Invoicing in QuickBooks

“How do I invoice thru QuickBooks?” is one of the most common questions we get at HELM. The truth is, QuickBooks does not make it that easy for construction companies, but we’ve come up with step-by-step guides to try to help clarify your options.

The first thing to understand when it comes to invoicing is the various types of contracts out there, since some invoicing methods are only appropriate for certain types of contracts. The most common contracts we see in residential construction are:

• Fixed Price (often with allowances)

• Cost Plus Fixed Fee

• Time & Materials

• Guaranteed Maximum Price

Depending on what contract type you pick, you’ll have different options for how you present your invoices, and there are pros and cons to each. Choosing a contract type can depend on a variety of factors:

• Type of project (new construction vs. renovation)

• Amount of documentation needed (Will an architect require an AIA Application for Payment?)

• Degree of transparency you want to provide to the client

• Amount of risk you are willing to take as the GC

Here’s a quick run-down of the four most common contract types and when they are most appropriate.

Fixed Price (also known as Lump Sum)

This contract is common in much of residential construction, especially for new homes and relatively straightforward remodeling projects. The GC sets one price, and is not required to provide detail to the client on their markups. Fixed Price contracts can be difficult in complex renovation projects where the scope is not always known at the beginning of the project. Fixed Price contracts work best when the GC is very accurate at estimating and the plans are complete. They also involve more risk – if the estimate is too low, it is easy for the GC to lose money on the job. However, on the flip side, there is potential for increased profitability if the GC comes in under their original estimate.

Cost Plus

Cost plus contracts require a higher degree of transparency in the estimating and invoicing, since the client will want to know exactly what they’re being charged for. Cost plus can also be helpful in situations where the client is planning to self-perform some of the work (but watch out for this for other reasons!).

There are three variations of Cost Plus:

Time and Materials

Basically cost plus a percentage markup. This is a very common contract type for small jobs and renovations, although occasionally is used on larger projects. It reduces risk for the GC because you are basically guaranteed that you will cover your costs – you shouldn’t lose money on a T&M job. However, it has the most risk to the client, since the project can potentially exceed their budget without warning. T&M contracts are best for complex renovations where the scope is unclear due to hidden existing conditions or lack of plans.

Cost Plus Fixed Fee

In this case you set a fixed amount for Overhead and Profit and then only charge labor, materials, and subcontractors at cost. This is most common in a design-build company where the fixed fee also covers design services. Pros: you can’t lose money on the job if your fixed fee is calculated appropriately. Cons: If a client expands the scope of the project during design or construction, you will want to re-negotiate this fee.

Guaranteed Maximum Price (also known as Cost Plus with Guaranteed Max)

This is more frequently seen in commercial construction where price is extremely competitive, and clients are budget-driven. The GC must disclose their percentage markup for Overhead and Profit and detail all costs incurred. The risk to the GC is if they go over the Guaranteed Maximum Price then they eat the difference. Highly transparent for the client, reduces the client’s risks of going over budget, and requires diligent change order management.

INVOICING OPTIONS

OK, so what about invoicing? Now that we’re clear on contracts, how can we actually invoice in QuickBooks? Here are the five most common methods:

• Progress Invoicing based on % Completion (for a whole estimate)

  • Only works for fixed price contracts.

  • Simple, best for small projects, or where little transparency is required.

  • The estimate must be entered into QuickBooks.

• Progress Invoicing based on % Completion by Item

  • Only works for fixed price contracts.

  • The estimate must be entered into QuickBooks, and some work in Excel is required to calculate % complete.

  • Provides higher level of detail to the client.

  • Helps to ensure payments stay in line with cash flow.

  • All vendor bills must be up to date in QB.

• Time & Materials

  • Good for T&M contracts.

  • Hard to do in QB without showing a high level of detail.

  • Tricky when you have crew with different pay rates, and adding markups can be tedious (if you do not want to show your markup as a separate line item, which we don’t recommend).

  • All vendor bills must be up to date in QuickBooks for the invoices to be accurately generated through QuickBooks.

  • Since everything is based on costs incurred, tracking change orders is less critical (although still considered best practice to avoid surprises and unhappy clients).

• Payment Schedule (also known as Milestone Billing)

  • Only works for fixed price contracts.

  • This takes more time to set up at the beginning of the project, and you have to be able to anticipate your cash flow needs (When will windows be ordered? When will the excavator bill?).

  • However, if set up correctly, all the invoices can be pre-loaded into QuickBooks and sent out when the milestones have been reached.

  • Change orders must be tracked diligently and invoiced separately.

• Application for Payment (AIA format)

  • This invoicing method is done manually outside of QuickBooks, typically in Excel.

  • QuickBooks Job Profitability reports can be used to generate the data needed to fill out the Application for Payment form.

  • Markups must be applied manually in Excel.

  • Benefits of this format include a consistent format which all architects and other contractors will recognize.

  • Includes a cover sheet which lists total contract price, amount paid to date, amount due, and remainder of contract.

In our next post we'll dig into the step-by-step process of how to create each type of invoice. Which type of invoicing do you most frequently use?