Managing Progress Billing and Milestone Payments in AR Automation

If your business bills on milestones, tracks percentage of completion, or withholds retainage, you already know: most AR automation tools weren't built for you. They were designed for transactional businesses — ship a product, send an invoice, collect payment. But when a single project stretches across months or years, involves dozens of change orders, and requires carefully sequenced draw requests, the billing process becomes a discipline unto itself.

‍

This is the reality for construction contractors, consulting firms, software implementers, engineering firms, and architecture practices. And while the complexity of progress billing is a given, the inefficiency doesn't have to be. Here's how finance teams can modernize these workflows while preserving the controls that project-based accounting demands.

‍

Why Progress Billing Is Uniquely Complex

Progress billing exists because of a fundamental mismatch: long project timelines on one side, and the need for steady cash flow on the other. A construction contractor can't wait 18 months to invoice. A consulting firm delivering a multi-phase strategy engagement can't fund three months of consultant salaries before seeing a dollar of revenue. Progress billing solves this by tying payment to work performed, not project completion.

‍

The scale of industries that depend on this model is enormous. According to the U.S. Census Bureau, total U.S. construction spending reached a seasonally adjusted annual rate of approximately $2.2 trillion in 2024. Add consulting, professional services, software implementation, and engineering, and you're looking at a significant share of the entire B2B economy operating on progress billing or milestone-based invoicing.

‍

Yet cash flow remains precarious even with progress billing in place. Rabbet's 2024 Construction Payments Report found that 82% of contractors now face payment waits exceeding 30 days — up from 49% just two years earlier. The average days sales outstanding (DSO) in construction has climbed to 94 days. These delays cost the U.S. construction industry an estimated $280 billion in 2024 alone. And according to Atradius's 2024 B2B Payment Practices report, half of all U.S. B2B invoices are currently overdue.

‍

The takeaway is clear: progress billing doesn't just need to happen — it needs to happen accurately, on time, and with the documentation to survive scrutiny. That's where automation becomes critical.

‍

Tracking Percentage of Completion

Before you can bill, you need to know how much work has been done. That sounds simple, but measuring progress on a long-duration project is one of the most judgment-intensive activities in accounting.

‍

Methods for Measuring Progress

Finance teams generally use one of three approaches:

‍

Cost-to-cost is the most common method, especially in construction. You divide costs incurred to date by total estimated costs to determine the percentage complete. If you've spent $600,000 on a project with an estimated total cost of $2 million, you're 30% complete — and you can recognize 30% of the revenue.

‍

Units of delivery works when output is measurable in discrete units — miles of road paved, modules of software delivered, or floors of a building completed. Progress is calculated by dividing units delivered by total expected units.

‍

Milestones achieved ties progress to predefined deliverables or phases. This is common in consulting and software implementation, where the statement of work defines specific deliverables (discovery report, system design, user acceptance testing) and payment is triggered upon completion and approval of each.

‍

Revenue Recognition Under ASC 606

The accounting framework governing all of this is ASC 606 (Revenue from Contracts with Customers), which replaced the older percentage-of-completion and completed-contract methods with a five-step model centered on performance obligations and the transfer of control. Under ASC 606, if control of a good or service transfers to the customer over time — as it typically does in construction, where the customer owns the asset being built on their land — revenue must be recognized over time using either an input method (like cost-to-cost) or an output method (like milestones achieved).

‍

The critical point for AR teams: the amount you recognize as revenue and the amount you're authorized to bill are not always the same number. A project might be 40% complete from a cost perspective, but the contract may only allow billing at defined milestones — say, at 25% and 50%. This creates the gap between earned revenue and billed revenue that every project accountant manages on their work-in-progress (WIP) schedule.

‍

The PM-to-Finance Disconnect

In practice, the biggest challenge isn't the accounting method — it's the communication gap between project managers and the finance team. PMs track progress in project management tools using their own metrics. Finance needs that progress translated into billable amounts, supported by documentation, and reconciled against the contract. When these teams operate in silos — the PM in one system, the accountant in another, the AR clerk in a third — errors and delays multiply.

‍

Issuing Progress Invoices

The workflow from "work completed" to "invoice sent" involves more steps and more stakeholders than most AR automation tools anticipate.

‍

The Typical Progress Billing Workflow

‍

Project manager certifies progress — The PM reviews the work completed during the billing period and certifies the percentage or milestone achieved.
Finance reviews against the contract — The controller or project accountant verifies the billed amount doesn't exceed the contract value, accounts for change orders, and checks retainage calculations.
Invoice is generated with supporting documentation — The invoice package is assembled with all required backup.
Client reviews and approves — The client (or their representative, such as an architect) reviews and either approves or disputes the application.
Payment is released — Upon approval, payment is issued per the contract terms.

‍

Industry-Standard Formats

In construction, the gold standard is the AIA G702 (Application and Certificate for Payment) and G703 (Continuation Sheet), developed by the American Institute of Architects. The G702 summarizes the payment request — contract value, approved change orders, retainage, previous payments, and the current amount due. The G703 breaks this down by line item, showing work completed and materials stored for each element of the schedule of values. These forms are so widely adopted that their format is used across the industry even in non-AIA contracts.

‍

For consulting firms, billing typically follows the statement of work (SOW), with invoices issued upon deliverable approval or at regular intervals (monthly, bi-weekly) for time-and-materials engagements. Software implementation projects often bill by sprint or phase — discovery, configuration, testing, go-live — with each milestone requiring formal sign-off before an invoice can be issued.

‍

Pro Tip: Regardless of format, the most common cause of payment delays is incomplete documentation. Make sure every progress invoice includes a clear reference to the contract and any approved change orders, an itemized breakdown of work completed this period, cumulative totals that reconcile to prior billing periods, retainage calculations, and lien waivers or compliance certificates as required. Missing even one supporting document can push payment to the next billing cycle — potentially a 30- to 60-day delay.

‍

Preventing Over-Billing and Under-Billing

Both overbilling and underbilling are dangerous, but in different ways. Understanding the risks of each — and implementing controls to prevent them — is central to sound project accounting.

‍

The Risks of Over-Billing

Overbilling occurs when a contractor or service provider invoices for more than the value of work actually completed. While some firms deliberately front-load billing to improve early-project cash flow, aggressive overbilling creates serious problems.

‍

From an audit and compliance perspective, overbilling misrepresents your financial position. On the balance sheet, overbillings appear as a current liability — essentially, money you've collected for work you haven't yet performed. EisnerAmper notes that significant overbillings on a contractor's WIP schedule can raise red flags with surety companies and bonding agents, potentially limiting a firm's bonding capacity and its ability to bid on new work.

‍

Beyond the financial statements, overbilling erodes client trust. If a project owner's architect reviews a pay application and finds that billed progress doesn't match observed site conditions, the entire payment application may be rejected — delaying payment not just for the disputed items but for the entire billing period.

‍

The Risks of Under-Billing

Underbilling is the opposite problem — billing less than the value of work completed — and it directly starves cash flow. As Procore's WIP accounting guide explains, underbillings appear as a current asset on the balance sheet (costs in excess of billings), representing work you've done but haven't been paid for. Sustained underbilling means you're financing the project out of your own pocket.

‍

Underbilling often happens because of delayed change order approvals (work is done, but the cost hasn't been formally added to the contract), PM estimates that lag behind actual progress, or simple administrative backlogs — the billing team doesn't submit pay applications on time.

‍

Controls That Work

The WIP schedule is the finance team's primary tool for catching billing discrepancies. It compares earned revenue (based on percentage of completion) to billed revenue for every active project. When the two diverge significantly, it's a signal to investigate.

‍

Effective controls include mandatory PM sign-off before any invoice is generated, automated comparison of billed amounts against contract limits and approved change orders, monthly WIP reviews involving both the project manager and the finance team, and real-time dashboards showing billed vs. earned revenue across the portfolio.

‍

⚠️ Watch Out: The Simplar Foundation warns that the exaggeration of WIP profits is "unfortunately too common," often caused by misplaced optimism, unaware management, or, in rare cases, deliberate deception. They note that it's "almost impossible for outside auditors to test WIP" because auditors aren't construction estimators. The responsibility for accurate WIP reporting should sit with the CFO, not be delegated to project managers alone.

‍

Handling Retainage

Retainage (sometimes called "retention") is the portion of each progress payment that the project owner withholds until the project is substantially complete. It's a mechanism unique to construction and certain project-based industries, designed to ensure the contractor finishes the work and corrects any deficiencies.

‍

How Retainage Works

On each billing cycle, the owner withholds a specified percentage — typically 5% to 10% — from the approved payment amount. On a $100,000 monthly draw, the contractor might receive $90,000 while $10,000 is held back. These retained funds accumulate over the life of the project and are released only after substantial completion, punch list closeout, and (in many cases) final inspection and acceptance.

‍

The cash flow impact is substantial. Construction profit margins often run between 5% and 10%, meaning retainage can equal or exceed the entire profit on a project. According to a Clemson University study cited by Levelset, general contractors wait an average of 99 days after project completion to collect their retainage, and subcontractors wait an average of 167 days.

‍

State and Federal Retainage Laws

Retainage is governed by a patchwork of federal and state laws. On federal projects, the Federal Acquisition Regulation (FAR § 52.232-5) allows the government to withhold up to 10% of progress payments when satisfactory progress has not been achieved. When the work is substantially complete, the contracting officer can release all but the amount necessary to protect the government's interest.

‍

At the state level, rules vary widely. According to ConsensusDocs, approximately 30 states have now enacted statutes governing retainage on private projects — a substantial increase from the past, when retainage laws primarily applied only to public work. A growing number of states cap retainage at 5%. New York's 2023 "5% Retainage Law" limits retainage on private contracts over $150,000 to no more than 5%. Many states also require retainage to be held in escrow or trust, and impose interest penalties for late release.

‍

Why Retainage Tracking Is an AR Problem

For the finance team, retainage creates a parallel receivable that needs to be tracked separately from the standard AR balance. Each invoice has two components: the payable amount (what you'll collect now) and the retained amount (what you'll collect later). These retained amounts need to be aged, reconciled, and — when the project hits the contractual trigger for release — billed separately.

‍

Example: A $2M Construction Project

Consider a $2 million construction project with five milestones, billed at 20% each ($400,000 per milestone), with 10% retainage. At each milestone, the contractor bills $400,000 but receives only $360,000. By the time all five milestones are complete, the contractor has billed $2 million but received only $1.8 million. The remaining $200,000 sits in retainage. If the release takes 90–120 days after substantial completion (plus punch list resolution), that's a quarter-million dollars tied up for months after the work is done. For a firm running at a 7% profit margin, the $200,000 retainage exceeds the entire project profit of $140,000.

‍

Final Invoicing and Project Close-Out

The final invoice on a project is where every accumulated complexity comes together. Close-out billing requires reconciling total billed amounts against the final contract value (including all approved change orders), identifying any remaining unbilled amounts, generating the retainage release invoice, and ensuring all compliance documentation — lien waivers, warranties, as-builts, insurance certificates — is in order.

‍

Change orders are a particular challenge at close-out. Over the life of a project, there may be dozens of scope adjustments, some approved for cost and scope, others approved for scope but still pending cost approval. The final invoice must accurately capture all of these while ensuring total billings don't exceed the final adjusted contract value.

‍

For construction projects using AIA billing, the final G702/G703 should show 100% completion across all schedule of values line items, with the retainage column fully released. Any remaining discrepancies need to be resolved before submission — because a rejected final pay application can delay retainage release by months.

‍

How to Automate Progress Billing Without Losing the Nuance

The challenge with automating progress billing has always been the nuance. Standard AR automation assumes a linear process: invoice goes out, reminders follow a schedule, payment comes in. But progress billing requires conditional logic — don't bill until the PM approves, don't exceed the contract value, track retainage separately, handle partial payments, and sequence communications based on project phase rather than a simple aging bucket.

‍

This is where a purpose-built AR automation platform becomes essential. Here's what to look for — and how Centime addresses these requirements for mid-market finance teams.

‍

Milestone-Based Workflow Automation

Centime's workflow engine supports both invoice-level and customer-level workflows. For project-based businesses, this means you can configure collection cadences that align with your billing milestones rather than generic aging schedules. Workflows can trigger reminders before and after milestone due dates, assign follow-up tasks to specific team members, and escalate automatically based on configurable rules. You can build up to 100 automations per workflow using the platform's automation builder, giving you the flexibility to handle everything from pre-invoice notifications to post-due-date escalation sequences.

‍

Grouped and Partial Payment Support

Progress billing rarely involves a single clean invoice-to-payment match. Clients may pay across multiple invoices, apply partial payments, or split payments across methods. Centime handles this through grouped invoicing — which lets you combine related invoices into a single customer view — and partial payment and multi-method support, so that payments are applied accurately even when the billing structure is complex.

‍

Real-Time Visibility Into Billed vs. Earned Revenue

Centime's AR dashboards give finance teams a live view of outstanding receivables, including the ability to update and manage receivables invoices in real time. Combined with customer-level workflows, this lets you segment your portfolio by project, customer, or billing stage — so you always know which projects are on track and which need attention.

‍

ERP Integration for Project Accounting

For mid-market companies running Sage Intacct, NetSuite, QuickBooks (Online or Desktop), or Microsoft Dynamics 365 Business Central, Centime integrates directly with your ERP's project accounting modules. This means invoice data, payment history, and customer records flow between systems automatically — eliminating the manual data entry and reconciliation that slows down project-based billing.

‍

Customer Portal for Milestone-Based Payment

Centime's customer portal gives your clients a self-service view of their invoices, including the ability to review billing history and make payments against outstanding milestones. This reduces the back-and-forth that often delays approval and payment on progress invoices.

‍

Bringing It All Together

Progress billing and milestone-based invoicing aren't going to get simpler. Projects are getting larger, regulatory requirements are tightening, and the pressure on cash flow is only intensifying. But the tools available to finance teams are also getting better — and the gap between firms that automate intelligently and those still managing draw requests in spreadsheets is widening fast.

‍

The key is choosing an approach that respects the complexity of project-based billing rather than trying to flatten it into a simple invoicing model. That means configurable workflows, real-time visibility, ERP integration, and the flexibility to handle retainage, partial payments, and milestone-based collection cadences.

‍

If your finance team is spending more time assembling pay applications than analyzing project performance, it's worth exploring how Centime's AR automation platform can help you reclaim that time — without sacrificing the controls your business depends on.

Sign up for our newsletter
to get finance insights and cash planning tips delivered straight to your inbox twice per week.

Managing Progress Billing and Milestone Payments in AR Automation

You may also like

Customer-Level vs. Invoice-Level Collections Workflows: When to Use Each Strategy

Autopay: The Key to Effortless and Strategic Collections

Solutions

Features

Pricing

Integrations

Resources

Software Solutions

Company

Industries

Compare

Guides