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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

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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.