What is progress billing and how does it work for general contractors?
Progress billing is how most commercial and larger residential construction projects get paid. Instead of billing the full contract amount when the job is finished, you submit a pay application at regular intervals (usually monthly) showing how much work you completed during the period. The owner pays you for that portion, withholds a percentage as retainage, and you move on to the next period.
The foundation of progress billing is the schedule of values. Before the job starts, you break the total contract price into line items that match how the work will actually get done. Site work, foundation, framing, rough mechanicals, drywall, finishes, and so on. Each line item gets a dollar value that adds up to the contract total. This document becomes the basis for every pay application going forward.
Each month you prepare a pay app showing the percentage complete on every line item. If framing is 60% done and the line value is $200,000, you’ve earned $120,000 on that line. Add up every line, subtract everything you’ve billed in prior periods, and you get what you’re billing this period. Most commercial projects use AIA G702 and G703 forms for this, which are standardized documents that owners, architects, and lenders recognize.
Retainage is money the owner holds back from each payment as security that the project will be finished properly. Typical retainage runs 5% to 10% depending on the contract and the state. On a $120,000 earned amount with 10% retainage, you’d bill the full $120,000 but only receive $108,000 that period. The $12,000 stays with the owner until substantial completion or final acceptance. Retainage adds up over a long project, and contractors who don’t plan for it get squeezed on cash flow toward the end.
Pay apps usually require supporting documentation. Lien waivers from you and your subcontractors, proof of payment to subs on prior draws, photos of work completed, and sometimes architect sign-off. The lender on a financed project typically has to approve the draw before funds get released. Getting a pay app rejected or delayed because the paperwork wasn’t clean is the fastest way to run out of cash.
On the bookkeeping side, progress billing affects how revenue shows up on your financials. Under percentage of completion accounting, you recognize revenue as work gets done, not when you get paid. You’ll have accounts for work in progress, retainage receivable (tracked separately from regular AR because it’s not currently collectible), and billings in excess of costs or costs in excess of billings depending on whether you’re overbilled or underbilled on each job. Proper job costing is what makes these numbers meaningful. Without accurate cost tracking by project, you can’t calculate percentage complete reliably and you can’t tell which jobs are actually profitable.
Most general contractors underestimate how much administrative work progress billing creates. Pay apps, lien waivers, sub payments timed to draw releases, retainage tracking across multiple open projects. If this side of your business is disorganized, you’ll lose money even on jobs that are technically profitable. That’s where experienced bookkeeping services in Pasadena earn their keep, keeping the draw cycle moving and the books accurate enough that you actually know where you stand.
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