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Accounting Industry Insight

How to Create a Cost-Plus Billing for a Construction Project

Last week, we shared the ins-and-outs of progress billing through the use of a schedule of values. This week, we’ll be focusing on cost-plus billing.

Whenever possible, many contractors prefer to use cost-plus contracts for their construction projects. These contracts help reduce the contractor’s risk, as the customer will reimburse them for most of the costs incurred during the project. This even includes unforeseen issues and overruns; they’re the customer’s problem, not the contractor’s.

While the lower risk is certainly attractive, put together an air-tight cost-plus invoice can be a challenge. Contractors have to track all of the costs incurred during the billing period, mark them up by the percentage specified in the contract, and supply supporting documentation to send along for review. The data collection and entry alone can take hours, and a small mistake can make a significant impact on the contractor’s bottom line.

Premier Construction Software takes the pain out of cost-plus billing, offering a one-stop solution to contractors to create invoices and save time.

What is a cost-plus billing?

Creating a cost-plus invoice might be important business, but the basics of what a cost-plus invoice is are actually quite simple. A cost-plus invoice will contain a collection of all the costs incurred by a contractor on a project. Generally speaking, these are direct costs such as materials, labor, and possibly mobilization costs. These costs are accounted for (with proof in the form of receipts, timesheets, invoices, etc.) and then marked up by a percentage specified by the contract.

The total of the invoice will always depend on the costs incurred on the project within the billing window. So, if a particular billing window is heavy on subcontractors, vendors, and materials, the invoice can be significantly higher than a lighter billing period. This is different than progress billing, where contractors base invoices on the percentage of a project’s completion. 

Another difference from progress payment invoices is that invoices for cost-plus billing are much more involved. Where progress payments may require photographs of completed or signatures from inspectors, cost-plus billing require hard documentation. Every cost, from materials invoices to timesheets (even parking costs if the contract specifies), needs to be collected, accounted for, and proven to the customer. In other words, documentation is everything.

Because cost-plus contracts have the potential to run wildly over budget based on materials chosen and unforeseen issues, customers are typically very discerning about which costs they’ll cover. Leaning on a Premier Construction Software’s document management system ensures everything is in order and accounted for.

How to calculate a cost-plus billing

The first step for a contractor to be successful under a cost-plus contract is meticulously detailed record keeping. This includes documenting labor, equipment rentals or purchases, materials, and any other costs related to the project — direct and indirect. Any of those costs within the billing period need accounting. 

Contractors need to log each of those costs into Premier Construction Software’s accounting system to ensure the contractor can charge for them when it’s time to bill. They also need to consolidate any separate ledgers, time logs, or job cost entries with the job. Any cost accidentally left out or forgotten comes directly out of the contractor’s profit. 

With all costs accounted for and documented, Premier Construction Software’s auto-generate tool can gather all of those costs into one neat, easy-to-understand, project-specific report specific. You’ll have the ability to review each line, and you can mark each cost to bill now, bill later, or never bill (for indirect costs not covered under the contract).

Once you select all of the costs and their billing designations, Premier Construction Software will automatically calculate the invoice. The system will automatically determine the appropriate rate for each man-hour by the labor code. And, you can set the cost-plus billing module to add set percentages for materials markups automatically, taking care of the ever-important profit calculation for the entire bill. 

After you review the invoice, Premier Construction Software will automatically send the bill via email to your customer. Your customer will be able to open the invoice from any internet-enabled device, drastically reducing the amount of time it takes to get paid.

What documents should you include with a cost-plus billing?

General contractor working on his laptop on an AIA application for cost-plus billing

Each project has different billing requirements, including what supporting documents the customer wants you to submit with the invoice. Luckily, Premier Construction Software’s document management system makes it easy.

Most time and material billings will include the following supporting documentation:

Payment application – This form summarizes the contract status and the amount billed. It includes a list of change orders and the amount currently being billed. It is similar to the AIA form G702.

Billing breakdown – This form includes the project’s schedule of values and a summary of the billed amounts for each line item. It shows how much is currently being billed and how much was previously billed for each line of the schedule. It is similar to the AIA form G703.

Transactions list – This report includes a list of all the cost transactions included in the invoice. It allows the owner to review the specific costs before paying the invoice. Premier Software automatically creates this list as part of its cost-plus billing workflow.

Copies of timesheets or certified payroll reports – Customers may also want to review copies of your employee timesheets showing the hours worked on their project. 

If the project is prevailing wage, you may also have to provide certified payroll reports. These reports list all the employees on the project, the hours they worked each week, and certify that they were paid the correct wages and benefits.

Copies of accounts payable invoices – Many project owners and banks will require copies of vendor and subcontractor invoices as additional proof of these costs. Premier Software can automatically attach these invoice copies to the email that goes to the owner or your customer. The owner may also request lien waivers or releases as proof of payment for previous payment applications. 

Reap the benefits of cost-plus billing without the drawbacks

Preparing a cost-plus bill for construction projects requires a keen eye for detail. Being able to put your finger, or mouse, on every receipt and timesheet that applies to a project will ensure you aren’t leaving money on the table. And, the faster and more accurate this process is, the better. 

Using Premier Construction Software’s document management system with the cost-plus billing module will streamline your billing process. You’ll be able to create accurate invoices instantly, free from missed line items or forgotten costs. And, with electronic signatures, you’ll even reduce the amount of time it takes to get paid.

If your team struggles with assembling cost-plus billings, let Premier Software show you a simpler, easier way. Get in touch with our team today.

Automate your cost-plus billing process using Premier Contstruction Software

Categories
Industry Insight

Billing in Construction: Progress Billing via Schedule of Value (SOV)

When working on a long-term construction project, contractors often use progress billing to keep cash flowing during the project. Progress billing involves requesting funds for the portion of the work that has been complete. It is usually based on a percentage of the contract. Most project owners require a breakdown of the work on the project, showing the progress on each line item of the breakdown. This is called a schedule of values and is used by most contractors when they are billing long-term projects.

We’re going to look at what a schedule of values is, how it’s used, and how to create one.

What is progress billing and a schedule of values (SOV)?

Construction companies bill projects based on the progress of the job via a schedule of values. A schedule of values lists every billable item on the project along with the subsequent dollar value of that task. Typically progress billings are submitted monthly, but complicated projects may require more frequency. A project manager enters in a % completion or amount for each item as they progress on the project. This routes to the architect and owner for approval. Once approved, the accounting team generates an AR invoice from the progress billing to ensure accounting and job costing are always in sync. The SOV is a valuable tool in the evaluation of percent complete on a project as well as a management tool for the billing process each month.

What is the typical breakdown of a SOV?

In the United States the industry-standard format for a billing schedule of values is per AIA form G703. General contractor accounting issues are common, so it is essential to establish a good schedule of values early on. Typically, a contractor discusses with the client how the schedule values should be broken down. Creating this schedule of values prior to the beginning of a project is beneficial to everyone because it then becomes part of the signed construction agreement. It’s important to verify that the sum of all line items should equal the total contract value.

A schedule of values looks similar to a requisition form and should list the items and scheduled value followed with the amount previously billed, amount billed this period, materials presently stored, total completed & stored to date, % complete, balance to finish, retainage. A construction contract will typically require that “Retainage” be withheld from each application for payment in order to provide the Owner or lender protection from the Contractor not completing the entire project. Additions to the contract can be listed separately below or in some cases, clients prefer for them to roll into the cost items listed above.

What is a schedule of values used for and by who?

The cash flow of a construction project is determined by the schedule of values, which is why it is the main document used for monthly payments. The schedule of values also evaluates how the project is progressing according to plan and whether the percentage is on point to where everything should be with the amount of money that has been spent at that time.

Many contractors prefer to collect as much of their money upfront as possible, which is why they’re always tempted to front-load the schedule of values.  The experienced architect and owner will not allow this front-loading, and will try to more accurately identify the proper values of each line item on the SOV.

While a general contractor will use the schedule of values continuously throughout the project, it is always also available to architects and owners. For most construction projects, the architect has an essential monthly task: reviewing the contractor’s application of payment. That means that they can see how well the construction project is progressing, if everything is on schedule and on budget, and see if there are any changes that they can make to improve their results.

Financing companies may also request a schedule to use for their own internal breakdown of loan funds. The schedule helps the lender reconcile the project draws to the total loan package. The lender must ensure that the contractor is not overdrawing specific line items, so they use the schedule of values to track the progress of the draws.

How to complete a schedule of values

The first step in creating and completing a schedule of values is to list the phases or activities of the project that are related to your work. Enter the scheduled value for each phase. Once you’ve assigned accurate values to all the items, add up the amounts to ensure that they equal your total contract amount. If there’s a discrepancy, review your calculations to find any errors.

Typically, the schedule or actual costs determine how much can be drawn for each phase of the project, it’s important that the information provided is as accurate as possible. Enter in the % or amount each month and generate the progress billing application and AR invoice.

Conclusion

Schedules of values are important documents in construction projects. They are used to bill the project and to show the progress of the work. Banks and owners use them to reconcile their financial documents and ensure that the project loan or funds have not been overdrawn.

Creating a schedule of values involves breaking the project down into phases or tasks that can be used to show the progress of the project. Each phase or task is assigned a value and the total of all the items matches the contract amount. Project teams rely on the accuracy of the information shown on the schedule to determine budgets and payment amounts.

To learn more about how Premier Construction Software can help you streamline your billing process, get in touch with our team for a personalized demo today.

Author Biography:

Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors. Dawn has held roles such as a staff accountant, green building advisor, project assistant, and contract administrator.  Her work for general contractors, design firms, and subcontractors has even led to the publication of blogs on several construction tech websites and her book, Green Building Design 101.

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Industry Insight Tips & Advice

What Makes a Successful Construction Project?

The goal of every project manager (PM) is to run a successful project from start to finish—which begs the question, “What makes a construction project successful?”

Generally speaking, a project’s success is gauged by the amount of time, money, and resources required to complete it. Therefore, the success of any project hinges upon the project manager’s ability to create a detailed process plan that can also adapt to real-time changes and unexpected situations. Because, let’s face it, in this industry you have to expect the unexpected—and find a way to plan for it—in order to keep your project on track. 

While it’s no easy feat, with the right people and strategies in place, project managers can consistently deliver projects that are on-time and within budget. 

Implement continuous planning

Project Manager sitting in office and working on desktop pc. Businessman looking at construction project spreadsheet while working in office.

During the planning phase, project members and stakeholders will establish deliverables, define goals, and outline project milestones. A well-planned project will provide a timeline and a step-by-step roadmap to complete the work on time and within budget as agreed upon in the initial meetings.  

But anyone who works in construction already knows that even a “simple” project is never really simple—it can, and almost certainly will, morph and evolve and require some level of change. For example, encountering unexpected environmental issues during the pre-construction phase could result in the need for design changes, which could then impact the entire construction plan and timeline.   

Because you never know what could happen, project managers should continuously revisit and rework plans as necessary throughout the entire project lifecycle to mitigate risk, as well as unexpected costs and delays.

Have your risk log ready

Being able to identify, monitor, and mitigate risk is fundamental to successful project management.  During the planning phase, project managers should prepare a risk log that outlines any foreseeable risks the project may face, as well as an action plan for what to do and how to resolve any issues that arise. 

Once the risk log has been drafted, it should be distributed to project members and stakeholders to equip the team with the confidence and know-how to resolve any issues, as well as to provide comfort to the client by showing there’s a game plan in place to tackle any foreseeable risks that may arise.

Hire the right people

Project Manager sitting in office and working on desktop pc. Businessman looking at construction project spreadsheet while working in office.

As is true in any industry, the people on your team will either contribute to your success or failure. Because construction project management has so many different components, variables, and moving parts, it’s absolutely critical to have the right people assigned to every aspect of the project to create high-performing, cross-functional teams. 

Every core project member, vendor, supplier, and stakeholder contributes to the overall team dynamic, so it’s important to make sure they all share the same level of commitment, understanding of the project, adaptability, and desire to succeed. Any inadequacies or dysfunction within a team can easily send a project spiraling in the wrong direction.  

Establish an effective communication plan 

Every single phase in the construction project lifecycle requires constant communication and collaboration. Any delays or miscommunication can lead to costly mistakes and project delays, so creating an effective communication plan is critical to ensuring the most accurate, up-to-date information is getting to the right people on time. 

One of the easiest ways to build an effective communication plan is to utilize a cloud-based project management software. Project management software provides the ability to add specific team members to projects where they can access all of the pertinent information and contract documents in one secure, centralized, and easy-to-access location. Using a centralized platform not only provides transparent communication that facilitates coordination between all parties, but it also creates accountability among team members. 

Constantly monitor progress

laptop with Jonas Premier Dashboard screen in construction office

For a project to be successful, the project manager needs to keep a constant pulse on what’s going on. This is another area where project management software can add significant value and help avoid costly mistakes. As we’ve touched on a few times, all projects—large and small—have a lot of moving parts that need to be constantly monitored to keep projects on-time and on-track. 

Project management software allows PMs to monitor data in real-time and provides the ability to generate custom reports that can be shared with other team members and stakeholders to keep everyone informed and on the same page. Additionally, consolidated dashboards make it easy to digest and consume multiple reports on one screen, and to identify any red flags, items pending approval, or actions required for next steps. 

Manage construction projects with the job dashboard in Premier

Conclusion

The best way to improve the likelihood of successful project completion is through careful planning, ensuring you have the right team in place, maintaining constant communication through defined channels, and continuously monitoring progress to mitigate risk, cost, and delays.

To learn how our cloud-based project management solution can help you do all of this and more, click here to schedule a free personalized product tour.

Author Biography:

Kathryn Dressler is a content strategist with more than 10 years of experience across the spectrum of marketing services, including blogging, social media, public relations, copywriting and editorial services.

Categories
Accounting Industry Insight

The Main Types of Billing in the Construction Industry

While many industries operate around a fixed price or point-of-sale billing structure, the construction industry tends to be a bit more complicated because of its long-term, project-based nature. Every construction project is unique and comes with its own set of requirements and challenges. Because of this, contractors may use a number of billing styles and methods, which then requires the use of construction accounting software in order to track, create and manage those billings.   

A construction contract is a legally binding document that stipulates how and when payments will be made once a project is executed. The contract type is usually defined by how disbursements will be made, and will include other pertinent project information like duration, liability, quality requirements, and more. 

While there are a number of variations that can be made to meet the specific needs of a project, this blog will focus on the most common construction contract types and billing options.   

Fixed Price / Lump Sum

Fixed price contracts (also referred to as lump sum contracts) are the most basic type of construction contract because they outline one total price for all construction-related activities. Sometimes, incentives are built into these contracts for early completion, but they may also include penalties (called “liquidated damages) for projects that are completed late. 

  • Pros: Fixed price contracts simplify the bidding process by naming one total price in lieu of submitting multiple bids. Because the project price is already set, finishing under-budget results in higher profit margins.
  • Cons: Because there’s one set price that’s agreed upon, any unexpected changes or setbacks cut directly into profit. Therefore, it’s critical to try to account for every variable upfront, which can be difficult to predict, especially on larger and more complex projects. 

Cost-Plus

Under a cost-plus billing structure, the owner agrees to pay the contractor for the project costs plus a fee, which may either be a fixed fee or calculated as a percentage of costs. 

  • Pros: This billing structure provides the most flexibility, and allows owners to make design changes along the way while also providing the contractor with assurance that they’ll be paid for any extra time or materials those changes require.
  • Cons: Cost-plus contracts require contractors to front and justify costs, which can sometimes be difficult to account for, and owners may be reluctant to reimburse for indirect costs like mileage or administrative expenses. And because the owner is ultimately responsible for payment of any unforeseen costs, this structure provides owners with the least control over costs.Automate your cost-plus billing process using Premier Contstruction Software

Time and Materials (T&M)

With a time and materials billing structure, the contract price is based on the cost of materials, plus an established pay rate. 

  • Pros: T&M billing is easy to use for small projects, and a good option when the scope of work is unclear or undefined. It’s attractive for builders because it means they’re not completely limited by budget, although price caps are commonly established to mitigate the owner’s risk.
  • Cons: Tracking and logging the cost of time and materials can be tedious, but failure to do so results in lower profit margins. Also, because this billing type pays by the hour or by the day, there’s no real incentive to finish a project early unless the contract includes a stipulation to pay a bonus for finishing ahead of schedule.  

AIA Progress Billing

Named after the American Institute of Architects (AIA) that produces its official forms, AIA progress billing invoices the customer based on the percentage of work that’s completed during that billing period. This type of billing is common in projects that last a long time as it allows the contractor to fund themselves and the project while it’s in progress.  

  • Pros: AIA contract documents are widely-used, standardized forms that are applicable to many project types, and they can be customized to include specific terms like retainage rates or interest rates on late payments.
  • Cons: While the AIA standard contract documents can be customized, the contractors may have to pay for these modifications to be made, which can be expensive. Additionally, any changes to standard documentation invites the potential for legal risk and, therefore, should be reviewed by legal counsel.

Conclusion

Understanding the different types of construction contracts and billing models is critical to determining the right fit for you and your project. Premier Construction Software supports cost-plus billing, progress and time & materials with built-in automation to streamline your billing process into seconds. To learn how Premier Construction Software can help streamline your AR billing needs, click here

 

Author Biography:

Kathryn Dressler is a content strategist with more than 10 years of experience across the spectrum of marketing services, including blogging, social media, public relations, copywriting and editorial services.

Categories
Industry Insight Trends & Technology

What’s the difference between a cloud-solution vs on-premise solution?

The use of construction management software on the rise, and there’s no shortage of service providers eager to tell you why their solution is the best fit for your business. 

So how do you decide which is right for you?  

When choosing which construction management software best meets your business needs, one of the biggest factors you’ll need to consider is whether to deploy an on-premise or cloud-based solution. 

Deciding between the two is a complex process with a number of variables to consider, but in this blog, we’ll explore some of the key differences in order to help you make a more informed decision about which is best suited for your construction company.

Cloud vs On-Premise Construction Software

By definition, the most fundamental difference between a cloud-based and on-premise solution is where it’s located. With an on-premise solution, the software is installed locally on computers and supported by a server that’s also located on-premise (thus, the name). A cloud-based solution utilizes external servers managed by a service provider. 

cloud-based construction solution providing convenience to users

Key Areas of Consideration

When deciding between a cloud-based or on-premise construction software solution, here are four key areas to consider: 

Cost

  • On-premise: Building a system from the ground up comes at a high cost. On-premise systems cost significantly more upfront because of the server hardware, software licensing, deployment and IT support staff. In addition to the initial investments, companies will also incur ongoing maintenance and operating costs.
  • Cloud: A cloud-based, SaaS solution costs much less upfront than an on-premise solution. The subscription cost and payment structure vary by provider, but payments are typically handled on a monthly or annual basis.  The set up and run times for a cloud solution are much quicker than an on-premise system because once the subscription fees are paid, you can start using the service right away and don’t have to wait for an in-house infrastructure to be built and deployed.

Accessibility

  • On-premise: Remote or limited access is available with some on-premise systems through VPN services; however, limited access is not ideal when critical, up-to-date project information needs to be accessed quickly. 
  • Cloud: With more and more employees working remotely, and project members needing to access information quickly while on the jobsite, a cloud-based solution is the superior choice for accessibility and one of the biggest selling points for a SaaS solution. Many cloud providers also offer custom apps for smartphones, which makes accessibility and collaboration even easier.

Security

  • On-premise: Many companies simply feel safer hosting confidential documents on-site within their own firewalls, though it’s important to note it’s not always actually safer. What it tends to really boil down to is the desire to feel in control. With an on-premise system, you control the system and the backup and privacy policies.
  • Cloud: Most SaaS solutions offer comprehensive security features, and may even have independent security certifications that are more stringent than many in-house IT policies. Cloud service providers routinely employ up-to-date security features so you can feel confident your data is always secure and protected.  

Maintenance

  • On-premise: With an on-premise system, you’re responsible for maintaining the hardware and software, as well as backups, storage and recovery. This typically requires an IT staff, which can be difficult for smaller companies to manage with a limited budget.
  • Cloud: Using a cloud-based solution means you don’t have to worry about updating or maintaining hardware or software, because your service provider will handle that for you. Spending less time and money on maintenance and updates means you can allocate those resources elsewhere.

So, which one is better?

In the end, the “better” solution for you will depend on your unique business needs—but more and more businesses are shifting to cloud-based software because of the upfront cost savings, accessibility, reliability and convenience it offers. The construction industry is fast-paced, and the ability to access up-to-date project information quickly and easily—from anywhere and at any time—is critical to minimizing miscommunication and costly mistakes, as well as keeping projects on-track. 

Laptop displaying a dashboard for a construction job

To learn more about Premier Construction Software and why our comprehensive, cloud-based SaaS solution may just be the perfect fit for your project management needs, click here to schedule a personalized product tour. 

 

Author Biography:

Kathryn Dressler is a content strategist with more than 10 years of experience across the spectrum of marketing services, including blogging, social media, public relations, copywriting and editorial services.