How do contractors handle progress billing in bookkeeping?
Progress billing means invoicing clients at specific milestones during a project rather than waiting until the job is complete. For contractors working on larger projects, this keeps cash flowing while work is in progress and matches income closer to when expenses happen.
The bookkeeping starts when you sign the contract. Record the total contract value and set up billing milestones based on your agreement. Some contracts specify billing at certain completion percentages like 25%, 50%, 75%, and 100%. Others tie billing to specific phases such as foundation complete, framing complete, and final inspection passed. Either way, your accounting system needs to track the original contract amount alongside what you’ve billed to date.
Each time you reach a milestone, create an invoice for that portion of the contract. If you’re billing 25% of a $200,000 contract, the invoice is $50,000. The invoice hits accounts receivable and a revenue account. For construction businesses using accrual accounting, the income statement shows revenue as earned when you bill, not when you receive payment.
Track your actual costs against each billing period. You need to know whether the work completed so far cost more or less than what you’ve billed. If you’ve billed $50,000 but spent $55,000 in labor and materials reaching that milestone, you’re underwater on the project. Without this tracking, you won’t know until the end whether the job was actually profitable.
Retainage creates a specific bookkeeping challenge. Many commercial contracts hold back 5% to 10% of each progress payment until the project is complete and the punch list is finished. You need a separate accounts receivable account for retainage. When you bill $50,000 with 10% retainage, record $45,000 in regular A/R and $5,000 in retainage receivable. The full $50,000 is still revenue, but the retainage won’t convert to cash until months later. Mixing these together makes your A/R aging report misleading.
Change orders need careful handling too. When the scope increases mid-project, update your contract total in the system before issuing additional invoices. This keeps your billings-to-contract-value ratio accurate and prevents confusion about what’s been billed versus what remains.
A bookkeeping service in Macomb familiar with contractor accounting can set up your chart of accounts correctly from the start. You need job-level tracking, retainage accounts, and reports showing billings versus costs by project. Getting this structure right means you actually know which jobs make money before you finish them, not after.
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