Effective project billing can deliver buoyant cash flow, happy clients, and healthy margins. But it's something that professional service firms regularly struggle with.
Whether due to a lack of appreciation of its essential role in revenue realization - or a lack of access to appropriate tools and data to support it - project billing can be a neglected business process.
Without a strategic, timely, and effective process for project billing and accounting, you risk inaccurate quotes, unbilled hours, slow payment, eroded profit margins, and more.
Here's what you need to know to improve your project billing methods - to get paid in full, on time, every time.
Project billing is the process of invoicing and collecting payment from customers that you’ve delivered a project for. There are two main project billing methods - fixed fee or time-and-materials projects.
Although it sounds like an end-of-project process for your accounting team, the project billing process actually starts before your project does. And it isn’t just the remit of your finance team - your project managers and staff are integral too.
Accurate and profitable project billing starts with how you plan to bill clients, structure payments, and what you estimate it will cost.
It’s also impacted by how well you stick to your proposed budget and schedule, the accuracy of your time tracking, and how well you utilize your resources.
So although project billing sounds simple on the surface, it can be challenging - and those challenges can threaten revenue realization, cash flow, profitability, and client relationships.
This is why it’s essential to perfect your project billing processes in a professional services firm.
There are two project billing methods defined by your contract - time-and-materials and fixed cost. But which is the best way to bill clients? There are actually pros and cons to each. It’s up to your project manager to work out the best approach for each project.
Fixed cost is an easier sell to clients because they know what to budget - but the agency takes on financial risk if the schedule slips and costs increase. Time-and-materials charges for the actual time spent on a project so is more likely to cover your costs, but it can be harder to get clients to agree to this approach.
Regardless of which of the project billing types you choose, you might use a project billing scheme to realize project revenue incrementally - and ensure cash flow for your business - as you reach certain project deliverables.
Fixed price projects work best for projects with very clear deliverables - especially if your agency has worked on similar projects before and can predict the schedule and budget with a high level of accuracy.
If this is your preferred approach, you need to pin down the exact scope of work early, to ensure an accurate quote for your client. This can be challenging as clients sometimes request quotes before knowing exactly what they want! You also need to ensure your project manager has access to data from past projects to enable them to accurately quote for the work - such as how long previous projects have taken, and how many resources have been required. Otherwise, you could be counting the cost in terms of schedule overrun, red-lining resources, and extra costs.
You should also ensure you have a change request process in place. This is a standardized way to record, assess, and approve/reject changes to a project. It protects projects against scope creep.
The time-and-materials model works well for projects that are less predictable. If the exact scope isn’t pinned down or if your agency hasn’t completed this type of project before. SPI research shows that time and materials-based projects typically produce the best margins as long as bill rates are set appropriately. The survey found that IT consultancies produced the best time and materials margins at 38.7%, compared to 36.9% achieved with fixed price models.
By charging for the time you actually spend on the project, your team are empowered to give the work the time it demands. If it turns out to be a bigger job than expected, there is no artificial pressure to get things done ‘quick’ rather than ‘well’ - and there’s reduced risk of burning out your resources with unrealistic expectations. This can deliver elevated outcomes for clients.
It can also curb clients’ urge to change the scope or spec of a project, as it falls to them to absorb that cost rather than you. And whilst time-and-materials can be an unknown quantity for your client, there’s always the chance that it will cost them less than expected…
If you decide to use this pricing method, you can still use past data from similar projects to help you provide a ballpark estimate for clients, easing the insecurity your client might feel around pricing. Using resource management software can also help you find the best-fit resources for the project - in terms of skills, seniority and cost - allowing you to use the most cost-effective resources available. This may be a saving you choose to pass on to your client or use to protect your profit margin.
A project billing scheme is a payment schedule - agreed between the client and service provider in advance - that stipulates interim payments you'll receive during the course of a project. It is usually tied into the delivery of predetermined project milestones or based on a percentage of work completed.
Projects can take a long time to complete - from weeks to years - and project-based businesses can’t wait until the end of the projects to realize the revenue. They need cash flow to pay their staff, rent, bills, and other expenses otherwise their business will grind to a halt - and the client project too. So a project billing scheme is mutually beneficial.
An additional benefit for the professional services firm is that a project billing scheme reduces the risk of non-payment as you collect revenue throughout the project. It also helps you create accurate invoices - and hopefully receive payment without dispute - as you bill regularly while time and costs are fresh in everyone’s mind.
Efficient project billing involves more than just your company bean counters. It is a true team effort.
The aim is to issue accurate, timely, transparent client invoices that are cleared for payment as quickly as possible. Any uncertainly over what the invoice includes - or why the client has been charged what they have - can delay payment and potentially damage the relationship.
As we've already explained, project billing doesn't start when your project stops. It's an integral part of the end-to-end project planning and delivery process.
The start of the project billing process is working out what - and how - to charge clients for a body of work. Your project manager will consider a range of factors including:
They will typically look at previous projects and use a range of project estimation techniques to predict the resources, time and budget required to deliver the project.
They may use project management software to provisionally plan the project - including resources and milestones - to predict the schedule, costs, and viability of a time-and-materials-based project.
Once the project is underway - if you have a billing scheme in place - billing will be underway too. This is where your project accountant invoices for work delivered to predetermined project milestones, dates, or percentage project completion.
In a fixed-fee project, for example, you might bill 25% of the project fee as you work toward the final delivery date. In a time-and-materials project, you might invoice the time and expenses incurred in the delivery of a particular phase of the project.
At this point, the project manager will be managing, monitoring, and reporting on actual project progress against the predicted schedule and costs - both to provide the accountant with accurate information for the invoices and to ensure the project isn’t veering off its predicted course.
If you want your project invoices paid quickly and painlessly, they need to be detailed, accurate, and up-to-date. Otherwise, you risk pushback from clients questioning charges, and your cash flow takes a hit. However, getting the granular level of detail you need can be challenging. Here are three of the biggest hurdles in project billing.
Identifying revenue and costs on an individual project basis requires an added level of scrutiny and transparency compared to general business accounting. As such, project billing adds an extra layer of admin - for accountants, project managers, and project staff.
One of the challenges is that this extra admin can be time-consuming and prone to human error. For example, manually tracking time or expenses in a spreadsheet, or accidentally typing in the wrong project code when allocating costs.
Your resources may work across multiple projects in the same time period. And not every hour they work is billable to a client. They may spend time in meetings, in training, checking emails, etc too.
This means you need to track their time at a granular level - hours rather than working weeks - and know the hourly billing rates for each resource. This adds an additional burden to your project team - working out what’s billable, at what cost, to whom and for how long.
It’s important to get this right because billable hours that aren’t billed will undermine your profits. Read more about billable vs non-billable work.
As well as the direct expenses you incur in the delivery of a project, there are also indirect costs that your business needs to cover through its project billing. For example, administrative costs, office overheads, specialist software, staff training, and more.
When creating invoices, it’s essential that you have a standardized way to distribute these costs fairly across the projects and clients. If you don’t, you may not recoup them.
There are lots of reasons to aim for high project billing accuracy. Obviously, there’s the big one - you get paid what you’re owed and maintain positive cash flow in your business. But that’s not the only benefit.
A transparent and detailed invoice gives clients everything they need to know to pass your invoice for payment. We can’t guarantee they’ll pay you quickly. But it’ll be quicker than if you get locked in a debate over the finer detail of your fee.
Monitoring project progress is an essential part of an efficient billing process. It ensures you achieve specific milestones to realize your expected income within a given timeframe.
By keeping a close eye on time and costs for project billing purposes, your PM is more likely to spot when projects are deviating from their forecast and take corrective action - helping you deliver on time, on budget, and protecting your profit margin.
The accurate time tracking and attribution of costs involved in project billing aren’t just beneficial in your current project. This data actually improves forecasting for future projects too.
You’ll gain an accurate insight into how long particular tasks take - and cost - to complete. So next time you’re asked to bid on a similar project, you’re less likely to undercharge.
This can be especially helpful for future flat fee projects, where an inaccurate project estimate can cost you dearly.
The final benefit is better client relationships. There’s nothing worse for a professional services project than a client who’s unhappy with what they’ve been charged. Or that a time-and-materials project has gone over schedule and over budget. Keeping tight control over project billing protects your relationship with your clients.
You can make improvements throughout your project to increase the accuracy of your project billing process. Some of these are specific to project billing. Others are project management good practices anyway. Let's start at the beginning.
When determining what to charge a client for a specific project, try to base your estimate on data from past projects. Find similar projects to understand what they involved and the costs incurred. Pay particular attention to any deviation between projected and actual project costs. These can help you spot where past estimates went wrong - and forecast more accurately for your new project.
Milestone billing is a great way to realize revenue quickly from your projects. It supports cash flow, so you can keep the lights on in your business, and also reduces the risk of non-payment because you receive increments throughout the project.
Once your project is up-and-running, closely monitor the time and money you're spending. Track it against your projections to ensure you're on track to deliver milestones and realize interim payments. Check that you're not overspending on resources or behind schedule. If you are, take decisive action to correct your course.
When you're expecting resources to track their time accurately, you need to make it as easy and frequent as possible. Don't rely on them to remember at the end of the week and track time in a cumbersome spreadsheet. Get time tracking software they can use quickly, intuitively, and in a non-disruptive way.
One of the goals of a strategic project billing process is to achieve regular revenue and predictable profit from project work.
Scope creep and unregulated project changes are the enemies of this objective. They throw additional, unplanned work into the mix - incurring extra costs and undermining both project progress and profits.
A change management process requires all changes to be assessed - and approved or rejected. And, if they're approved, for that to be reflected in the project's schedule, budget, or resource allocation.
Project accounting software is specifically designed to help businesses monitor and report on the financials of individual projects. They typically include functionality for billing and invoicing, project profitability, time tracking, and more.
These tools give project managers and project accountants the visibility they need on a project-by-project basis - as well as allowing for automation that makes the whole process quicker, easier, and less prone to human error.
Project accounting functionality is often built into resource management software - like Runn - which brings project planning, resource allocation, and project accounting into a single system.
No one wants to feel in the dark - especially when it comes to spending money. So go into as much detail as you can in client invoices. Use available data to provide granular breakdowns of billable hours and resource costs. This won't just help your client understand and approve the charges, it will also help you and your Accounts Payable team if the client comes back with any queries.
If cash flow is your aim, add incentives to pay your invoice faster. A 10% early payment discount could help realize revenue faster, freeing up money for investing in growth and other activities. Also, make sure you avoid some typical invoicing errors that see invoices missing a monthly pay run due to queries - like failing to include a purchase order number.
Runn is a powerful project and resource management platform with built-in project accounting tools. Managing project finances, progress, and resources has never been easier.
‘One big thing Runn has done for us is to increase both the speed and accuracy of billing. It’s turned our invoicing into an hour-long task. But before, it would take at least four times longer than that.’ - Nick Boni, Director of Digital, Lola Tech
Runn's makes it easy to get the information you need, when you need it. So you can create timely, accurate invoices that get paid, fast.
Start your free 14-day trial today and see what Runn can do for you.
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