What is an invoice?
An invoice is a document sent by a service provider to a customer to outline the prices and quantities of all purchased goods and services. An invoice notifies the customer of the total cost of all the outlined items on the document and provides both terms and methods of payment.
In residential construction, builders + remodelers use invoices to notify their clients about impending payments on their projects. Over the course of a project, building companies may issue several bills to clients at a regular frequency in order to balance the flow of cash on a project.
Why are invoices important in residential construction?
Generating invoices and tracking how much money a client owes can be a painful process for builders + remodelers. Without efficient and accurate invoicing, building companies can lose money and fall behind on collecting payments. In an industry that operates on carefully built margins, builders + remodelers cannot afford to scrape by the invoicing process. Establishing an invoicing system is vital to maintaining the balance of cash flow for a project and building business.
How do builders + remodelers invoice clients?
The frequency of invoices on a construction project depends, first, on the project’s size, and second, on the builder’s level of financial transparency with their client. When it comes to size, builders should consider the timeline and financial risk of the project. Shorter projects lasting less than a week may only require a couple invoices to start the project and a closing payment at the end. Longer projects will need several invoices spread over the course of the project. Even quick projects can come with high financial risk. When determining the recurrence of their invoicing, financially adept builders are always sure to evaluate the dollar value of every project. Here are a few different ways builders + remodelers stay on top of their invoicing.
In fixed price projects, projects in which builders + remodelers account for total cost and profit to present an un-amendable bottom line, many builders + remodelers divide the dollar value of the project into distinct payment sections. These sections are paid over the course of the project. Additional requests, selection overages, or allowances are typically handled with Change Orders to account for changes in total cost. Builders will invoice these change orders separately or add them as an addendum to a regularly scheduled invoice.
In contrast to a fixed price structure, a client may prefer an open book structure that breaks down cost and profit in detail. In this structure, an invoice shows the client all costs and profits for every bill and project expense incurred, plus the agreed markup fee. As a whole, construction invoicing follows one of three general schedules:
1. Draw Schedule
A draw schedule is a predetermined schedule of payments dependent on the length and dollar value of the project. Agreed upon in the construction contract, a draw schedule asks for certain sums at regular intervals -- either at preset dates or based on general schedule completion percentages. This type of invoicing allows for clear budgeting and offers predictable cash flow. Anyone leveraging this format should consider how to handle change orders and variations to work -- either adding them to the existing draw schedule or invoicing them separately.
Monthly or weekly invoicing creates a regular and predictable schedule of income on a project. Billing at this frequency works best for open book style projects where building firms invoice incoming bills and expenses plus profit markups since these typically come in regularly over the course of the project. Even on fixed price projects, a monthly flow of income offers predictability. To balance cash flow appropriately against project expenses, it can be helpful to invoice clients more regularly.
3. Dependent on Schedule Milestones
Given the often uncertain nature of a construction schedule, organizing invoices around the completion of schedule milestones offers regular income while taking variations in the project timeline into account. Similar to a draw schedule, utilizing this method takes a step further by incorporating actual project progress. For example, once the foundation milestone is roughly 25% complete, a payment is requested. Invoicing at this frequency ties income more directly to the anticipated expenses at each stage of the project.