Construction Billing: Methods, Process & Best Practices

January 30, 2025

Construction billing is a crucial aspect of any project, ensuring contractors, subcontractors, and suppliers are compensated for their work. Unlike other industries, construction billing involves complex processes, multiple stakeholders, and varying payment structures. In this guide, we’ll break down the construction billing process, explore common billing methods, and provide best practices to streamline invoicing.

What Is Construction Billing?

Construction billing refers to the process of invoicing clients, tracking payments, and ensuring accurate financial documentation for a construction project. The process typically involves multiple stages of work completion, contract terms, and legal compliance.

Since construction projects often span months or even years, the methods of payment in construction must be structured to ensure steady cash flow while accounting for labor, materials, and overhead costs.

Common Construction Billing Methods

There are various construction billing methods, each suited to different project types and contract structures. Below are some of the most commonly used ones:

1. Lump Sum Billing

Lump sum contracts involve a fixed total price for the entire project. The client pays in agreed-upon installments or upon project completion. This method provides budget predictability but requires careful cost estimation.

2. Progress Billing

Progress billing is one of the most widely used methods for billing for construction projects. Payments are issued based on completed milestones or a percentage of work done. It helps maintain cash flow and ensures fair compensation for ongoing work.

3. Time & Material (T&M) Billing

T&M billing charges clients based on actual labor hours worked and materials used. This method is flexible but requires detailed tracking to avoid disputes.

4. Cost-Plus Billing

Cost-plus billing reimburses contractors for actual project costs plus a pre-agreed percentage for profit. This method ensures transparency but may lead to higher costs for clients.

5. Unit Price Billing

For projects with repetitive tasks, unit price billing charges clients per unit of completed work. This method is common in large infrastructure projects like road construction.

The Construction Billing Process

To ensure smooth payments and avoid disputes, following a structured construction billing process is essential. Here’s how it typically works:

Step 1: Drafting the Initial Contract

Before any work begins, the contract should outline payment terms, billing schedules, and conditions for disputes or delays. The contract should specify whether progress billing, lump sum payments, retention booking, or another method will be used.

Step 2: Tracking Work Progress & Preparing Documentation

Contractors must track work completed to prepare accurate invoices. This includes maintaining daily logs, progress reports, and material usage records to support payment claims.

Step 3: Submitting a Payment Application or Progress Claim

In many construction projects, especially larger ones, contractors must submit a payment application (pay app) or progress claim instead of a standard invoice. This document includes:

  • Work completed (percentage of contract scope or milestones reached).
  • Materials used and stored on-site.
  • Deductions and adjustments (such as retention, previous payments, and change orders).
  • Supporting documentation (timesheets, material invoices, etc.).

Step 4: Valuation & Approval by Project Owners or QS

Before releasing payments, project owners or quantity surveyors (QS) review submitted payment applications. This process, called valuation, ensures that:

  • The claimed work aligns with project progress.
  • Materials and labor costs are justified.
  • Any disputes over quality or scope are addressed.

Step 5: Invoice Generation & Submission

Once a payment application is approved, contractors generate an official invoice. This invoice reflects the agreed-upon amount after valuations, deductions, and retentions.

Step 6: Payment Processing & Follow-ups

The client or project owner processes the payment based on contract terms. Payments may be made via bank transfer, check, or construction financing options. Contractors should monitor payment schedules and follow up on overdue invoices to maintain cash flow.

Step 7: Record-Keeping & Compliance

All invoices, payment applications, and approvals should be stored for tax purposes, audits, and future disputes. Using construction billing software can help automate record-keeping and ensure compliance with contract terms.

How to Create a Bill for Construction Work

Creating a professional and accurate construction bill involves a few key elements:

  • Project details: Name, location, and contract reference.
  • Work completed: Breakdown of labor, materials, and equipment used.
  • Payment terms: Due dates, accepted payment methods, and late fee policies.
  • Signatures: Approval from both parties to avoid disputes.

Using digital tools like Planyard can streamline billing for construction projects by automating calculations, tracking expenses, and ensuring accuracy.

How Do You Charge Labor in Construction?

Labor charges in construction depend on factors like job complexity, skill level, and regional wage rates. The most common ways to charge labor include:

  • Hourly rates: Paying workers based on hours worked, common in T&M billing.
  • Fixed project costs: Including labor costs within a lump sum contract.
  • Prevailing wages: Ensuring wages meet local regulations, especially for government projects.

Proper labor tracking is essential to avoid underpayment or disputes.

What Does a Construction Billing Specialist Do?

A construction billing specialist manages invoicing, payment tracking, and financial records for construction companies. Their responsibilities include:

  • Preparing and submitting payment applications and invoices.
  • Ensuring compliance with contract terms.
  • Communicating with clients regarding payments.
  • Resolving disputes and following up on overdue payments.

Hiring a specialist can improve financial efficiency and reduce billing errors.

Final Thoughts

Effective construction billing is essential for maintaining project cash flow, ensuring fair compensation, and reducing financial risks. By using the right construction billing methods and tools, contractors can streamline invoicing and minimize payment delays.

Looking for a better way to manage construction billing? Planyard simplifies budgeting, invoicing, and payment tracking, helping you effortlessly stay on top of your finances.

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