Here at CrewCost, we talk about cashflow a lot – from how to manage it, to most importantly, how to boost it. A healthy cash flow is foundational to running a successful business, and proper invoicing can help you get there. In this article, we’ll break down everything you need to know about invoicing for contractors, including how to deal with late payments and potential disputes.
Key Takeaways
- Proper invoicing for contractors helps you maintain positive cash flow and get a closer look at how well jobs are progressing.
- To avoid risk, invoices should be sent by milestone or percent of completion – the AIA’s G702/G703 form offers a helpful standard here.
- Staying organized and documenting everything is key to avoiding late payments and disputes.
Understanding Invoicing in Construction
Every contractor has to deal with invoicing. And while getting paid is great, many contractors lack a solid invoicing process.
A solid invoicing process that tracks each of your job’s milestones or percentage of completion can help you get faster payments, lower your risk of disputes, and ultimately save you a lot of headaches.
Essential Components of an Invoice
Along with providing the original contract sum, along with your payment terms, due date, and any change orders, each invoice should include the following:
- Schedule of values – A schedule of values breaks down your job by line item. These can be split in several different ways, including by project scope or location. For example, a contractor might split their schedule of values by labor or by specific locations in a project. By breaking down your invoice by line item, you’re able to give a complete picture of what has been done, and your architect and client can easily confirm.
- Retainage held – In construction, retainage is the withholding of a portion of every line item to ensure that systems are complete and operate well with other systems . Basically, retainage protects your clients by making sure everything is not only built or installed, but works and functions as promised. Retainage is normally set in your initial contract negotiations, and standards can vary by state.
- Total percent completed & stored to date – This is the amount you bill for all your work completed to date, along with the value of any materials you’re storing for later use, whether on-site, or in a third-party warehouse. How stored materials are handled can be different by job so to avoid confusion here, we recommend confirming these details before starting a new contract.
- Backup materials – Documentation (photographs, video, invoices, etc) that serve as proof of work done, or proof of costs. For example, if you’re billing for materials, you’ll want to provide a shipping manifest for them.
Your invoices and actual costs won’t always match up – this is where overbilling and underbilling come into play. While there’s certainly an art to this, remember that at the end of the day, cash flow should be your main consideration when invoicing. In some instances, your incurred costs won’t neatly fit into the predefined line items of the schedule of values. This is where you might see some imbalances in the numbers.
Your invoice should act as a snapshot that captures not just the work already in place but also any costs you’ve incurred for upcoming work. It’s all about creating a fair representation of the project’s financial and operational status.
👉🏼 Check out our Ultimate Guide to Construction Accounting
An Example of a Well-Structured Construction Invoice
The industry standard for construction invoicing is the AIA’s G702 Application and Certificate for Payment and G703 Continuation Sheet, shown below:
You don’t necessarily need to buy an AIA-branded copy, just as long as your invoices follow the same format and layout.
🔎 Dive Deeper: Guide to AIA Billing
Invoicing for Contractors – Frequency and Timing
Invoicing by milestone or percentage complete eliminates the need for you to front all of the money for a job at the outset. This is a huge advantage to have, especially if you’re stretched for cash. Maybe you’re worried about a client’s timeliness or have a large number of concurrent projects with cash demands.
Once you send out an invoice, you can record the amount owed as an account receivable. This doesn’t mean it’s cash in your pocket just yet, but you can count it as an asset on your financial statement. This is a big reason why timeliness is key. Being timely with your invoices gives you a better chance of not only being paid faster, but making sure you’re paid at all.
A note for subcontractors: Your general contractor will set up the standard billing periods, but there will usually be some variation on what you’re submitting actually covers, and you might have to make some predictions. For example, if you’re supposed to bill on the 25th of the month, you’ll need to project how much you’re going to get finished in the last week. A good rule of thumb is to make sure you know the invoicing agreement at the outset.
Properly Documenting Work and Deliverables
Documentation is everything, especially when it comes to getting paid properly for the hard work you’ve done. Expect to receive the same level of scrutiny you give to your invoices from your project stakeholders as well. The more detailed you can be as you document a job’s progress, the better.
Being able to back up progress and milestones with detailed documentation will play a big role in how quickly your invoices are paid. This ‘backup’ can be anything from shipping manifests, to documentation of all of the payments you’ve already made toward materials. Nowadays, there’s a lot of helpful tech that can help you and your teams capture all of the details from a jobsite. For example, 360 degree cameras are the perfect tool to document the amount of work that has been put in place.
If you’re invoicing by milestone, expectations around milestone tracking should be clearly set from the outset. For example, outlining the definition of what you and your client will consider as ‘done’ for each element of the job.
Invoicing for Change Orders and Variations
No one likes the hassle of change orders, but 35% of all jobs require at least one, so it’s important to have a proper process for them. Generally speaking, you can only bill for change orders that are approved (or back to the art of overbilling, ones where the work is already in progress and you expect will be approved soon). As such, you’ll want to keep track of any change orders coming through so you can bill appropriately for them, either by percentage complete or by milestone. For larger change orders especially, it’s in your best interest to also break everything down by line item, so everyone is clear on exactly what is getting paid for.
We can’t stress the importance of good communication here. When change orders roll in, you’ll need to make sure both you and your client are crystal-clear on both scope and pricing. Never assume anything, and make sure to get everything in writing.
Dealing with Late Payments and Disputes
No matter how hard we wish they weren’t, late payments are sometimes just the reality of the industry, no matter what you do. Still, keeping all of your ducks in a row can make a big difference here. Staying organized with proper documentation, being 100% clear on how percentage completion is defined in your contract and ensuring that general requirements such as updated insurance certificates are in place can eliminate a lot of excuses for late payment.
Sometimes though, you still might face a late payment. That’s why you always need a plan B in mind. Generally speaking, filing a lien is your best recourse here, but keep in mind that you’ll need to file by a specific deadline (deadlines vary by state). In the unfortunate event that you end up in small claims court or arbitration, thorough documentation from photos and daily logs will offer the most support in helping you avoid the need to settle for any less than what you were owed.
If you’re a subcontractor, keeping in communication with the GC or owner is your best bet here. Before you file that lien, make a phone call or two and make sure everyone is aware that there is a late payment that needs to be settled.
Automating Invoicing Processes
When it comes to running your business, nothing should be left to chance. Proper and consistent invoicing can make all the difference when it comes to maintaining your cash flow. Thankfully though, it doesn’t have to be a thorn in your team’s side. Cloud-based construction accounting software like CrewCost connects the jobsite to your back office, so you can invoice – and get paid – on time.
Explore how we designed a better accounting solution for construction. Sign up and try it for free for 30 days.