The financial risks of a construction project are huge. All project stakeholders benefit from measures that improve the chances of project success. Milestone payments are a powerful tool for project teams to aid financial management by controlling budgets and improving project accountability.
Milestone payments are one type of progress billing. Based on the completion of specific sections of work, milestone payments link payments to specific deliverables, organizing the payments along the schedule timeline and providing a financial incentive for work completion.
For all their usefulness, payment milestones present a certain administrative workload. Payment platforms like Truss can help by automating payments and tracking payment progress.
Here, we’ll discuss how to set milestone payments, some benefits and challenges the billing model presents, and how digital payment tools like Truss can make payments and cash flow control easier and less time-consuming.
How do milestone payments work?
Contractors can apply for milestone payments when they have completed the work to meet the conditions necessary for payment. Construction contracts must lay out detailed conditions for payment so that all parties understand when payments can be expected.
Milestone payments are tied to clearly defined project deliverables. Some milestones that might be included in a billing plan are demolition, foundation completion, or framing finished.
Setting milestones
Many construction teams include milestones in their overall project planning and scheduling to act as check-in points and to aid transparency and accountability throughout large projects. Milestone payments can be attached to any completion date to best maintain steady cash flow throughout the project.
The project’s start date and final handover are the most obvious milestones in construction scheduling. After that, the project team can determine the most effective points to put milestones and their associated payments.
Some projects may set payments around simple parameters, like pre-construction, construction, and closeout phases.
Others may use the five phases the Project Management Institute (PMI) identifies:
- Initiation,
- planning,
- execution,
- monitoring and control,
- and closeout.
Project planners can also attach milestone payments to more unique project elements that will help distribute payments evenly across project costs.
Benefits of milestone billing
Milestone billing is a bit more complicated than a single, upfront payment for a service. However, on the often long and complex projects construction firms take on, there are a lot of benefits to breaking up payments into smaller chunks.
1. Better cash flow control for contractors
Billing at set times throughout the project schedule ensures contractors a steady stream of income to help cover project expenses, like subcontractor payments, payroll expenses, permits, and administrative costs. Contractors can continuously fund the project with predictable payment timelines and careful budgeting, preventing delays and protecting important industry relationships.
Truss Payments can further improve the speed of cash flow by allowing contractors to access funds as soon as the owner issues payment, so they can go on to pay vendors or use their cards for project expenses.
Fast cash flow means fewer delays due to nonpayment and happier vendor relationships.
2. Provides incentive for faster action
Milestone billing presents a powerful incentive to timely project progress. By meeting the scheduled deadlines according to quality expectations, contractors can expect prompt and regular owner payments.
3. Keeps owners up to date on project progress
Pay applications from contractors provide a detailed rundown of a project’s progress to date, with no need to chase down information or visit a construction site in person. The details provided can open up lines of communication, increase transparency, and increase contractor accountability.
Truss Payments helps contractors and owners get a clear overview of project billing status, by displaying outstanding and paid balances and allowing parties to attach memos or notes to transactions.
4. Mitigates financial risks
Construction projects can go on for months, or even years. The extended timelines and very high price tags on large projects make a single-payment system difficult for owners and contractors.
Owners may not be able to access all the money for a project at one time. Construction lenders won’t often release funds in single installments because it poses too big of a risk. For that matter, the owner risk involved in handing a single lump sum to a contractor is far too great for a project that could change in so many ways. Breaking payments into smaller, incremental payments minimizes the risk and ensures project progress before the next payment comes.
The contractor would face significant cash flow problems in floating the costs of an entire extended process, and then the risk of nonpayment could be catastrophic. Progress billing throughout a project helps manage those risks.
Challenges to milestone billing
Although milestone billing is a common and accepted progress billing method on construction projects, there remain some downsides to using it.
1. Administrative burden
Completing payment applications can require a heavy administrative burden for general contractors and subcontractors. Construction firms need meticulous records, receipts, invoices, photos, and documents as backup for each pay app they submit, and need to have them ready to meet the pay application deadline.
2. Changing construction schedules
One of the most certain things about construction is uncertainty – construction schedules often change or become delayed as complications arise. When a project payment schedule is tied to specific milestone events, they, too, may become delayed.
Using Truss Payments to manage milestone payments enables owners to adapt milestone payments as necessary to keep the project running smoothly.
Best practices for milestone billing
Construction stakeholders should exercise care in using milestone billing. Complete transparency and open communication can help avoid confusion and set early expectations for payments throughout the project.
Specific, measurable contract language
Milestone billing is different than other partial billing methods, which tend to occur according to calendar intervals rather than project achievements. Billing milestones should be specifically detailed in contract language so that both owner and contractors understand payment terms and when pay applications should be sent.
Regular communication and updates
Contractors should strive to keep owners up-to-date on project progress so that owners can arrange their finances to be prepared to pay the contractor when the invoice arrives.
Accurate and thorough record-keeping
Systematized record-keeping processes can help have all information organized and ready for when pay application backup is required. Construction management platforms can help construction teams develop these practices and create a system for storing and retrieving information for an easier billing process.
Maximizing Financial Efficiency and Accountability with Milestone Billing
Milestone billing offers significant advantages for managing construction finances to both owners and contractors, by linking payments to specific project deliverables. Payments spread over the construction schedule help teams keep open lines of communication, manage cash flow and budgets, and incentivize speedy project progress. Project teams can use milestone billing with digital payment tools like Truss to manage milestone payments, by automating invoices, tracking payment progress, and offering flexibility in managing payment dates when needed.
By incorporating clear project billing milestones, maintaining accurate records, and fostering regular communication, construction teams can leverage milestone billing to drive project success and maintain financial stability.
