When a business entity undertakes a large project for any given client, the billing is often done on a stage by stage basis to ensure a steady inflow of cash throughout the project’s engagement. This practice of invoicing the client consistently refers to progress billing. The invoices raised are referred to as interim invoices or progress invoices.
Typically used by businesses dealing with large projects, progress billing is an accounting method wherein the client is invoiced on an incremental basis, normally when a certain project stage is completed. The terms and conditions concerning the payment structure are present in the engagement letter or contract signed when agreeing to take on the project. Milestones are usually set throughout the project. For every milestone achieved, an invoice is raised concerning the work completed.
The benefits of progress billing are as follows:
Since the invoice billing is done in incremental stages, it ensures that the business has a steady cash inflow, thus freeing up monetary resources.
The regular cash inflows ensure that the business has enough cash to regularly meet its working capital needs, thus alleviating the need to opt for financing. This saves the company the cost of financing.
Progress billing or progress invoicing reduces the burden on the customer as well. Instead of making a lump sum amount at the start of a project, the fee is paid in stages based on the milestones achieved by the business. There is a better sense of understanding and satisfaction regarding the money paid since it is measured against the project’s progress.
The contractor has an incentive to hit the project’s milestones since completing every milestone releases a portion of the fee due from the client. This incentivises him to work toward his reward.
It is often said that the hardest part of the business is getting clients. However, another task is equally challenging: ensuring that one receives their payments on time. Progress invoicing takes care of that problem to an extent, ensuring that payments are released on an incremental basis.
An interim invoice contains only a portion of the full fee. Often, the interim invoices are a percentage of the total fee outstanding, for instance, 20% of the total fee. The total outstanding fee is divided into portions based on the work completed. Interim invoices are popularly known as progress invoices since it forms part of an accounting method called progress billing or progress invoicing.
Software, construction, and engineering industries normally have projects that have a long-term view. The completion of each project takes months, most times even years. It would be more practical to make payments based on the project’s progress in such industries and businesses, especially since the amount invested in such projects is considerably large.
This grants the client a sense of security in terms of the payment since the payments are made only to complete a particular phase or stage of the project. A long term project may be divided into various phases. On the completion of each phase, an invoice is raised.
Both the parties to the contract, the client and the business, need to decide on the following terms:
The outline of the project is formulated next, along with the estimated fee payable by the client. The fee details must be specified with the break-up of costs incurred so that all clarifications and objections can be made before the contract is signed and becomes legally binding. The duration of the project as initially decided will be documented along with the time targets for each milestone that triggers the release of an interim invoice.
Once the draft is created and submitted to the client, it will be made accordingly if there are any alterations. Once this is finalised, the commitment to stick to the planned schedule of the project and its respective milestones is confirmed by the signatures of both parties to a contract, thus making them legally responsible for the completion of their respective performances.
After every milestone, an interim invoice will be submitted to the client as agreed upon in the contract. This progress invoicing will be carried out throughout the project within the period specified. Every interim invoice must also contain the outstanding fee to be paid by the client.
On completion of the project, the final invoice is sent to the client. This invoice will fairly be detailed as compared to the interim invoices since it will contain the following details:
The GST law defines ‘Continuous supply of goods’ and Continuous supply of services’. Further, as per the GST laws, Schedule II Para 6(a) clearly states that Works Contract (defined u/s 2(119)) is a composite supply of service. Time of supply is a crucial factor that helps determine when GST is applicable on continuous supplies and works contracts.
In the case of continuous supply of goods:
In the case of continuous supply of services: