Last editedMar 20233 min read
In a typical billing cycle, businesses request payment once goods or services have been provided. For short-term projects and retail transactions, this system is both straightforward and efficient. But what happens when you’re working on a long-term project involving multiple phases? Sending a single invoice at the point of completion may not be enough to cover overhead costs. Progress invoicing offers a solution by ensuring sufficient cash flow to pay for project expenses over time. If you’re wondering when you would use progress invoicing, keep reading for a few typical examples.
Progress invoice meaning
This invoicing method breaks down the overall project cost into a series of smaller payments. Rather than billing your client for a large lump sum once the project is completed, you bill them for each fraction of the work as it’s completed. The progress invoice meaning refers to billing for a work in progress. Customers are sent a series of invoices requesting partial payment, usually in accordance with the completion of certain milestones or phases in the project’s timeline.
The intention behind progress invoicing is two-fold. It ensures that the business has enough cash on hand to pay for each phase of the project. It also reduces the risk of completing a large or costly project without any upfront payments. From the customer’s perspective, it involves less risk than paying an advance for work that hasn’t even started. Instead, they pay for each stage as it’s completed.
When to use progress invoicing
You can send a progress payment invoice for projects of any length. This type of billing frequency is most useful for long-term projects or those with a high value. By requesting money for earlier deliverables, a business can ensure it has cash on hand to pay for future deliverables within the same project.
There are also many different industry approaches to invoicing. Some industries are more likely to use progress invoicing than others:
Progress invoicing is standard in the construction industry. Construction projects involve high-value raw materials and the use of third-party contractors. To fund these ongoing costs, it makes sense to bill the client at intervals.
2. Defense and aerospace manufacturing
Defense contracts also involve large budgets and long timelines. It can take years for a major engineering project to be completed, which makes sending a single invoice impractical. Instead, large defense and aerospace projects require a series of invoices to pay for the work in progress.
3. Web design and development
The costs of raw materials might not be as high with web development projects, but timescales can be as lengthy. Long timelines and shifting user goalposts mean that progress billing makes more sense in this industry. It also ensures a high level of flexibility for clients, who can adjust their goals as needed.
Benefits of progress invoicing
Whether you’re a freelance designer or large construction company, there are many advantages to using progress invoicing.
Provides a consistent cash flow
The most obvious benefit is improved cash flow. Rather than dipping into your own funds throughout the course of a lengthy project, you’ll receive a steady stream of smaller payments from your customers.
Prevents the need for advance payments
New clients will be hesitant to pay for a project’s cost upfront. Providing services without any advance payment is also risky for the business. Progress billing provides a happy medium by reducing risk for both parties.
Helps pay for project expenses
With a steady cash flow, your business has the capital it needs to pay for raw materials, parts, and labor. You’ll be able to move on to the next project stage without the need to find an alternative source of funding.
Makes payment collection easier
When customers receive a massive bill at the conclusion of a project, it can take some time to pull the needed funds together to make a payment. Sending a series of smaller bills reduces this burden and makes payment collection easier.
Establishes client expectations
Progress billing your clients improves communication. Billing is transparent, as customers can see a breakdown of exactly what they’re paying for at each stage of the project. This transparency ensures that everyone is on the same page moving forward with the contract.
Progress invoice example
To give you a better idea of when to use progress invoicing, consider the following example.
A client hires XYZ Construction to build a new apartment building. Before beginning work, the company sits down with the client to work out prices, milestones, and timelines. They also establish payment terms in the contract. In this case, XYZ Construction agrees to a two-year timeline and total budget of $3 million, with profit of $1 million.
The breakdown of costs and profit is:
$2 million in costs
$1 million in profits
After the first year, XYZ Construction completes 50% of the project. They charge the client $1.5 million, with 0.5 million recorded as profit. This leaves them $1 million to spend on the materials needed to fund the next stage of the project. By the end of the second year, the project is 100% complete. The company sends an invoice for the remaining 50% owed.
How can GoCardless help with invoicing?
A QuickBooks study shows that 69% of US small business owners are kept up at night worrying about cash flow. Progress billing with GoCardless helps take away any uncertainty. Take back control by collecting recurring invoice payments directly from customer bank accounts, on the day they’re due. Late payments are eliminated, ensuring you have the funds you need to cover overhead costs. In fact, businesses can get up to twice as fast by including GoCardless as a payment option on their invoices.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.