Progress billing and retainage for contractors

Progress billing means invoicing a large job in stages as the work gets done, instead of one invoice at the end. You bill either by milestones (for example, a share at start, rough-in and completion) or by percent complete on each part of the job. Retainage is a percentage held back from each progress payment and paid once the job is finished, as an incentive to complete everything.

For a contractor, progress billing keeps cash coming in on long jobs. For the client, it means paying for work as it's done. Retainage is common on commercial work and less common on residential jobs, but it's worth understanding either way.

Why bill in stages at all?

On a job that runs several weeks, waiting until the end to bill means you're financing the project. You pay for materials, labor and subs for weeks, sometimes months, before you see a dollar beyond the deposit.

Progress billing:

Matches cash in to cash out, so you're not funding the job from your own pocket
Reduces risk, because you never have the whole contract value outstanding
Gives the client checkpoints, so they see what they're paying for

What are the two main ways to bill progress?

Milestone billing. You agree up front on stages and what share of the contract each one bills. For example, a remodel might bill:

A deposit at signing
A share when rough-in is complete
The rest at completion

Milestones are simple and clear for residential clients. The downside is that a stage can stall, leaving you waiting for a payment while you've done much of the work.

Percent complete billing. The contract is split into lines (sometimes called a schedule of values): demolition, framing, electrical, plumbing, finishes and so on. Each billing period, you report how far along each line is, and bill the difference from what you billed before. This is more precise and common in commercial work, but it needs more tracking.

Whichever you choose, put it in the contract so nobody is surprised.

What is retainage?

Retainage (or retention) is a percentage held back from each progress payment until the job is complete. If retainage is 10% and you bill $10,000 of work, the client pays $9,000 now and holds $1,000. When the job is done, often after final inspection and the punch list, the held amounts are released on a final invoice.

Retainage is common in commercial and public construction, often in the range of 5% to 10%, but the actual rate is whatever your contract says. Many states regulate retainage, including maximum rates and when it must be released, and the rules can differ for public and private projects. Check your state's rules before you agree to or impose retainage, and read your contracts carefully.

A worked example

Here's a simple made-up example to show the math. The numbers are for illustration only.

A contractor signs a $40,000 addition with milestone billing (30% at start, 40% at rough-in, 30% at completion) and 10% retainage.

Invoice 1, start (30%):

Work billed: $12,000
Retainage held (10%): minus $1,200
Due now: $10,800

Invoice 2, rough-in (40%):

Work billed: $16,000
Retainage held (10%): minus $1,600
Due now: $14,400

Invoice 3, completion (30%):

Work billed: $12,000
Retainage held (10%): minus $1,200
Due now: $10,800

So far the contract is fully billed ($40,000), the client has paid $36,000, and $4,000 is held.

Retainage release: once the job is complete and accepted under the contract's terms, the contractor invoices the $4,000 held.

Sales tax, if it applies to your work, depends on your state and how your contract is structured. Ask your accountant how it should appear on progress invoices.

How do change orders fit into progress billing?

When a client approves a change order, the contract grows. The cleanest way to bill it is as its own line: either billed on its own when done, or included in the final invoice. Avoid quietly folding it into the next milestone percentage, since that makes the math hard for the client to follow.

How do deposits fit in?

If you took a deposit when the client approved the quote, apply it to the first progress invoice. Make sure that first invoice is at least as large as the deposit, so no invoice shows a negative balance. After that, payments go against each invoice as usual.

How do you avoid billing mistakes?

Progress billing goes wrong in predictable ways:

Over-billing: billing more than the contract allows, often from a spreadsheet error.
Losing track of what's been billed, especially when an invoice gets canceled and reissued.
Forgetting the retainage release, sometimes for months.
Percentages that go backwards when someone reports percent complete inconsistently.

The fix is to keep billed-to-date figures tied to the actual invoices, not a separate spreadsheet, and to make the final invoice simply "everything left on the contract."

Is progress billing the same as an AIA pay application?

Not exactly. On commercial projects, general contractors and owners often require standardized pay application forms, like those published by the American Institute of Architects. Those forms follow the same idea (a schedule of values, percent complete, retainage), but in a specific format. If a commercial client requires a particular form, use it. Residential and small commercial jobs usually just need clear progress invoices.

A progress billing checklist

Billing method (milestones or percent complete) written in the contract
Retainage rate and release conditions in the contract, checked against state rules
Deposit applied to the first progress invoice
Change orders billed as their own lines
Billed to date tracked from actual invoices
Final invoice bills exactly what's left
Retainage release invoiced promptly at completion

FAQ

Is retainage common on residential jobs? It's much more common on commercial and public projects. Residential clients sometimes ask for a holdback until the punch list is done, which works similarly. Put any holdback terms in writing.

When should retainage be released? When your contract says, typically at substantial or final completion. Some states set deadlines for release. Check your state's rules.

Can I bill for materials stored on site? Some contracts allow billing for stored materials before installation. If you want to, put it in the contract.

Should I charge interest on late progress payments? Only if your contract allows it and your state permits it. Get advice before adding late fees.

How ServFlo helps

ServFlo's progress invoicing is on every plan. You start a progress billing from an approved quote or a job and bill it by milestones (defaulting to 30% deposit, 40% rough-in, 30% completion, all editable) or by percent complete on each line. Retainage from 0% to 50% can be held on each invoice as a clearly labeled line and released on its own invoice once the contract is fully billed. Deposits move onto the first invoice, billing beyond what's left on the contract is refused, and the final invoice bills exactly what remains. Approved change orders on projects become their own contract lines. See quotes and invoicing.

Photo by Salvo Media LLC on Unsplash.

Progress billing and retainage, explained simply