Project Billing Guide: Stages, Types, And All You Need to Know 

Project billing is the cornerstone process of managing a professional services project.

 If you can complete a project to a client’s satisfaction, you’ll be more likely to get positive referrals and repeat work. But even more importantly, how can you finalize a project in a way that’s beneficial not only to the client but to your agency?

In this article, we’ll discuss the basics of successful project accounting. This includes how to create an effective billing process and manage your invoice creation and sending, all while supporting business profitability.

Key Takeaways

Project billing is the comprehensive process of pricing your services, creating invoices, and collecting payment according to client agreements. It can be complicated as it involves many moving parts: setting project fees, recognizing expenses, monitoring budgets and profit, providing visibility to both parties and ensuring your work is compensated fairly and on time.

The latter is a particular roadblock for agencies — according to project billing research, 48% of invoices issued by small businesses pass their payment date, which significantly impacts their growth, decision-making, and productivity.

However, the importance of effective project billing extends beyond timely payments. It encompasses several critical aspects that contribute to the successful financial management of projects.

The project billing process has multiple stages, beginning with planning, going over to project execution and invoicing, and ending with full payment received.

Let’s go through these stages in more detail to showcase their importance and key elements.

The estimation and planning stage is the foundation of successful project billing.

Estimation incorporates various key insights and strategies: understanding your historical data (e.g., estimated vs. real completion time), having a firm grasp on employee availability and skills, and accurately forecasting costs and potential risks.

You’ll also need to know how to set your agency rates to remain profitable and competitive. Accurate estimation helps set realistic budgets and expectations for both the project team and the client. To learn more, check out our guide on how to manage a project budget.

Joi Polloi, a UK creative tech agency, used the agency management software Productive to get better control over their budgeting and improve estimating for future engagements:

Read the full story to learn more.

During the project planning phase, you’ll need to create and sign certain documentation that contains financial terms, details on the execution (scope, objective, deliverables), and may include requirements such as achieving specific project management metrics, depending on your project billing type (for example, in performance-based projects).

The statement of work (SOW) is one of the most crucial documents, as it involves details including:

According to certain research, such as the Standish Group Chaos Report, incomplete requirements (12%), changing specifications (12%), and unclear objectives (5%) are some of the main causes of project challenges. Even details that might seem obvious at first, for ex. what constitutes a bug fix vs. change request in web dev project management, should be clearly defined to avoid issues down the line.

During the project execution and management stage, the focus shifts to implementing the project plan and managing resources and finances effectively. This stage involves resource scheduling, budget tracking, and expense management to ensure that the project stays on track and within budget.

While your resource scheduling should be planned out in advance, changes will need to be implemented along the way according to various internal or external demands. For example, a team member might go on unexpected sick leave, or the client might request additional work on a deliverable.

Effective resource management means that the right team members are utilized on the right tasks. Depending on their seniority and skill levels, some team members’ time will be more expensive than others. In T&M projects, this gap is usually accounted for, but in fixed-price projects, the situation is different.

And when a single project manager needs to balance these resources across multiple projects, it can get even more complicated.

Resource scheduling tools can help in planning and managing resource allocation; for example, with Productive’s Resource Planning, you can view the impacts of scheduling on profitability and revenue. Changing your allocation impacts these metrics in real time.

Creating clear, detailed, and, above all, accurate invoices is crucial for prompt payments. While this sounds like a no-brainer, research by Endava shows that as many as 29% of agencies have a high number of discrepancies in their invoices.

Project accounting software can help professional services firms get better control of actual hours spent on projects, generate invoices faster and more reliably, and monitor unpaid vs paid invoices more easily.

The essential elements of an invoice include:

Following up on sent invoices is essential to maintain a steady cash flow. Depending on how many projects your business is handling at once, things can start to slip through the cracks.

Here are some tips on how to streamline your invoice management (all of these features are offered by Productive, but some Productive alternatives may have them too):

Different projects and client relationships may require different billing approaches. Which is the most appropriate method for your project and professional service firm? Here’s a quick overview:

Here are some more details:

Fixed-cost billing involves charging a predetermined amount for the entire project, regardless of the time or resources used. This method is often used for projects with well-defined scopes and deliverables. According to research by SoDa & Productive, this model is the most popular among agencies, accounting for almost 50% of net revenue.

Billing can occur before the project is delivered, upfront (though this is rare due to the risk to the client), or upon completion. It’s also possible to do a mix of the two, where a percentage of payment is paid as an advance, with the full amount being invoiced upon completion.

Pros:

Cons:

In a time-and-materials project, clients are charged based on the actual time spent and materials used during the project. This method is suitable for projects where the scope is not clearly defined or may change. According to research, it accounts for about 15% of global agency net revenue.

Billing can be periodic (weekly/monthly), based on particular project milestones, or handled as a lump sum in case of shorter projects.

Pros:

Cons:

Retainer billing involves charging a regular, upfront fee for ongoing services. Clients pay a set amount, usually monthly, for the benefits of regular services and continued availability. According to research, retainers account for about 20% of annual net revenue.

Pros:

Cons:

Cost-plus billing is specific to the construction industry. It means that the clients are charged for the direct costs of construction, while the plus refers to the contractor’s fee, usually a fixed percentage of total costs.

There are other business-specific types of billing, such as commission-based for advertising agencies. You can head over to our guide on the different pricing models to learn which one is best for your business.

Revenue recognition is another important part of the billing management process. It’s the process of recording revenue on your financial statements, and it’s crucial for meeting accounting standards and providing a clear picture of the company’s financial performance.

While revenue can be recognized when payment from customers is received (cash-based revenue recognition), this method doesn’t accurately reflect the period in which billable work was completed.

For that, the accrual-based method is more accurate, as it records revenue when it is earned.

Smaller businesses usually start with the simpler cash-based method, but it’s recommended that they switch to accrual-based accounting once they reach a particular revenue threshold (usually $1M).

Check out our list of the best RevOps software to learn more.

The key business roles for project billing include:

Learn more about different professional service company roles, such as the agency traffic manager or project analyst.

Effective project billing ensures that:

Project billing challenges can disrupt an agency’s cash flow, ultimately leading to less profitable projects, a reduced capacity to grow, and employee burnout and attrition. Understanding these challenges is the first step in addressing them, starting with:

Unbilled or underbilled time can be an underrated issue in professional services businesses. It can specifically affect projects that are connected to creative work, such as marketing or design projects. Inevitably, a lot of hours will go towards brainstorming and conceptualizing, but your employees might hesitate to track these hours, which can lead to burnout and incorrect future estimations.

Consider this post by a designer on social media:

In some cases, the project managers might perpetuate and encourage this line of thinking to leave the impression of a project being completed more quickly and at less cost.

Some solutions to this billing challenge include encouraging a healthy mindset toward tracking hours, determining exactly what falls into hours chargeable to clients on a case-by-case basis, and ensuring all project participants understand this.

An important aspect of expense management is how you’re handling your overhead. Things like facility costs, time spent on internal meetings, or paychecks for administrative staff impact all of your projects. Recording fixed and variable overhead separately or as part of a single project leads to inaccurate financial insights.

Productive provides a handy solution: with its overhead algorithm, overhead is calculated per hour, adding the cost on top of standard cost rates. This ensures that overhead is distributed evenly across all projects, providing a better understanding of true profit per project.

Extra expenses can also be billed and approved across your budgets.

Learn how Productive helps businesses get full process transparency.

Cash flow delays happen when there is a lag between invoicing and receiving payment. According to research by QuickBooks, 20% of businesses spend between 1 to 4 hours each week chasing overdue invoices. This can have pronounced negative effects on small businesses, and according to research by Xero and Paypal, as many as 50,000 businesses fail each year due to cash flow issues. Efficient invoicing and follow-up processes can help mitigate these delays (we’ve covered some potential solutions earlier in the article).

Client disputes over billing can arise from misunderstandings or discrepancies in invoices. Other common issues may occur: dissatisfaction with the quality or quantity of deliverables, unclear project terms, processing errors, etc.

While most invoice disputes can be easily resolved, they will lead to delays in your payment schedule and require valuable manpower and hours to resolve. Providing detailed breakdowns of work performed, accurate time tracking, addressing client concerns promptly and regularly, and maintaining transparency throughout the billing process can help prevent disputes.

Scope creep is a common issue for professional services businesses, especially those that don’t work on hourly rates but instead provide fixed-price billing. In fact, according to IEEE research, the inability to manage scope creep is the main cause of 80% of failing software projects.

The best way to counter scope creep is to have a clear overview of project progress and how potential changes may impact it. If you can accurately forecast the impact a change has on budgets and show this impact to your clients, you’ll be more likely to come to a mutually satisfactory agreement.

Improving practices in your project’s billing can lead to better financial management, enhanced client satisfaction, and more successful projects. Here are some strategies to consider:

Use robust time tracking tools to ensure all billable hours are recorded accurately. This helps in capturing all work performed and ensures accurate billing. Some useful features of timekeeping software include integrated timers for capturing time, quick and reliable timesheet creation, time off approval and management, etc.

Clearly distinguish between billable and non-billable activities to ensure accurate invoicing. This can help in avoiding disputes and ensuring that all billable work is compensated. Keep in mind that while non-billable work is not chargeable to clients, it’s no less valuable to your business operations.

Maintain comprehensive documentation for all project activities, expenses, and changes to support accurate billing. This includes keeping detailed records of work performed, expenses incurred, and any changes to the project scope.

Establish and communicate clear payment terms in your contracts to avoid misunderstandings and delays. This includes specifying payment due dates, accepted payment methods, and potential late fees for overdue payments.

Maintain open communication with clients and provide regular updates on project progress and billing status to build trust and ensure transparency. Software solutions that provide a client portal can streamline this process, so that clients or customers can proactively review their data and reports.

Implement professional services automation tools for invoicing, time tracking, and expense management to improve efficiency and reduce errors. This can help in streamlining the billing process and ensuring that all billable work is captured accurately.

One of the best solutions for this is Productive, and here’s why:

Productive is often described by customers as an all-in-one solution for managing your business workflows. It combines key features for business operations management, including project management, resource planning, budgeting and billing, reporting, and more.

The benefits of using Productive is that you’ll be able to combine the functionalities of multiple software into a single platform. This reduces tech stack costs, makes processes more efficient, and supports richer and more reliable data.

When it comes to project billing in particular, Productive includes:

Book a demo today to learn more about supporting your processes and business growth.

In conclusion, mastering project billing is crucial for the financial health and success of any professional services agency.

By implementing effective billing processes, utilizing modern software such as Productive, and maintaining clear communication with clients, businesses can ensure timely payments, accurate financial tracking, and enhanced project profitability.

Embrace automation to address challenges such as expense management and scope creep and build stronger client relationships.