the project and the materials used. The customer has more control over the cost of the project as they can negotiate the terms of the agreement.
• Fixed Price Contracting: This is a contractual agreement between the customer and the contractor where the customer pays a fixed price for the completion of the project. The customer has control over the cost of the project and the contractor is responsible for any cost overruns.

In summary, Progress billings are one approach used to pay for projects that involve long-term investments and high costs. Other approaches include Cost Plus Contracting, Time and Materials Contracting and Fixed Price Contracting. Each approach has its own advantages and disadvantages and should be carefully considered before selecting an approach.

References

• Bodnar, G. H., Hopwood, W. S. (2001) Accounting Information Systems
• Chaudhry A., and others (2015) Wiley IFRS 2015: Interpretation and Application of International Financial Reporting Stnandards John Wiley & Sons
• Prather L., (2017) Financial Accounting and Reporting Study Guide Notes AuthorHouse
• Stice E. K., Stice J., D. (2013) Intermediate Accounting South-Western
• Whittington O. R., (2009) Wiley CPA Examination Review, Outlines and Study Guides, Volume 1 John Wiley & Sons

Author: Arkadiusz Liszka