What is project billing, and how do you make it easier?

Aiva Strelca 26.02.2024
Project billing feature picture illustration

Daunted just by the thought of project billing? We feel you. Making sure you’ve set the proper hourly rates, not messing up invoices, and charging clients can be tricky, regardless of how many hours you’ve spent on billing projects in your career. 

The good news is that the project billing process can be simplified, and it doesn’t even need to take that much effort.

How exactly?

This project billing guide will explore the topic thoroughly, from the project billing process and methods to tools to help you along the way. Read on to make your project managing life easier!

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First things first – what is project billing?

Let’s start with the basics of project billing – explaining what project billing is. 

Project billing is a process of invoicing customers for work completed on a specific project. It includes documenting all the work done and time spent doing it and noting all the expenses that have come up while executing the project. 

While it may seem like it, billing is not an end-of-project task. Accurate and efficient project billing starts before you kick off your project – with cost estimation, creation of a project timeline, choosing how you will track project expenses, and more. These elements are crucial for accurate billing as it’s not just about the numbers alone. 

Project billing process – what are the stages?

To draw a clearer picture of the concept and help identify some of the potential pain points, check out what a project billing process can look like. 

1. Planning the project

A well-planned project is easier to bill. Clearly set deliverables, cost estimates, detailed timelines, and activity plans are deal breakers in the overall project success and also help calculate the project costs and time spent working on specific tasks as you have estimations to compare with the actual resources allocated. That way, the billing process is more manageable, transparent, and precise. 

Note: This article won’t explore project planning and cost estimation further, but you can check out this guide to learn more about it.

2. Establishing the initial agreement

The next step in the project billing process is establishing an initial agreement with your client. That includes setting clear terms and conditions, negotiating payment structure and schedule, and setting expectations for invoicing frequency and method. 

Billing projects when they’re finished is not the only option. Some professionals prefer several payments at various stages throughout the project’s lifecycle, depending on the terms agreed upon between the project team and the client. Thus, billing can occur at milestones or predetermined intervals during the project’s execution. 

Plus, in some cases, upfront payments or deposits are needed to start working on the project.

Two men shaking hands

3. Working the work

When the talks are talked and agreements settled, it’s time to get to work. What’s essential in this stage is that you document your and your team’s work and the associated costs. Moreover, it’s crucial that you track project hours and keep records of the materials used. 

Another aspect to consider is communicating the project’s progress with the client. Why bother? If the client is up-to-date with the project and its costs, it reduces the chance of unwelcome surprises regarding the project’s budget and the costs appearing in the final invoice. 

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4. Creating invoices

When the work is done (or when you’ve hit an invoicing milestone as agreed with a client), it’s time to generate invoices. There are plenty of tools and software available that can ease this task, and we recommend testing out some options and choosing what suits your needs best. 

Including a detailed breakdown of the charges in the invoices is also recommended, especially if you’re dealing with a tricky client. But, regardless of the amount of details your invoice will have, always remain transparent when invoicing your clients.

5. Collecting the big bucks

Probably, the best part of the project billing process is collecting the payment for your work. During this phase, open communication with clients is crucial, as there could be questions or concerns regarding billing. Maintain transparency and be eager to explain points your clients need help understanding. Remember that you have a contract to refer to and data on the work hours and tasks completed (see why tracking your work is crucial?). 

When collecting the money for your work, you must set payment terms and deadlines. Even the best of clients can delay paying invoices. To avoid situations where you receive the gazillionth “money’s coming tomorrow” email, set strict deadlines and establish a policy on overdue payments

A man writing on a paper

Project billing methods

Now that you have an idea about the project billing process let’s look into some project billing methods you can adopt.

1. The fixed-cost method 

Using the fixed-cost method, the project team charges the client a predetermined, fixed amount of money for the entire project, regardless of the actual time or resources spent. This approach can work for projects with explicitly defined deliverables and if the project is similar to something the team has worked on before. 

Fixed-cost billing provides clients with cost predictability. Still, it requires careful estimation and risk management by the project team to ensure that carrying out the project remains profitable.

Pros: For clients, it’s simpler, less risky, and provides predictable costs. For the project team – if you can deliver the project earlier, the project becomes more profitable than predicted as you receive the same amount of money for fewer work hours.

Cons: Clients won’t pay for overruns, and it requires deliberate and accurate cost estimation and project timeline planning.

2. The time and materials method

As one can probably guess from the title, this project billing method charges clients based on the time spent working on the project, along with the cost of materials used. Usually, hourly rates are agreed upon, and clients are billed for the hours worked. Materials costs are also passed on to the client, often with a markup – an amount added to the price of materials to cover overheads and profit. 

Pros: Works well for projects that are not predictable or if the project type is new for the team and there are many potential variables. If clients request extra work or more materials need to be used, the clients pay for it.

Cons: Total project costs are often uncertain at the beginning, which can cause arguments with clients when billing. Clients may have less control over the project’s progress and costs, which can become a motive for dispute.

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3. Project milestone billing

In contrast to the two previous methods, where payment for the work is made at the end of the project, milestone billing charges clients at specific milestones of the project’s completion. 

Clients are invoiced when predefined milestones are achieved, such as completing key deliverables or concluding a specific project phase. Hence, payments are aligned with the project’s progress, and there’s a clear payment schedule.

Pros: This method motivates the project team to reach milestones on time and complete tasks effectively so the payments are not delayed. The method also reduces financial risk for the project team and promotes regular communication between the team and the client, boosting the project’s success rates.

Cons: Milestones can be tricky to define and may misalign with clients’ expectations. Moreover, this method limits flexibility in the project’s scope changes and may cause cash flow challenges for project executors during periods with fewer billable milestones.

4. Retainer billing method

With retainer billing, clients pay a set fee in advance to retain the provider’s services for a certain period. For example, clients pay a monthly fee and receive X work hours within a project. This method is often used in long-term contracts, and it’s common to provide slightly discounted rates to retainer clients.

Pros: To project teams, retainer billing brings a significant benefit – predictable revenue. It also builds client loyalty, which benefits both parties as clients often receive priority treatment due to the ongoing relationship. 

Cons: Clients may request additional services or exceed the agreed-upon scope without adjusting the retainer fee. Retainer agreements might make it hard for the project team to accept new clients or projects. 

Project team meets with a retainer client to discuss progress

5. Cost-plus billing method

Cost-plus billing refers to paying the project costs plus operating costs plus an additional fee or percentage of profit. This typically includes materials, labor, and subcontractor fees. The method is commonly used in the construction industry or manufacturing, where the project costs can vary significantly due to using physical materials and resources.   

Pros: Cost-plus billing provides transparency as clients see the actual costs incurred by the project executor. It also enables project scope and requirements flexibility since clients are billed on actual costs.

Cons: Despite being a transparent method, it can lead to disputes over the reasonableness of fees or the accuracy of invoiced expenses. From the administrative perspective, this project billing method is quite complex. 

Bonus: 3 common pain points & project billing software to ease the struggle

It’s time for us to share some project billing software that can help reduce billing process challenges. Nothing beats hands-on tips, especially regarding project billing and its pain points, right? Here are three common challenges paired with helpful software solutions.

1. Trouble billing project hours due to lack of data

It’s time to create the final project invoice and charge your client. This could’ve been a happy moment if only you had precise data on how many hours each of your project team members spent on their tasks. Their hourly rates differ. Their work hours vary. When asked how much time they spent completing project-specific tasks, the vast majority replies, “oh, I don’t know”. A nightmare from the perspective of project billing. 

A project billing software to ease the pain: DeskTime

Being a time tracking software with a “Projects” feature, DeskTime will ensure that every second spent on a project is tracked. Track time automatically and then assign it to a specific project, set individual hourly rates for you and your team members, know how many billable hours you’ve worked, and more. This time tracking software is indispensable in project billing and management overall.

A man explaining how DeskTime works for project billing

2. Trouble explaining the final project costs and deliverables to your client

The project has come to an end. It’s generally successful, though there were some roadblocks that your team had to overcome, which did affect the project’s final costs and some of the deliverables. Nothing too extreme, but your client has trouble understanding why the project wasn’t executed precisely as planned. If only you had a unified platform to take the client through the project’s progress, task execution, cost recalculation due to challenges, and more…

A project billing software to ease the pain: Asana 

Among the various project management tools and platforms available, Asana has earned a reputation for adding clarity and increasing accountability for project teams – just what you need for cases such as the one described above. It will provide documentation on who did what and when, what tasks took more effort and why, and more. 

3. Trouble collecting payments from your client

Your project was smooth sailing from all points of view – the client was great, the team worked flawlessly, and the deliverables were outstanding. You’ve sent the invoice to the client, all costs approved, and now you… wait. Two, then three weeks pass by, and suddenly, the invoice is already a month overdue. What now?

A project billing software to ease the pain: FreshBooks

FreshBooks is a popular accounting and invoicing software that streamlines the project billing process. It allows you to create professional invoices easily, set up automated payment reminders, and accept online payments via credit card or other payment gateways. The software also offers features for tracking invoice status and sending recurring invoices, which can help improve payment collection rates.

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