What is Project Billing? Discover Types and Processes
Service providers aim to be paid the correct amount promptly and by the agreed terms at the start of a project. Achieving this requires a well-functioning billing system within a company.
The setup of a billing system significantly impacts profitability and customer relationships, making it crucial to have an effective project billing system in place.
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The complexity of a project can pose challenges when it comes to billing. Lengthy and intricate projects may make it more difficult to establish an efficient and punctual billing system.
However, it is possible to overcome these challenges with organizational strategies and helpful tips. Employing a sound strategy, ensuring accurate data, and utilizing appropriate tools will help prevent overlooked billable hours and late payments.
Was ist die Projektabrechnung?
We can define project billing as presenting the customers with an invoice and collecting payment for services.
Project billing starts before the project tasks are completed as a joint effort between the company’s financial or accounting team and project managers.
Project billing is more complex than it seems because it’s impacted by several factors that may or may not be under the team’s control. These factors involve how well the team respects the budget, and deadlines, how well they use the resources, and how accurate time tracking is. This last element is crucial for correct billing, and we dedicated an entire section about it later in the article.
TIP: Read our guide about client billing if you think it’s the same as project billing.
Types of project billing
Two types of project billing should be defined in the contract: fixed-cost and time-and-materials.
Both methods present pros and cons and are pretty distinct. Let’s dive into them.
The fixed-cost project billing method
The fixed-cost type of project billing is an approach that works best for projects with clear and well-defined deliverables or project milestones. The client and provider should set the project fee right at the beginning of the assignment.
This method is simpler and less risky for clients since they’re not responsible for any project overruns.
The service provider needs to monitor the project closely so that the overrun scenario doesn’t happen. It’s a straight-to-the-point type of project billing.
If the team can deliver the project earlier than planned, it can even bring higher profits (for less time spent working).
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Time-and-materials project billing method
Time-and-materials is a method that works well for less predictable projects. If the project’s nature is volatile, things can be more flexible if the client doesn’t define the deliverables well.
It’s also a good choice if the company hasn’t previously worked with a specific type of project. In this method, the actual hours spent on a project are billed instead of a pre-defined “package” of hours.
Let’s compare the pros and cons.
| Project method billing | Vorteile | Nachteile |
|---|---|---|
| Fixed cost | -Structured and organized billing with a defined fee; -Clients accept easily; -Chance of higher margins if the team finishes the project earlier. | -Billing accurately is more challenging; -Clients might not be 100% aware of their needs at the beginning of the project and require changes; -Demands more intense research into past projects to provide accurate quotes; -Project overruns cost fall on the work team. |
| Time-and-materials | -Less pressure to work on the project under a certain deadline; -Less risk of burning resources; -Clients are less likely to make frequent requests since the extra cost falls on them; -Bill extra hours if the clients request more work. | -Uncertain costs; -Lack of control from the client side (this can generate dissatisfaction and hurt the relationship with the client); -Harder to be accepted by clients that don’t see a clear price from the start; -Invoicing can be a motive for dispute. |
Notes:
Remember that a change request process should exist for any alterations needed at a fixed cost. There should be a standardized way to record, assess, and approve/reject changes to a project. An efficient project cost-tracking system is the best way to protect the work done by the team.
Time-and-materials is the project billing type that requires (and benefits) the most from time tracking. Invoices won’t be disputed or contradicted if every billable hour of work is accounted for.
Who is involved in project billing?
Accurate and efficient project billing is truly a team effort, with several stakeholders involved. All of them have different roles in the process:
- Project manager – overseeing the project and ensuring that billing aligns with the project’s deliverables and milestones is the responsibility of a project manager. The project manager is also responsible for providing the documentation necessary for accurate billing.
- Accounting or Financial team – responsible for generating invoices, making and tracking payments, managing accounts, and ensuring everything comply with local policies and regulations.
- Clients – the receiver of the project’s deliverables, invoiced for the work completed, according to the pre-defined terms of the contract.
- Legal team – responsible for creating and reviewing the agreements between the project stakeholders and including billing terms and payment schedules.
- Team members/collaborators – the group responsible for the project’s progress and providing information and updates.
These are the tools involved in project billing:
- Time tracking tools – the people involved in working on the several stages of the project, such as employees, contractors, or freelancers, track their time spent and expenses incurred while working on the different tasks. This data is essential to estimate time for a project and for accurate billing and may be recorded using time tracking software such as Timeular.
- Financial management system – tools for financial management or enterprise resource planning (ERP) help automate and manage project billing processes. These systems generate invoices and integrate billing with other financial functions.
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Stages of the project billing process
The project billing process happens simultaneously when the project is developed, starting even before the first tasks are completed.
The project billing process starts with forecasting and estimation. This defines how and how much to charge clients for the work required.
During this stage, the project manager weighs the pros and cons of the different types of project billing methods and defines the financial and strategic priorities of the company, as well as the target revenue and profit to gain from it.
Revenue vs profit: What is the difference?
The project manager should look back at past projects and use them to estimate time and budget. Project management software might also be helpful during this stage.
During the execution of the project, the billing process is fully underway. Invoices are issued for the deliverables received by the clients or milestones achieved, according to what was agreed upon by both parties, depending on the method of billing chosen.
Clear communication ensures clients receive the invoices and understand the payment expectations until the final transaction.
The project manager manages these stages and reports on the project’s progress, comparing against what was predicted.
The main challenges in project billing
Project billing doesn’t come without its challenges. Reaching the level of detail required for an accurate billing process can be difficult, mainly because of the added complexity it brings to everyday work.
Project billing adds an extra layer of administrative work for accountants, project managers, and project staff. This extra work can be time-consuming and error-prone if the team is unprepared for it. For example, using a manual system to track time and expenses.
Automatically tracking time can help avoid the manual task of doing so in an Excel sheet, for example. If an effective time-tracking method is not in place, the project building won’t deliver the results expected, as billable hours can be lost in the paperwork. The same concept can be applied to tracking expenses.
Increasing Billable Hours
Did you know that accurate time tracking is one of the best ways to increase billable hours? Find more strategies in our post.
The benefits of accurate project billing
- increases business profitability
- improves budgeting and estimations
- provides insights into resource utilization
- improves business efficiency
- promotes transparency, trust, and client satisfaction
Accurate project billing will help achieve the ultimate goal of profit.
A structured process that allows the flow of money regularly helps cover the daily needs of an organization. On the same wavelength, setting up a project billing process will also diminish the risks of money loss for the service provider, with partial payments coming in.
Another great benefit of accurate project billing is that it demands continuous monitoring, helping keep projects on track and well-documented. The organization it demands from a work team will help avoid unpleasant surprises during or after a project. It’ll also guarantee that future projects become more accurate and profitable.
By ensuring accurate project billing, you’re also creating a better relationship with clients by providing transparent billing, which leads to higher trust and satisfaction.
How to increase revenue from existing customers?
Find why accurate billing is one of the best ways to increase revenue from existing customers
How to improve a project billing process
The project billing process can be improved by tracking time. Time tracking consists of monitoring and recording the time spent on different activities and tasks.
You can track time in several ways, from manually handwriting time stamps of the start and end of tasks to using timesheets or an automatic system like tracking software. A time tracking tool is the most efficient and accurate way to do it.
Features like ease of use, accurate tracking, reporting capabilities, and integration options with other project management or billing systems should be preferred.
Every team member needs to know the importance of accurately tracking time spent on various project activities and how to correctly use the time tracking tool.
To make sure all billable hours are accounted for, time tracking needs to be a consistent part of the project routine. This will give a holistic view of the project’s costs and resources.
The project manager must ensure everyone logs their work hours using the same terminology and categorizing time entries based on project tasks, activities, or specific billing codes.
This allows for better analysis and accurate billing, streamlines invoicing, enhances transparency and offers insights for effective project management and financial control.
Improve your project billing with Timeular
Features offered by Timeular make this time tracking software an excellent tool for project billing. Timeular is easy to sync across different devices and smoothly integrates with several tools such as Google Calendar, Google Sheets, Trello, and many others. Also, Timeular works wonderfully for teams thanks to its shared folder system.
Looking for the most effortless and accurate tool for tracking billable hours?
The software provides comprehensive and insightful time reporting system displaying productivity patterns and identifying improvement areas. In Timeular, teams can customize and export reports in a few clicks.
Using Timeular, the team members can conveniently edit tracked time data to insert missed tasks. Indeed, Timeular recently released context tracking, allowing each team member to record which applications and websites they consult.
Schlussfolgerung
Organizations can streamline their processes and increase profitability by implementing effective billing practices.
The key is communication and collaboration between every stakeholder involved.
We showed how integrating time tracking into the project billing process brings significant advantages, including better resource allocation, improved billing accuracy, and transparency. Actions that contribute to the betterment of provider/client relationships.
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