Progress Billing and Percentage-of-Completion

How it works

At each billing interval (usually monthly), the project manager assesses what percentage of total work is complete and submits a 'pay application' for that incremental portion. A project that's 35% complete after month 1 and 60% complete after month 2 invoices 35% then 25%.

In construction, the AIA G702/G703 forms are standard. Software and consulting projects often use simpler spreadsheets but the principle is identical: bill what you've earned, not what time has elapsed.

Accounting and tax treatment

GAAP (ASC 606) requires long-term contracts to recognize revenue using percentage-of-completion (or, in narrow cases, completed-contract). The cash collection schedule should align reasonably with the cost incurrence schedule to avoid working-capital strain.

For tax purposes, percentage-of-completion is usually required for long-term construction contracts unless the contractor qualifies as a 'small contractor' (under the gross-receipts threshold, currently \$30M, IRS Section 460). Smaller contractors can use the completed-contract or cash method, which can defer taxable income.

How AIA-style billing works in practice

On a $500k project that's 40% complete with $20k of stored materials and 10% retainage, the application for payment looks like: contract value $500k × 40% = $200k of work in place, plus $20k materials, less 10% retainage of $22k, less prior payments of $150k, equals $48k due this period. Each pay app is a complete picture of project status, not a standalone invoice.

The schedule of values (SOV) — the list of cost categories that make up the project — is negotiated at the start and is the foundation of every subsequent pay app. Front-loading the SOV (assigning more value to early work like mobilization) is a common cash-management tactic but risks pushback from owners who want a balanced curve; a defensible SOV is one you can support with detailed cost backup if challenged.

Retainage is real cash being held back. On a project with 10% retainage and a 90-day cure period after substantial completion, you can be waiting four to six months after finishing the work for the final 10% of the contract value to be released. Modeling retainage in your project P&Ls and cash forecast is critical; many contractors are profitable on paper but cash-poor because their retainage receivable balance never goes down.

Familiarize yourself with the AIA G702/G703 forms even if your industry doesn't formally require them. The structure — separate documentation of contract value, work-in-place, stored materials, retainage, and prior payments — is good discipline for any project-based business and is often what owners and lenders expect to see. Many construction software platforms (Procore, Buildertrend, CMiC) generate these forms automatically.