The construction billing process explained
The construction industry is notorious for late payments, endless paperwork and poor communication. Since construction projects take place over an extended period of time, it’s important to keep your processes streamlined, and improving your billing process can be the best place to start.
Construction billing differs from business to business, but one thing remains true – there’s power in using a construction billing software. The ability to run your entire process through software will change your business for the better. Follow these tips to help you reduce late payments, minimize paperwork and make your construction billing process more efficient.
- What is construction billing?
- What is the process of construction billing?
- Who oversees construction billing in a project?
- What makes construction billing challenging?
- How do cost plus and fixed price contracts affect construction billing?
- 5 construction billing best practices
- Improve your billing process with Buildertrend
What is construction billing?
Construction billing documents an expense for your company. A bill is any payment you owe to your partnering parties like expenses for materials, equipment or services. Billing in construction is similar to purchase orders, but billing is a quicker way to record an expense and get that expense paid in full.
What is the process of construction billing?
Construction billing is the process contractors use to request and receive payment for completed work, materials and services throughout a project. Unlike many industries that bill once a job is finished, construction projects are often billed in stages as work progresses.
A typical construction billing process includes the following steps:
- Create a Schedule of Values (SOV): At the beginning of the project, the total contract value is broken down into specific phases, tasks, or cost categories.
- Track work completed: Contractors document the percentage of work completed during a billing period, along with any approved change orders or additional costs.
- Prepare a payment application: The contractor submits an invoice or payment application detailing completed work, materials used and the amount due.
- Review and approval: The project owner, lender, architect or project manager reviews the billing documentation to verify that the work has been completed as claimed.
- Process payment: Once approved, payment is issued according to the contract terms. This may include retainage, where a percentage of the payment is withheld until project completion.
- Record and reconcile payments: Contractors update their financial records, track outstanding balances and ensure payments align with project budgets and cash flow projections.
The exact billing process can vary depending on the project type, contract structure and payment method. Common construction billing methods include progress billing, milestone billing, time and materials billing and fixed-price billing. Regardless of the approach, accurate documentation and clear communication are essential for maintaining healthy cash flow and reducing payment disputes.
Who oversees construction billing in a project?
Construction billing is typically overseen by multiple stakeholders, with responsibilities varying based on the size and complexity of the project. The primary goal is to ensure billing is accurate, aligned with contract terms and supported by completed work.
Effective construction billing requires coordination among all parties involved. Clear documentation, regular progress tracking and established approval workflows help ensure payments are processed accurately and on time while minimizing disputes.
Common parties involved in overseeing construction billing include:
- Contractors and project managers
- Accounting and finance teams
- Property owners or clients
- Architects and engineers
- Lenders and financial institutions
- Subcontractors and suppliers
What makes construction billing challenging?
Construction billing can be complex because it involves multiple stakeholders, strict payment schedules, changing project scopes and extensive documentation. Even small errors can impact cash flow and project profitability.
Some of the most common construction billing challenges include:
- Managing documentation: Tracking invoices, receipts, purchase orders and payment records can become overwhelming without organized systems.
- Late client payments: Delayed payments can create cash flow issues and make it difficult to cover labor, materials and subcontractor costs.
- Handling change orders: Project changes can increase costs and timelines, making accurate documentation essential to ensure proper payment.
- Maintaining cash flow: Paying vendors or subcontractors before receiving payment from clients can strain a company’s finances.
- Coordinating multiple parties: Builders, subcontractors, suppliers, owners and lenders all play a role in the billing process, increasing the risk of communication gaps and payment disputes.
Effective billing processes, clear documentation and consistent financial tracking help construction companies overcome these challenges and maintain healthy cash flow throughout a project.
How do cost plus and fixed price contracts affect construction billing?
The type of construction contract you use has a direct impact on how billing is managed throughout a project. The two most common contract structures are cost plus contracts and fixed price contracts, each requiring a different billing approach.
Cost plus contracts
In a cost plus contract, the client pays for the actual cost of labor, materials and other project expenses, plus an agreed-upon fee or percentage for the contractor’s profit and overhead.
Because costs are billed as they occur, contractors must maintain detailed records and provide regular documentation to support invoices. Transparency is critical, as clients often expect visibility into project expenses and change orders.
Best for: Projects with evolving scopes or when costs are difficult to estimate upfront.
Fixed price contracts
In a fixed price (or lump sum) contract, the contractor agrees to complete the project for a predetermined price. Billing is typically tied to project milestones, phases of work or a payment schedule outlined in the contract.
Since the contract price is established upfront, contractors assume more risk if labor or material costs increase. Accurate estimating and careful budget management are essential to protect profitability.
Best for: Projects with a clearly defined scope, timeline and budget.
Key differences in billing
| Cost plus contracts | Fixed price contracts |
|---|---|
| Billing reflects actual project costs | Billing follows a predetermined contract amount |
| Requires detailed expense tracking and documentation | Requires accurate estimating and budget control |
| More flexibility for scope changes | Less flexibility without formal change orders |
| Cost risk is shared with the client | Contractor assumes greater cost risk |
Regardless of contract type, successful construction billing depends on accurate documentation, clear communication and consistent financial tracking throughout the project.
E-book: The ultimate profitability checklist: Check out our comprehensive guide to help you confidently determine which contract type – cost plus or fixed price – is the best fit for your jobs. Download now
5 construction billing best practices
Construction billing becomes much easier when builders follow consistent processes and use the right tools. These best practices can help improve cash flow, reduce errors and keep projects financially on track.
1. Keep detailed records
Accurate billing starts with accurate documentation. Store invoices, receipts, purchase orders, contracts and change orders in a centralized location so they’re easy to access when questions arise.
2. Monitor financial performance regularly
Review project costs, budgets and cash flow on a consistent basis. Regular reporting helps identify cost overruns, track profitability and catch billing issues before they impact the project.
3. Establish a consistent billing schedule
Create a predictable schedule for sending invoices, approving payments and paying vendors or subcontractors. Consistency helps improve cash flow and reduces the risk of missed deadlines.
4. Digitize your billing process
Manual billing processes can lead to delays, lost paperwork and data entry errors. Construction billing software helps streamline invoicing, payment tracking, approvals and document management while keeping everyone aligned.
5. Connect billing and accounting systems
Integrating billing and accounting processes reduces duplicate data entry and improves financial accuracy. When project and accounting data stay synchronized, teams gain better visibility into costs, payments and overall financial performance.
Advanced billing: This type of billing in construction is completed before the project even starts. It’s usually in the form of a lump sum payment. With this method, there’s a lot of trust put into the parties responsible for working on the job. It can be risky because the project can run over budget. This type is ideal for parties who are familiar with each other and have a good long-standing relationship.
Arrears billing: This construction billing method is done at the end of the project. It’s also sent in a lump sum once the final product is approved. This type can be risky for the builder because they can end up paying out-of-pocket for materials and labor during the project. Arrears billing would be an ideal choice for businesses that are looking to form relationships and trust with new clients, and who also have a strong cash flow already.
Progress billing: Billing is done incrementally throughout the project when using construction progress billing. It’s more complicated than the other two types, but it can be beneficial. It allows for the builder to get paid at regular intervals which creates less out-of-pocket costs throughout. With progress billing, the contractor needs to create an agreement with the client for points of payment during the project. This is favored by clients because it incentivizes each milestone to be hit in a timely fashion.
The main difference between invoicing and billing is which party is looking at the document. An invoice is what the contractor sees and sends to the client to be paid. When the client receives the document, it would be considered a bill to them because they’re required to pay it.
Progress billing is when the payments are done at certain points throughout the project. The contractor and client will agree on certain points in the project where they will pay. So once certain milestones are hit, the client will pay what they owe at that point.
To charge for a construction project, you’ll send an invoice to the client with the amount they’re required to pay. The document can list each item or service that the client is paying for. Once they receive the invoice, they can pay the builder the owed amount.
Improve your billing process with Buildertrend
Your construction billing process can significantly improve by using Buildertrend’s software. The entire process takes place on the platform – from estimates to purchase orders to invoices to bills to payments. You can streamline your process and keep everything organized. With a built in construction purchase order software, all PO information can easily translate to a bill to avoid double entry. Then, the billing feature creates a quick and simple way to record all expenses and move them along to payment.
You can also improve your bill reporting process. With all data available in the software, you can sort through bills with a few simple clicks and even save the filters or reports you run often. You’ll minimize the need for paperwork altogether because everything is captured in one place.
By using construction billing software like Buildertrend, you’ll reduce late payments with access to reports on billing due dates. In addition, with the power to link your bills to the scheduling tool, you’ll always be aware of upcoming payments.
Ready to improve your billing process? Buildertrend has the tools you need to execute a strong process and keep your business running efficiently. Schedule a demo today and learn more.
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