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Progress Billing for a General Contractor

Progress Billing for a General Contractor Definition

A construction project typically involves many different trades in order to reach completion. Therefore, it can be just as daunting a task to submit for payment to a client along the way. The Owner of a construction project relies on the project architect, lender and sometimes a third party inspection company to make certain that payment is applied for correctly and within reason. Once the progress billing for a general contractor definition is truly understood, you will smoothly pass through the steps of preparing and submitting everything needed to complete a construction project.

Start the project with a plan to be profitable. Price for profit at the beginning to prevent any cash flow crunches during the completion of the project. 

Start With a Good Schedule of Values

A schedule of values is a list with the dollar amount assigned to each area of work to complete on a construction project. A construction project is broken out by each scope of work and typically separated according to the Construction Specifications Institute Divisions (CSI). Therefore, it is best to separate a project’s Schedule of Values into basic CSI divisions. Examples of these divisions are General Conditions, Sitework, Utilities, Concrete, Steel, etc. Once you define the areas of the scope of work, then a assign corresponding value to each one. Also, establish a percentage complete for each item as you make progress on the project. In the United States the industry standard format for a billing schedule of values is per AIA form G703. Progress billing for a general contractor accounting issues are common, so it is essential to establish a good schedule of values early.

Establish the Rate of Construction Retainage

A construction contract will typically require that “Retainage” be withheld from each application for payment in order to provide the Owner or lender protection from the Contractor not completing the entire project. You may withhold 5% or 10% from each payment to the Contractor. Hold the funds in reserve until you complete the project punch list at the end of the project. Therefore, each progress billing must take this retainage amount into account on each line item of the schedule of values and ultimately on the bottom line of the application.

Establish the Frequency of Progress Payments

A progress billing is exactly that, a billing that progresses towards completion a percentage at a time. Therefore, it is necessary to establish the frequency that you shall submit each application. Often times, a progress billing will be submitted to an Owner or Lender once per month; complicated projects may require more frequency. A progress billing must specify the current period percentage of completion and the cumulative total. Do this for both the individual items and the total.

Establish the Percentage of Completion

Vendors will submit their invoices for payment to a contractor for the amount of work that they have completed over the period. A contractor must confirm the completion of the work according to this percentage. Then the contractor should include the corresponding amount within the progress billing to the Owner or Lender. Perform this process for each scope of work. Then total all completed items percentages.

Submit It Correctly Then Get PAID

Progress billings are often rejected by an Owner or Lender. They reject it because of a variety of issues. Some of these issues include incorrect completion percentages, incorrect math, or applications submitted tardy. In order to achieve profitable progress billing revenue recognition, effective processing is important. Be sure to review vendor invoices and percentage completions with field supervision to avoid over/under billings. Also, be certain to double check math calculations or use construction software to avoid rejected payment applications due to math mistakes. Finally, submit your progress billing forms on time! This is an easy way to get credit with an Owner or Lender because it gives them ample time to review the application.

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Progress Billing for a General Contractor Sample

UNCONDITIONAL FINAL WAIVER AND RELEASE OF LIENS AND CLAIMS

OWNER: Business X, LLC.

PROJECT NAME: PRIORITY MANAGEMENT

For and in exchange of the sum of $                                , the sufficiency of which is hereby acknowledged, the undersigned Contractor, subcontractor, consultant, materialmen or laborer (hereinafter the “Undersigned”) warrants and represents as follows:

(1) The Undersigned has been employed by Business X, LLC. to furnish labor, materials, or services in connection with the construction of improvements on or to the above referenced project.

(2) The Undersigned has performed all labor, materials, or services required under its Contract, Subcontract or Purchase Order in full compliance with all terms and conditions thereof, and all applicable plans and specifications.

(3) Any and all contractors, subcontractors, laborers, suppliers and materialmen that have provided labor, material, or other services to the Undersigned for use or incorporation into the construction of the improvements to the Project have been paid in full for all amounts due and owing to them on the Project, or shall be promptly paid in full from the proceeds of the payment referenced above and there are no outstanding claims of any character arising out of or related to the Undersigned’s activities on or improvements to the Project. If the Prime Contractor signs this Waiver, then attached hereto as Exhibit A is a complete list of all subcontractors and suppliers retained by such party as of the date of this Waiver.

(4) The Undersigned waives and releases any and all liens, lien rights, claims of liens, and any other claims for payment for labor, material or equipment of any type or description that it may have against the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, the Prime Contractor (if this Waiver is signed by a subcontractor or supplier) and/or any person with a legal or equitable interest in Project, arising out of or in any fashion related to, any labor, materials or services furnished by, through or under the Undersigned on, or used in connection with, the Project, without exception.

(5) This Final Waiver and Release constitutes a representation by the Person signing this document, for and on behalf of the Undersigned, that the payment referenced above constitutes full and complete payment for all work performed and costs or expense incurred (including, but not limited to, costs for supervision, field office overhead, home office overhead, interest on capital, profit and general conditions cost) by, through or under the Undersigned relative to the work of improvements at the Project, including all retainage.

More specifically, the Undersigned hereby waives, quitclaims, and releases any claim of damages due to delay, hindrance, interference, acceleration, inefficiencies or extra work, or any other claims of any kind it may have against the Prime Contractor (if this Waiver is signed by a subcontractor or supplier), the Owner, the Owner’s Project Manager, the Owner’s Engineering Consultant, the Architect for the Project, and/or any other person or entity with legal or equitable interest in the Project.

IN WITNESS WHEROF, the person signing this document, acting for or on behalf of the Undersigned and all of its employees, subcontractors, laborers, suppliers and materialmen, executes this document this         day of                               , 20          .

By:                                                                       

Title:                                                                     

This instrument was executed and acknowledged before me on this        day of                          , 20     , by                                                      , on behalf of said entity.

Notary Public

                                                                          

(Notary Seal)

My Commission Expires: 

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Progress billing is an important factor that can impact a company’s profitability. Price it right the first time! If you are uncertain of whether you have a pricing problem, download the free Pricing for Profit Inspection Guide and fix it.

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progress billing for a general contractor

See Also:
Progress Billing Example
How to Maintain an Effective Job Schedule
Retainage Management and Collection
Construction Accounting
Work in Progress
Trade Credit

2

Percentage Completion (POC) Method

See Also:
Percentage Completion Method Example
Accounting Principles
Point of Sale Method (POS)
Installment Method
Completed Contract Method
Collection Method
Work Breakdown Structure (WBS)

Percentage Completion (POC) Method

Use the Percentage Completion (POC) method with construction based projects that extend over the course of several years. Furthermore, many accountants prefer the percentage completion accounting over the Completed Contract Method. It also paints a more realistic view of the company. Because the projects are usually long term lasting several years, it estimates completion for the company. So it shows revenues year by year than to just all of the sudden have one large inflow at the end where the project was completed.


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Percentage Completion (POC) Method Formula

The Percentage of completion formula is very simple. First, take an estimated percentage of how close the project is to being completed by taking the cost to date for the project over the total estimated cost. Then multiply the percentage calculated by the total project revenue to compute revenue for the period. Then derive the construction income by subtracting the cost from the period revenue.

Use the following simplified equations for the percentage completion formula and other associated formulas:

Period Costs (annual , quarterly, etc.)/ Total Estimated Cost = Percentage Completed

Percentage Completed * Total Project Revenue = Period Revenue

Period Revenue – Period Costs = Project Income

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Percentage Completion (POC) Method

10

How to Maintain an Effective Job Schedule

How to Maintain an Effective Job Schedule

Accounting’s main function in Construction is to properly manage the financial stability of the organization. One of the tools that accounting uses to do this is the construction job schedule. This schedule shows the performance of each construction job. Project management works with accounting to furnish the contract amount, change orders, and estimated total cost. Communication is key in keeping the job schedule accurate and correct. The accounting manager’s job is to review and analyze the numbers to determine the profitability of each individual job and maintain an effective job schedule. There are several ways to do this:

  • Over/under billing
  • Estimated total cost vs. actual total cost
  • Total Gross Profit (loss) recognized in current period

Over and Under Billing

Over/under billing needs to be determine by the accounting manager; it is his/her job to make sure that all change orders and contract amounts are correct. Problems arise when you have entered the costs and exceed the billing amounts to the client in any period. Cash flow issues are another problem that will affect your month to month financial stability. It may be the most single important accounting short term issue that you will come across in your job schedule and weekly cash flow.

To determine if you are under billed you must review the “Cost and Estimated Earnings in Excess of Billing” column of your spreadsheet. As you review each job, keep in mind that if you have a larger numbering in a job column, then it should send up a red flag. Your organization does not want to “finance” the project for the client. So it is your job as a manager to maintain balance regarding the amount you are billing. Then compare it to the invoice you receive from vendors and sub-contractors.

To effectively maintain that balance you must develop a system that will incorporate project management into your job schedule. Meet once a month to go over each job to determine what you need to change (i.e. executed change orders, additional jobs, etc…). Having meetings with your project management personnel will only help to eliminate the problem of having too little income to cover outstanding accounts payable invoices each month.

Cost Coding

Each month, input your actual cost incurred to date. It should always be less or at the same cost of the estimated total cost. To maintain an effective job schedule you must, as a manager, determine why your actual costs are not in line with your estimated costs. One way to determine that is to review what has been cost coded to the various jobs.

This will help because it will determine if there was a mistake in coding or a mistake in keying the information in by your accounts payable clerk/assistant. If a mistake has been made and then corrected, then check with project management to determine whether you need to execute a change order. Vendors and subs do not submit their invoices based on an executed change order to the client from your organization. Therefore proactively make sure the work has been done. Then you must issue a change order to the client immediately. This not only a project management or construction management issue. It’s a company issue each functional group within the company needs to address.

Job Profitability

If your company is a for-profit entity, your work as an Accounting Manager/Controller is to keep your bottom line black (profit). That should be your focus. You must be able review your job schedule to determine your job by job profitability. Keeping your overhead low will not solve the problem, if your jobs are not performing at the required level. Although job profitability is a project management function, effectively managing the job schedule by reviewing profits in a period is extremely important. It is also critical to recognize profits in the proper period if your company utilizes accrual based accounting.

If too much profit is taken in a period, then it could hurt you down the road when unforeseen costs hit. For example, one job could jeopardize the overall company profitability for the year. Ways to combat this is to determine a proper amount to reorganize in the period. If there seems to be a lot of revenue that a certain project could take on, then review and verify its accuracy. Sometimes previous costs have not been taken into account. It could require that you take a greater loss in addition to the cost that have currently hit the present job. Following up once you review the schedule could save you and the company down the road.

Conclusion

For Construction Accounting, the Job Schedule is the single most important factor pertaining to profitability and stability. When you are a good steward of the company’s finances and maintain an effective job schedule, you can only perpetuate the confidence of others in your organization. This leads to more profitable months in the years to come.

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maintain an effective job schedule

See Also:
Progress Billing for a General Contractor
Retainage Management and Collection
Work in Progress
How to manage inventory
Trade Credit

0

Contract Price

See Also:
Maintenance Contract
Completed Contract Method
Progress Billing for a General Contractor
Covenant Definition of a Bond Contract
Account Manager

Contract Price Definition

Contract price, defined as the price of a contract which is paid to a contractor upon completion, is used any time a contract exists. Due to the fact that a contract is an agreement to complete a certain type and amount of work, the contract price is fully paid to a contractor when they have completed the job which has been agreed upon. Generally, contract price includes a down payment, may include a few continuing payments, and ends with a final amount paid to close the contract.

Contract Price Explanation

Contract price, explained simply as the price which two parties agree on for a certain amount of work, is a very common concept. Common contracts are for construction, landscaping, leasing, and even the common mobile phone.

Contract Price Cost Analysis

Contract price cost analysis is essential to preventing a bad deal. Different contracts serve different purposes. The common landscaping contract, for example, does not have irregular expenses or a final completion date. The nature of this agreement lends itself to a payment schedule. Due to this, the contract price for landscaping is commonly paid on a per month basis. In contrast, a construction job has irregular expenses and a final completion date. In this case, the contract price will be paid differently. As stated above, they commonly have a down payment, regular payments, and a final construction retainer. This payment will be paid when the job is almost complete and the client only expects a few small changes.

Contract Price Escalation

Contract price escalation may occur partway through the process of completing the work. The reason for this could be increased expenses, increased time to complete the project, and more. In this case both parties will need to renegotiate the deal. Contract price adjustment can be very complicated when one party does not want to change. Still, it must occur despite the inherent difficulty of changing a standing agreement.

Contract Price Example

For example, Dwight is an agent for major hip-hop music stars. His work deals heavily with negotiations. Dwight helps to negotiate contracts for his artists. For Dwight, the final contract price clause is really the deciding factor of success or failure in his work. Dwight is working on a contract today. He has completed the agreement and is pleased. This price comes different than those above: a payment per album, a payment per concert or tour, travel and accommodations, and some for living expenses. Very different from the standard contract, Dwight knows the minor differences make major effects. If he had even left out living expenses, his artist may have come out of the deal with little to show for it. Dwight must keep a constant state of awareness to make sure he does not make a mistake. Dwight goes home and has a sigh of relief.

Today, he has been successful at his work. He knows every day can not be this good. So, he resolves to celebrate his successes and mitigate his failures. This way, he will keep his perspective where it needs to be.

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Construction Accounting

See Also:
Progress Billing for a General Contractor
Cash Flow Statement
How to Select Your Commercial Insurance Broker
Chief Financial Officer (CFO)
Financial Ratios

Construction Accounting Definition

Construction accounting, a type of project accounting, is the method for financially tracking the progress of a construction job. This is essential for bidding, request-for-proposals, project management, invoicing, construction retention payments, and more.

The process of construction accounting management involves monitoring both costs and revenues. Costs fall into 3 main categories: Direct (Direct Labor, Direct Materials, etc.); Indirect (Indirect Labor, Indirect Materials, etc.); and selling, general, and administrative.

To account for revenue, compare the expected project value to the approximate percentage of completion of the project. Over time, you will receive cash with completion invoices. A final payment made upon satisfactory completion of the job. The construction retainer is the final payment because it retains the contractor until that the project is completed.

Construction accounting and financial management involves monitoring draw, progress billing, work-in-progress, and a slew of construction accounting methods which range from GAAP compliant to industry-specific. Generally, the industry has accepted a series of unique methods of financial reporting that are not present anywhere else. These aid in construction accounting and taxation.

Construction Retention Definition

Construction retainage is the final amount of payment kept, by the customer, to ensure satisfactory completion of a project. In both residential and commercial construction, construction retainage is also referred to retention money. Although it is extremely common to the construction world, you can use this method of quality control in other places.

In the world of construction, retention accounting occurs in a similar method as above. Projects are paid with increasing completion until finished. Then, the customer will examine the project, with the project manager, to ensure that it meets their needs. The customer makes the final payment once this is agree upon. To contractors and other workers in construction, this is when retention release has occurred.

Laws exist to protect the investment of the customer as well as the contractor. Laws vary from state to state. An attorney that is experienced with construction retention laws should deal with any discrepancies. In the event of unacceptable or negligent construction, recovery of the retainage is a possibility. Maintain every document and record for each client and each project so that in the event of a disagreement, you will have support to your case.

Construction Accounting Example

The founder of Cabinetco, a custom cabinetry builder, is Maggie. Her projects, pieces of art in their own right, have continuously pleased customers. Maggie, over time, has become well versed in the process of accounting for her projects.

Maggie begins her projects with a Request-for-proposal, or RFP. Her records of past projects allow her to closely estimate the total cost of each new project. Upon this foundation Maggie makes a bid for the estimated cost of each project. In her experience, customers are always pleased when they pay less than the estimate. Therefore, Maggie makes sure to present customers an estimated cost which will be less than her billed price. She does this with a keen eye so as to ensure consistent profitability on each project.

Maggie knows that her bid price does not drive her business: customers do. She has made great efforts to present excellent work and has created happy customers. Word-of-mouth is her most effective marketing message. This leverage allows her to negotiate the lowest retainage payment possible. Maggie knows the importance of cash flow in the survival of her business.

How To Account on Long Projects

Once Maggie has confirmed her bid with a customer she begins building. She then orders the perfect materials and has a trusted team to subcontract her building. Her role in this process is as a project manager. Her ability to control quality drives word-of-mouth recommendations to Cabinetco.

On long projects Maggie sends regular invoices. These state the percentage of completion on the project, the payment due for that level of completion, expected date to the next invoice or benchmark, and other details.

Maggie, finally, presents the project to the customer. She knows that every time she sees a happy face she is retaining customers as well as defining her brand. She then sets a date for final completion and invoices for her project retainage.

Maggie has cracked the code to success in her business. To her, it is about accountability, over-delivering, and project management.


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1

Completed Contract Method

See Also:
Accounting Principles
Percentage of Completion Method
Installment Method
Point of Sale Method (POS)
Cost Recovery Method

Completed Contract Method Definition

The completed contract method is also known as the contract completion method. It is a form of revenue recognition used for project based accounting such as construction. The completed contract method of accounting records all revenue earned on the project in the period when a project is done.

Completed Contract Method Meaning

The Completed Contract Method of revenue recognition is normally only used in the short-term. For example, projects that last less than a year are considered short-term. It is anything over a year, then most firms prefer the percentage of completion method because it paints a more realistic picture in the long term. However, for firms that are more conservative the complete contract method becomes appropriate because the revenue will not be recognized until the total cost has been accounted for and all the revenue has been received.

Completed Contract Method Example

The following represents an example to help explain completed contract method accounting:

Bob works for Whistle-at-You Construction Co. (WAY). He has obtained the following information via a contract with a company. This company is in need of refurbishing some office space. Whistle-at-You believes that they will be able to complete the project in 8 months. WAY uses the completed contract method of revenue recognition when it is dealing with projects that will only lasts under a year. The contract states that the company will pay WAY $5 million upon completion of the project. The estimated costs equal $4 million.

At the end of the construction, which ended up being 9 months instead of 8 months, the company pays the $5 million to WAY. But the actual cost for the project amounted to $4.5 million dollars. Because the project is completed Bob will recognize revenue in the amount of $5 million and the actual cost of construction of $4.5 million. Therefore, he will correctly state the income at $500,000.

Note: If Bob had used the percentage of completion method, then the company would have made some adjusting entries to correct for the extra costs and the extended month. This is one major advantage that completed contract method revenue recognition has over the percentage completion method.

completed contract method

0

Capitalized Interest

See also:
Capitalize
Interest Expense
Interest Rate
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)

Capitalized Interest Definition

The capitalized interest definition is the interest on the cost of construction, or a self constructed asset by a company. Interest capitalization occurs because it is a part of the cost in developing the asset for the company’s future use.

Capitalized Interest Meaning

Capitalized interest means that a company is usually developing its own assets. Or it may be involved in the construction industry where a bid on a project typically includes the interest. Typically, interest capitalization construction occurs when a company is developing assets for its own use like the construction of a building for new office space. It might also include the construction and development of equipment items that a company uses in its operations. Construction companies use capitalized interest accounting because it is considered like the self-constructed assets as part of their cost. Because construction companies do not receive full payment for a construction project until it is completed, the companies have a need to go out and finance the majority of the construction costs until they receive payments.

Therefore, consider the interest expense to be part of the normal costs associated with construction. Thus, properly account for the capitalized interest expense on the balance sheet instead of the income statement. Do this until the company completes the project.

Capitalized Interest Example

For example, Jimbo Slice is the CEO of Chupacabra Inc.. He is looking to construct a new building in downtown Houston, Texas. The company must first secure capitalized interest mortgage for the new office space. Jimbo goes to visit the bank to try and gain access to a loan. After consideration, the bank grants Jimbo the loan for the construction. It will cost an estimated $4 million to complete at an interest rate of 9%. The interest expense is thus capitalized on the balance sheet because the construction is for Chupacabra’s new office space and no one else in particular. Given the numbers, Chupacabra will capitalize the interest expense of $90,000 per year assuming that the company will complete construction in 4 years.

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