In construction, how you bill can be just as important as how you build. A solid billing strategy protects your cash flow, minimizes disputes, and keeps your project financially stable. Yet many contractors stick to a single method without realizing that different projects or even phases of a project might benefit from different billing structures.
Let’s break down five key construction billing methods, how they work, their strengths and weaknesses, and what kind of projects each one suits best.
1. Lump-Sum (Fixed-Price) Billing
A lump-sum contract sets a total price for the entire project before work begins. The contractor completes the scope of work for that agreed amount, regardless of actual time or costs incurred.
This method rewards efficiency and cost control but exposes you to financial risk if estimates are off or if changes occur mid-project.
How it works:
- You estimate all labor, materials, equipment, and overhead costs upfront.
- Add your desired profit margin.
- Present one total price in your proposal or contract.
- Payments are often broken into milestones (e.g., deposit, mid-project, and completion).
When to use it:
- Projects with finalized drawings and minimal expected changes.
- Residential builds or small commercial projects where scope is predictable.
- When clients demand cost certainty.
Advantages:
- Easy to communicate — one price, no surprises.
- Encourages contractors to manage budgets efficiently.
- Administrative work is minimal once the contract is signed.
Challenges:
- Change orders can be difficult to negotiate mid-project.
- Any cost overruns directly impact your profit margin.
- Requires accurate estimating and contingency planning.
Pro tip: Include clear language about scope changes and excluded items in your contract to prevent disputes later.
2. Time and Materials (T&M) Billing
T&M billing charges clients based on actual labor hours and material costs, plus a markup for overhead and profit.
It’s transparent and flexible — especially valuable when the project scope is uncertain — but demands rigorous record keeping.
How it works:
- Track all labor hours using time sheets or software.
- Record all material purchases and rentals.
- Apply an agreed-upon markup (often 10–20%) for profit and overhead.
- Submit itemized invoices periodically, usually weekly or biweekly.
When to use it:
- Repairs, renovations, or service work where scope can’t be accurately defined.
- Emergency jobs where immediate action is required.
- Projects with trusted clients who understand variable pricing.
Advantages:
- Minimal risk of underquoting.
- Adaptable when design or scope changes occur midstream.
- Encourages open communication with clients.
Challenges:
- Requires strong documentation and transparent communication.
- Clients may resist if they feel costs aren’t predictable.
- Poor tracking can lead to payment delays or disputes.
Pro tip: Use digital field reporting or job-costing software to log hours and materials daily. This minimizes errors and builds client confidence.
3. Unit Price Billing
In a unit price contract, work is divided into measurable components (units), and each unit has a predetermined price. The contractor is paid for the number of units completed.
It’s a fair and flexible method when quantities may vary, but success depends on accurate measurement and data collection.
How it works:
- Define measurable work items (e.g., per cubic yard of concrete, per linear foot of pipe).
- Establish a price for each unit before work begins.
- Conduct periodic measurements to confirm completed quantities.
- Invoice based on actual units installed.
When to use it:
- Civil and infrastructure projects — roads, utilities, drainage, site work.
- Jobs where quantities fluctuate due to ground conditions or design changes.
- When both parties agree on standardized measurement procedures.
Advantages:
- Payments align closely with work progress.
- Lower risk for both contractor and client since adjustments are simple.
- Works well for projects with partial designs or evolving scopes.
Challenges:
- Requires accurate quantity surveying.
- Disagreements may arise over how units are measured.
- Administrative burden increases with complex breakdowns.
Pro tip: Always verify measurement methods and approval processes before starting — unclear measurement standards are a common cause of delayed payments.
4. Progress Billing
Progress billing is common in large or long-duration projects. Instead of waiting until completion, you invoice periodically based on the percentage of work completed or milestones achieved.
This method ensures consistent cash flow and keeps the client updated on progress, but it requires detailed project tracking.
How it works:
- The total contract amount is divided into phases or percentages.
- Monthly or milestone-based invoices are submitted reflecting work done to date.
- Retainage (a percentage withheld until project completion) is often applied.
- Supporting documentation like schedules of values (SOVs) or progress photos may be required.
When to use it:
- Multi-month or multi-phase projects (commercial, industrial, or public works).
- When contract value exceeds a client’s typical cash flow capacity.
- Projects under AIA, FIDIC, or JCT contract structures.
Advantages:
- Predictable and steady cash flow for contractors.
- Clients pay proportionally for progress made.
- Reduces risk of nonpayment at project completion.
Challenges:
- Requires accurate reporting and documentation.
- Progress disputes can arise if completion percentages aren’t agreed upon.
- Retainage can restrict access to full payment for months.
Pro tip: Use standardized progress billing templates with detailed SOVs. The more transparent your progress documentation, the faster invoices are approved.
5. Cost-Plus Billing
Cost-plus contracts reimburse contractors for all actual costs plus an additional fee (fixed or percentage-based) for profit and overhead.
They’re ideal for projects where the design evolves during construction, but they demand absolute transparency and careful client communication.
How it works:
- Track all costs in real-time: labor, materials, rentals, permits, subcontractors, etc.
- Add a markup (e.g., 15–25%) for overhead and profit.
- Submit detailed invoices with receipts, time sheets, and supporting documentation.
When to use it:
- Design-build projects or projects under fast-track schedules.
- When the client values flexibility over fixed cost.
- Early-phase projects where drawings aren’t finalized.
Advantages:
- Ensures you’re paid for every actual cost incurred.
- Promotes collaboration with clients and designers.
- Low financial risk for the contractor.
Challenges:
- Demands meticulous cost tracking and reporting.
- Clients may perceive a lack of cost control.
- Disputes can arise if costs appear inflated or poorly documented.
Pro tip: Set clear cost categories (direct costs, indirect costs, markup) and use cost codes consistently across reports. This builds trust and simplifies audits.
Other Common Billing Variations You Might Encounter
Besides the main five billing methods, a few variations are worth knowing. They don’t replace those methods — they just adjust how payment is structured.
- Guaranteed Maximum Price (GMP): A variation of cost-plus with a price cap. The contractor is reimbursed for actual costs up to an agreed limit. Anything beyond that comes out of pocket, while savings can be shared.
- Milestone Billing: A form of progress billing where payments are tied to completed phases or deliverables, not just percentages. It helps align cash flow with real progress.
- Retention (Retainage): A portion of each payment (often 5–10%) held back until final completion. It’s not a billing method but a security measure to ensure the contractor finishes the work and fixes any defects.
Understanding these variations helps contractors tailor payment structures to different project sizes, contract types, and client expectations.
How to Choose the Right Billing Method
Choosing the wrong billing structure can squeeze cash flow or create unnecessary conflict. Use this framework to decide:
| Project Characteristic | Best Billing Method |
|---|---|
| Scope is fixed and well-defined | Lump Sum |
| Scope is uncertain or evolving | Time & Materials or Cost-Plus |
| Work is repetitive or quantifiable | Unit Price |
| Project spans several months | Progress Billing |
| Client demands detailed transparency | Cost-Plus |
Also consider:
- Client type: Public agencies often prefer progress or unit price billing for accountability.
- Cash flow needs: If your project demands upfront material purchases, choose methods with frequent payment cycles.
- Administrative capacity: Some methods (like cost-plus) require heavier documentation workloads.
Final Thoughts
The billing method you choose shapes every part of your project from estimating and scheduling to contract negotiation and cash management.
Top-performing contractors master all five and apply them strategically depending on project type and risk profile.
Billing isn’t just about invoicing; it’s about aligning financial structure with project delivery. By selecting the right method and documenting it properly, you protect your business, strengthen client trust, and keep projects moving without financial surprises.