Progress billing and deposit invoices: how to stop doing unpaid work

You and the customer agree three things before any work starts: the total price, the stages, and what triggers each invoice. That is usually a short payment schedule in the quote or contract. Each invoice then refers back to it, so the customer's accounts payable team can see exactly where the project stands.

There are three common ways to set the triggers.

Milestone billing. Each invoice is tied to a deliverable: designs approved, first fix complete, phase one live. This is easiest for the customer to check, because the milestone either happened or it did not. It works well for agencies, consultancies and fixed-scope jobs.

Percentage of completion. Each invoice bills the share of the work done since the last one. Construction often uses this with a schedule of values: a breakdown of the contract into line items, each with its own value and percent complete. It is accurate on long jobs, but it gives the customer more to question, so back each claim with evidence.

Time-based billing. You invoice on fixed dates, usually monthly, for work done in that period. It is simple to run and suits retainers and long projects without clear milestones. The risk is a gap between what you billed and what the customer thinks was delivered.

Progress invoicing and progress billing are the same thing. In the UK, construction work is usually billed through interim payment applications, and construction contracts there carry their own payment rules. In the US, construction payment rules vary by state and by contract. If you work in construction in either country, check the rules that apply to your contracts with a lawyer.

A deposit invoice asks for part of the price before work begins. It does three jobs at once:

• It covers costs you carry early, such as materials, equipment or a team booked for the project.
• It tests the customer's payment process. If a 20% deposit takes six weeks and three reminders, you have learned how the rest will go before you are owed much.
• It gets you set up as a supplier. Many larger customers need to add you to their system before they can pay anything. A deposit invoice makes that happen at the start, not when the first big invoice is already overdue.

Make the deposit due before work starts, not on your usual terms. "Due on receipt" or a date a few days before the start date works. Then hold the start date until it arrives. Starting work while the deposit is "being processed" turns it into an ordinary overdue invoice.

How to write a deposit invoice

A deposit invoice is a normal invoice with a few extra lines. Label it clearly, so nobody pays it twice or treats it as the full bill.

DEPOSIT INVOICE

Invoice number:   [Invoice number]
Date:             [Invoice date]
Due:              [Due date, before the start date]
Customer:         [Customer name]
PO number:        [PO number, if they use one]
Project:          [Project name], per [Quote or agreement reference]

Contract total:                       [Contract total]
Deposit due ([Deposit percent]%):     [Deposit amount]

This deposit is credited against the final invoice.
Work starts on [Start date] once it is received.

Pay to: [Payment details]
Questions: [Your name], [Email]

In your accounts, a deposit you have received for work not yet done is usually recorded as a liability, not revenue, until you do the work. The exact treatment, and how sales tax or VAT applies to deposits, depends on your country and your accounting method, so check with your accountant.

Say an agency agrees a $40,000 website project. An invented schedule might look like this:

A few principles make a schedule easier to collect:

• Keep the final payment small. The last invoice is the hardest to collect, because the customer already has what they wanted. Put more of the price earlier.
• Make milestones things the customer can see. "Designs approved" is clear. "Development 50% complete" invites argument.
• Say how a milestone is signed off. For example: approved in writing, or deemed approved if no changes are requested within five working days.
• Set the payment terms for stage invoices. Short terms work best, because the next stage depends on them. Our guide to Net 30 payment terms covers how to set terms that hold.
• Agree what happens if a stage is unpaid. See the clause below.

If you work on percentage of completion, the arithmetic for each invoice is: contract value times percent complete, minus everything billed before. Say a $60,000 job is 40% complete and you have billed $15,000 so far. This invoice is $60,000 times 40%, which is $24,000, minus $15,000: $9,000. If the contract holds back a percentage of each payment until the end, see our page on retainage for how that shows on the invoice and how to get it released.

A payment schedule clause to start from

Put the schedule in writing, in the quote or contract the customer signs. This is a starting point, not legal advice. Have it checked against your own contracts.

Payment schedule

The total price is [Contract total]. We will invoice as follows:
[Stage 1 name]: [Amount], invoiced on [Trigger].
[Stage 2 name]: [Amount], invoiced on [Trigger].
[Final stage name]: [Amount], invoiced on [Trigger].

Each invoice is due within [Number] days of its date. A milestone
is complete when [Customer contact role] approves it in writing,
or [Number] working days after we submit it if no changes are
requested in that time.

If an invoice is unpaid [Number] days after its due date, we may
pause work on the next stage until it is paid. Any change to the
project timeline caused by a pause will be agreed in writing.

The customer's accounts payable team needs to see where this invoice sits in the whole project. Show the running totals every time.

PROGRESS INVOICE [Stage number] OF [Total stages]

Invoice number:     [Invoice number]
Date:               [Invoice date]
Due:                [Due date]
Customer:           [Customer name]
PO number:          [PO number]
Project:            [Project name], per [Agreement reference]

Milestone:          [Milestone name], approved by [Name] on [Date]

Contract total:                 [Contract total]
Previously invoiced:            [Total of earlier invoices]
This invoice:                   [Amount]
Remaining after this invoice:   [Amount still to bill]

Pay to: [Payment details]

Attach the evidence for the milestone: the approval email, a sign-off sheet, photos, or a link to the delivered work. The person who pays your invoice was usually not in the project meetings. Give them what they need to say yes without asking you.

Send it the day the milestone is reached, with a short covering email:

Subject: Invoice [Invoice number]: [Milestone name], [Project name]

Hi [First name],

[Milestone name] was approved on [Date], so attached is invoice
[Invoice number] for [Amount], stage [Stage number] of
[Total stages] under our agreement. It is due on [Due date].

The approval is attached for your accounts team. After this
invoice, [Amount still to bill] remains to be billed.

Thanks,
[Your name]

The advantage of progress billing is that you see a payment problem early. Act on it while the amount is small.

First, find out why. Common reasons are the same as for any invoice: no PO, the invoice went to the wrong person, the approver has not signed off, or the customer disagrees that the milestone is complete. A reminder will not fix any of those. Ask what is holding it up, using our payment reminder email templates as a base.

If the customer says the milestone is not finished, treat it as an invoice dispute: agree what is outstanding, fix it, and re-confirm the sign-off. If they pay part of the invoice, record it against the right invoice and ask for the balance, as our page on partial payments explains.

If the invoice is simply late, and your agreement allows it, tell the customer before you pause the next stage:

Subject: Invoice [Invoice number] and the start of [Next stage]

Hi [First name],

Invoice [Invoice number] for [Amount], for [Milestone name], was
due on [Due date] and is still open. Is there anything on your
side holding it up?

We are due to start [Next stage] on [Date]. As set out in our
agreement, we start each stage once the previous one is paid, so
could you confirm a payment date by [Date]?

Thanks,
[Your name]

Keep it factual. You are applying a term the customer agreed to, not making a threat. If they cannot pay the stage in one go, a written payment plan agreement gets you a schedule instead of a vague promise. On projects with several open invoices, a statement of account shows the customer everything at once.

If you are a subcontractor waiting on a main contractor who is waiting on their client, the payment terms in your subcontract decide when you are owed. Our page on pay when paid clauses explains what those terms usually mean.