What are progress billings for long-term projects?
In this article, we’ll discuss progress billings, one of the facets of accounting for long-term contracts. More than just a record of invoices sent to the client, the amount of billings determine, in part, what appears on the balance sheet.
1. Progress billings
During the course of a project, contractors may bill clients for a portion of the total contract price in order to mitigate project costs and assure that at least a portion of the costs incurred can be paid for in the event of client bankruptcy. The billing schedule is generally agreed upon in advance. The amount charged could be based on a percentage of costs incurred since the last bill, or it might be a set amount.
Billing statements could include information about costs incurred so far, estimated costs to completion, payments made to date, and current payments due. Below is an example of what a statement might look like for a fictional company that is having a manufacturing factory built for its new product line.
XYZ Company |
|
Original contract price |
$10,000,000 |
Costs incurred to last billing date |
$2,800,000 |
Progress billings to date |
$3,200,000 |
Cost of materials since last billing date |
$500,000 |
Cost of labor since last billing date |
$1,000,000 |
Overhead allocated to project since last billing date |
$800,000 |
Total costs incurred since last billing date |
$2,300,000 |
Amount due on past billings |
$0 |
Current payment due * |
$2,500,000 |
(*) Amount is based on a pre-determined schedule in the contract.
When the statement is sent out to the client, the journal entry records a debit to accounts receivable and a credit to progress billings. When the contract is completed, the progress billings account for the project is closed along with the other contract accounts.
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