What is Milestone Billing?

Milestone billing charges clients as each phase of the project wraps up. Payments are tied to reaching specific milestones instead of sticking to a fixed schedule. These milestones can be sub-goals, breaking down the larger project fees into manageable parts. 

For example, billing occurs when a key task, like a draft or design, is finished rather than every two weeks. This differs from level billing, which charges a set amount regularly, no matter what’s completed. Milestone-based billing can either be a fixed amount or a percentage of the total cost. 

The billing details are agreed upon upfront for each project rather than relying on an industry-specific contractor payment schedule. This approach keeps things clear, so everyone knows when milestone payments are due and what work will be delivered. 

What Is an Example of Milestone Billing? 

The milestone billing model is an approach often used in software development. A developer bills as each phase is completed rather than waiting for a monthly invoice. 

For example, they send an invoice after finishing the user interface design. The client pays for work that’s done, ensuring there’s no milestone payment without progress. 

In construction, the same logic applies. A contractor bills when key stages, like the foundation, are completed. This method keeps payments directly tied to results.  

Milestone billing plans hold the parties involved on both sides accountable. The client pays when the project makes real progress, and the contractor stays motivated to meet deadlines. 

What Is the Difference Between Progress Billing and Milestone Billing? 

The difference between progress payment billing and milestone-based billing comes down to how you track and trigger payments. Progress payment billing is tied directly to the percentage of work that’s been completed.  

When 40% of the project is done, you bill for 40% of the total. This straightforward project billing method keeps payments aligned with the project’s overall budget 

Milestone billing, however, is more strategic. You bill when specific, agreed-upon milestones are hit.  

It focuses on delivering key phases—such as completing a prototype or finalizing a draft—before the payment cycle is triggered. This method makes sure clients pay for real, tangible progress rather than just incremental steps. 

In essence, progress payment billing is budget-driven, while milestone billing is event-driven. Both approaches work, but milestone billing puts more emphasis on achieving critical objectives rather than just ticking off percentages. 

What Is the Difference Between Periodic Billing and Milestone Billing? 

Payments in periodic and milestone-based billing are triggered differently. Periodic billing, or level billing, follows a time-based billing process. Clients are billed at regular intervals, regardless of how much work has been completed. This method is common for ongoing services where steady, predictable payments make sense.  

Milestone-based billing, however, is event-based. Clients make milestone payments only when specific project milestones or deliverables are achieved. This ensures payments directly reflect progress. It’s a smarter option for projects where results matter more than just time spent.  

Periodic billing helps to maintain a steady cash flow, while milestone payment billing ties payment to progress and performance.

What Are the Benefits of Milestone Billing? 

• Keeps Cash Flowing: Milestone billing brings in payments as work gets done. Simply put, contractors don’t have to wait for a large payout at the end and can rely on steady cash flow. This helps to cover ongoing costs like labor and materials, which keeps projects moving smoothly. 

• Easier for Clients to Manage: Clients find it easier, too. Payments are split into smaller, manageable amounts instead of one big bill. This helps business owners maintain a budget and plan without being overwhelmed by costs. 

• Tied to Progress: Payments match real progress with milestone billing. Clients pay when they see results, like a completed task or phase. These performance-based payments help ensure there’s no guesswork involved in what they’re paying for. 

• Reduces Non-Payment Risk: It also lowers the risk of delaying or missing payments, as payments are made when smaller deliverables are completed. Payment has already been secured for the completed work if the project takes longer or ends early. 

• Keeps Everyone Motivated: Performance-based payments keep both sides motivated. Businesses work to hit deadlines because payments rely on them, and clients stay involved since they pay based on progress. 

• Flexible for Changing Projects: This method is flexible. It works well for projects that change over time. Milestones can shift if needed, making it great for long-term or complex work. 

• Builds Trust: Clients know exactly what they’re paying for at each milestone-based billing stage. Remember, trust is everything in B2B. 85% of clients are likely to recommend a company they trust, compared to just 48% if they don’t. Milestone billing helps strengthen that trust by providing clear, tangible progress and ensuring clients feel confident in their investments. 

• Adds Security: Lastly, it offers both financial and legal security. Businesses get paid and clients only pay for what meets the agreed standards. There’s a clear record to refer to if any issues come up. 

What Are the Challenges of Milestone Billing? 

• Setting Clear Goals: It can be challenging to set clear, specific goals for each phase involved in milestone-based billing. Misunderstandings about what counts as ‘done’ can easily lead to confusion. Both sides might see the work differently, which slows things down and causes frustration. 

• Estimating Costs and Timelines: Nailing down costs and timelines isn’t easy. Projects often run into unexpected changes, like shifts in scope or delays. These make it hard to stick to the budget and milestone payment schedule, leading to cost overruns which are far too common. A review of nearly 1,500 projects found the average overrun is 27%. 

• Payment Delays: Did you know nearly half of all B2B invoices in the U.S. are paid late? Delays in payments are, unfortunately, par for the course. In milestone billing specifically, clients need to approve the work before you get paid, and if they’re not satisfied, revisions push payment back even further.

• Managing Client Expectations:  Clients sometimes expect more, especially if the work doesn’t match their vision. They ask for extra revisions, which drags out the project and increases costs. 

• Tracking Progress: Keeping track of progress for each milestone can be tedious, especially on more long-term projects. It takes careful coordination to ensure everything moves forward successfully, and miscommunication can quickly lead to delays and budget overruns. 

• Scope Creep: As you hit milestones, clients may ask for extra work that wasn’t part of the original plan. This scope creep delays the project and drives up costs, complicating things. It’s no surprise that 50% of projects deal with scope creep, and because of it, only 57% stay within budget, with just 51% finishing on time. 

How to Set up Milestone Payments? 

Setting up milestone payments means using milestone invoicing and performance-based payments. It helps manage cash flow, keeps teams motivated, and ensures transparency. Here’s how to use it effectively. 

1. Get Clear on the Scope and Timeline

Clearly lay out the project’s goals, timeline, and budget. Make sure everyone understands the project’s scope and expected revenues from the start. 

The goal is to avoid confusion and set realistic expectations. This is key—37% of projects fail when goals aren’t clearly defined, and 44% of large projects fail when business and project goals don’t align. 

Remember, B2B buyers are risk-averse. They want to know exactly what they’re getting into, and being clear from the beginning builds that trust. It shows that you’re both competent and dependable—two things B2B buyers value most. 

2. Identify the Key Deliverables

Avoid making assumptions about what needs to be done. Work with your team and client to define clear, measurable, concrete deliverables. These are the building blocks of your project and will help keep everyone accountable. 

For instance, if you’re developing a website, don’t just assume that ‘design the homepage’ is enough. Instead, break it down: ‘Create a wireframe by week two, complete the initial design draft by week four, and deliver the final version with client feedback by week six.’ 

Each step is specific, time-bound, and easy to track, ensuring the whole project stays on course. 

3. Turn Deliverables into Milestones

Break down the project management deliverables into clear milestones. Also, set practical timelines and effort estimates for each milestone. The goal is to make sure each milestone represents real progress so payments are connected to actual accomplishments rather than just deadlines. 

4. Put a Dollar Amount on Each Milestone

Decide the value of each milestone based on the actual time, complexity, and effort involved. Don’t just split the total cost evenly. Make sure the payments match the dollar value of the work completed at each stage. 

For example, in a website project, you might allocate 30% of the cost for design, 40% for development, and 30% of project costs for testing and launch. This way, payments line up with progress as the project progresses. 

5. Set Up the Payment Terms

Align your payment milestone payment schedule with project deliverables. Make it very clear when invoices go out and when payments are due. Setting these terms upfront helps avoid surprises. 

B2B companies typically wait 40.3 days for payment, partly due to the 10 days it takes to process an invoice. Delays can stretch even longer without clear terms. 

They also tie up cash that could drive growth, such as investments in new tech or market expansion. Don’t let cash flow become a roadblock. Set up clear payment terms linked to milestones to avoid delays and keep your cash flowing where it’s needed most. 

6. Create an Approval Process

Set up a system for client approval at each project phase completion or milestone, with clear criteria for deliverables and a set feedback timeline. This approach keeps everyone accountable and helps prevent payment delays. 

If you skip this, you risk confusion over expectations. Failing to get clear approvals leads clients to reject work, extend timelines, and delay payments. A solid approval process keeps the project on track and avoids these issues. 

7. Keep an Eye on Progress 

Don’t just set the project-based billing milestones and forget them. Regularly track progress and be ready to make adjustments if the scope or timeline changes. Remember, flexibility is key, especially in long-term projects. 

8. Rely on Tools

Use project management and milestone invoicing tools to automate tasks, track milestones, and keep things moving forward. Tools like Upland PSA will save you time and cut back on mistakes.  

Upland PSA stops billing delays and prevents revenue from slipping through the cracks by capturing all project details. Less admin, more action. 

9. Plan for the Unexpected

Things don’t always go as planned. So, have a backup plan for adjusting milestones or payments if something changes. Make sure everyone knows how payments will work if the main project goal changes. Keep it clear and simple to avoid confusion. 

10. Visualize the Schedule

Use a visual time-tracking tool to show deliverables, payments, and updates in real time. Since the brain processes images 60,000 times faster than text, visualization is a smart way to keep everyone on the same page. It also helps prevent missed billing deadlines and confusion. 

Milestone Billing: Looking Ahead 

The future of billing won’t be linear. It’ll be data-driven, agile, and backed by AI and predictive insights. Businesses need flexible systems that can adapt to changing needs and customer expectations. 

Billing methods like milestone billing have to keep up. Customers want more control and transparency, with payments linked to real progress and regular updates. Project billing needs to follow as industries shift toward automation and real-time data. 

Upland PSA can lend a hand. It simplifies these processes and keeps project-based billing more in sync with project deliverables. Learn more. 

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