Progress Invoicing (also called progress billing, percentage of completion billing, or partial billing) involves billing from an estimate (or Schedule of Values) over the course of time and could be considered a type of installment billing. Progress billing is commonly associated with the construction industry; however, it is common in other industries as well.
QuickBooks® Pro, Premier, and Enterprise editions all offer several options for invoicing and a Progress Invoicing function is also available.
Some projects or jobs will require only a single invoice, others will require two invoices, others may require three invoices (one at the start of the job, one when you are 50% done, and the other when you are finished), other projects might require that you submit monthly progress invoices over the course of months or even years.
Typically, if you take on a job that you will have finished at the end of 30 days, you might only want to create a single invoice, unless retention or retainage is held for some reason, in which case you will have to create two invoices.
When your scope of work on the project will span one or more months, then you will want to consider progress billing. When you generate progress billings, you will bill ONLY for the work that you have completed and the materials that you have used or installed – occasionally you will also be allowed to bill for materials that you have at the jobsite but have not yet used.
If you are a subcontractor, sometimes the General Contractor will have a form that they insist you use (instead of your own invoice form), other times they may insist that you submit your progress billing on an industry standard billing form – such as the AIA G-702 & G-703 forms developed by the American Institute of Architects – or similar plain paper forms containing the same information.
Make sure that you submit your billings on the forms that they want or they will probably reject your invoice; mail it back to you and tell you to resubmit your billing CORRECTLY. Usually having to resubmit a bill means that you have to wait until next month to submit the corrected bill.
Always try to get your invoice paperwork right the first time and include any proper releases that are required. Sometimes the General Contractor will hold up everyone’s invoices —-even if only one contractor has submitted their billing incorrectly.
Every contractor, regardless of their business structure (sole proprietor, partnership, corporation) has to choose an overall method of accounting; before the first federal tax return is filed. Accounting methods include:
the cash method- the accrual method
- the accrual method which excludes retentions, and (possibly)
- a hybrid method(s)
Depending on the type, size, and length of the construction contract, there are various methods of accounting for long-term construction projects that are allowed – each method has its own advantages and disadvantages.
A contractor will need to select a specific long-term contract accounting methods – possibly with different methods for it’s exempt and non-exempt contracts – and also selects sub-treatments for the classification of contracts and the allocation of indirect costs.
In a nutshell, accounting for long-term contracts relates to the treatment method that is chosen; or that is required by the rules and regulations of the tax code, in order to account for income and cost recognition for long-term contracts.
10+ Methods of Accounting for Construction Contracts
| Method | Revenue Recognition | Cost Recognition |
|---|---|---|
| Cash | As payment is received | As expenses are paid, except for depreciation and capitalization rules. |
| Hybrid – (Part Cash/Part Accrual | Cash or accrual – depending upon the method selected | Could be cash or accrual. For example, the contractor could use the cash method for receipts and disbursements AND accrual for inventory and payables related to inventory. |
| Accrual | As billing invoices are issued | Based on economic performance regulations of §461(h) |
| Accrual Excluding Retention | Based on when billing invoices are issued OR billings minus retainage deferred under the contract. Recognition of retainages, once entitled to receive |
Based on economic performance regulations of §461(h) |
| Completed-Contract (CCM) | Billings or total contract price once contract is finished and accepted. See 1.460-4(d) for revenue recognition for disputed contracts |
Costs are deferred as incurred. Specific costs are outlined in 1.460-5(d). Once completed, costs are closed out to expense.SG&A costs are expensed as incurred.
See 1.460-4(d) for expense recognition for disputed contracts. |
| Exempt Percentage-of-Completion (EPCM) | Contract price (including change orders) multiplied by percent complete.Percent complete determined by various alternative methods, such as:
|
Based on economic performance regulations of §461(h).Costs determined by 1.460-5(d).
All costs are expensed as incurred. |
| IRC §460(b)Percentage-of-Completion Method (PCM) | Revenues determined by only the cost-to-cost formula | Based on economic performance regulations of §461(h).Costs determined by 1.460-5(b).
All costs are expensed as incurred. |
| IRC §460(b)(3) Simplified Cost-to-Cost Method | Same formula as §460(b), except costs determined as outlined by §460(b)(4) or 1.460-5(c) | Based on economic performance regulations of §461(h).Job costs are direct material, direct labor and depreciation, amortization, and cost recovery on equipment directly used.
All costs are expensed as incurred. |
| Reg. 1.460-4(e), §460(a) Percentage-of-Completion/Capitalized-Cost Method (PCCM) | Use PCM formula as §460(b) with same type of costs for 70%, and use exempt contract method for the remaining 30%. | For 70%, same as the §460 PCM method, the balance of the contract is accounted for by the exempt-contract method. |
| IRC §460 10% Deferral Method | Same as §460(b) above, except that revenues and billings on all contracts with less than 10% complete, determined by the cost-to-cost formula, are deferred until greater than 10% complete. | Based on economic performance regulations of §461(h).All costs are expensed as incurred.
All costs on contracts less the 10% complete are not expensed as incurred, but rather are deferred in an account similar to an inventory account |
