What it means
Progress billing is the standard payment mechanism on construction, engineering, shipbuilding and large software implementation contracts. Rather than waiting months or years to be paid, the contractor invoices as milestones are reached or as an independent surveyor certifies the value of work done.
It matters because long projects consume cash from day one. Materials, subcontractors and wages all have to be paid well before a finished building or system is handed over, and without progress billings a contractor would need to fund the entire project from its own balance sheet.
Billing and revenue recognition are separate processes, which is the point most people find confusing. Revenue is recognised as the work is performed, typically using the percentage of completion measured by costs incurred against total expected costs, while billing follows whatever schedule the contract sets out.
When revenue recognised exceeds amounts billed, the excess sits on the balance sheet as a contract asset, sometimes described as unbilled revenue. When billings run ahead of revenue, the excess is a contract liability, and the older terminology called this billings in excess of costs.
Two practical features complicate the picture. Many contracts allow the customer to withhold a retention, typically 5% of each billing, until the defects period ends, and any variation to the scope needs to be formally approved before it can be billed or recognised.
In practice
Real-world examples.
Example
A commercial builder invoices monthly against a surveyor's certificate of work completed. In one month the certificate values work at $860,000, so the builder bills that amount less 5% retention, receiving $817,000 while $43,000 is held until practical completion.
Example
A shipbuilder agrees four milestone payments of 25% each: on signing, on keel laying, on launch and on delivery. The schedule front-loads cash so the yard can buy steel and engines without drawing on its overdraft.
Example
A software integrator on a two-year implementation bills 20% at kick-off, then quarterly against completed workstreams. Its accounts show a contract liability for most of the first year because billings deliberately run ahead of the work performed.
Formula
Calculation
Percentage complete = costs incurred to date / total estimated contract costs
Revenue recognised to date = percentage complete x total contract value
Contract asset (or liability) = revenue recognised to date - amounts billed to date
A civil engineering firm holds a contract worth $15,000,000 with total estimated costs of $12,000,000. At the end of the reporting period it has incurred $4,200,000 of costs and has issued progress billings of $4,800,000.
Percentage complete = $4,200,000 / $12,000,000 = 35%
Revenue recognised to date = $15,000,000 x 0.35 = $5,250,000
Contract position = $5,250,000 - $4,800,000 = $450,000
Because revenue recognised exceeds billings, the firm records a $450,000 contract asset. Its profit to date is $5,250,000 - $4,200,000 = $1,050,000, and if the customer retains 5% of each billing, $240,000 of the $4,800,000 billed is held back until the defects period ends.Case study
Seen in the real world.
Thornbeck Construction is a fictional contractor created for this illustrative example. It won a $22,000,000 hospital extension and billed strictly monthly in arrears, thirty days after each certificate.
The pattern caused a serious cash squeeze. Thornbeck paid subcontractors on 30-day terms and material suppliers on 45, but with certification and payment delays it was waiting an average of 74 days to be paid, so at peak it was funding $2,700,000 of the client's project from its own facilities. Retention of 5% added a further $1,100,000 held back across the contract.
Thornbeck renegotiated the billing schedule on its next two contracts to include a 10% advance payment and twice-monthly certification. Peak funding on a similar-sized job fell to around $900,000, and the interest saved was worth more than the small discount the firm conceded to secure the improved terms.
Watch out
Common mistakes.
- Treating progress billings as revenue, when revenue is recognised according to work performed and the two figures almost never agree at a period end.
- Forgetting retention when forecasting cash, which typically leaves 5% of every billing uncollected until long after the work is finished.
- Carrying out variation work before it is formally approved, which leaves the cost incurred but the amount unbillable and often disputed.
Questions
People also ask.
What is the difference between a contract asset and a contract liability?
A contract asset arises when you have recognised more revenue than you have billed, while a contract liability arises when you have billed more than you have earned.
How is the percentage of completion decided?
Most contractors use costs incurred as a share of total expected costs, though physical measures such as surveyed work or units completed are also acceptable when they better reflect progress.
Do progress billings guarantee payment?
No, they only create an invoice, so the contractor still faces certification disputes, retention withheld against defects and normal customer credit risk.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%