There are numerous methods for billing for work on a construction project. You can bill at the end of the project, at the beginning, or as the project progresses. Progress payments are made as a result of progress billing while the project is still in progress. (AIA billing is also used when using an American Institute of Architects construction contract.) In this article, we’ll define progress payments, discuss their benefits and drawbacks, and discuss how retainage affects progress payments.
What is a progress claim?
A progress claim is a collection of documents, forms, and applications that request periodic payments or full payment for a contractor or construction subcontractor in the construction industry. The claim gathers documents and evidence in accordance with the terms of the construction contract and requests payment for work completed to date.
Once the project has reached an agreed-upon time interval milestone, a progress claim for financial compensation on the money that is currently owed can be made. The validity of a progress claim is only as good as the contract that covers it. The right contract should include contractor payment terms as well as a payment schedule for the appropriate builder.
Simply put, progress payments are based on the percentage of completed work. Instead of waiting until the end of the job to bill, progress billing allows you to bill incrementally as the job progresses. Payments are typically made on a monthly basis, but they may also be sent at various percentages of completion (e.g. when the job is 30% complete, 60% complete, and 100% complete).
There are several pricing structures for construction contracts. Some of the more common examples are:
Time & material contracts
T&M contracts are based on the actual hours worked and materials purchased for the job during the time you are billing for. Typically, an hourly billing rate is agreed upon, with a set mark-up for materials. Invoice amounts are calculated using a simple mathematical formula (labour hours x labour rate + materials costs x mark-up percentage). It is important to keep good cost records because owners or general contractors may want to review them to ensure they are getting what they pay for.
Lump sum contracts
The contract price is fixed in lump sum contracts. This type of contract is typically used when the total project costs can be easily estimated. A subcontractor on a small project may bill with a simple invoice at the end of the project. They are very simple to prepare, and usually don’t necessarily require a lot of documentation. On a larger project, lump sum contracts may include progress billing to give the owner more control over the work as it progresses while also providing ongoing payments to the subcontractor performing the work.
Cost plus contracts
Cost plus contracts operate similarly to T&M contracts in that the total contract price is determined by the actual construction costs. In these contracts, the subcontractor adds a percentage or a fixed fee to the project’s contract cost to cover overhead or other expenses. Back-up documentation will almost certainly be required by the owner or general contractor in order to verify expenses.
Unit price contracts
A unit price contract specifies the cost of a unit of work (for example, $100 per linear foot), and that amount is multiplied by the number of units completed. This is simple, except when there are disagreements about how many units are finished. The subcontractor may be required to provide documentation proving the amount of work completed.
Contracts with progress payments
Some of these contract structures, such as lump sum or cost plus contracts, can be combined with progress payments. The key to understanding progress payments is to keep in mind that the percentage of work completed to date is used to determine how much to bill.
How are progress claims used in the construction industry?
Building projects in the industry frequently involve long timeframes with incremental milestones, which is reflected in progress payment construction contracts.
These progress claims are typically used to compensate contractors and subcontractors to help with cash flow throughout the job until completion using a construction payment schedule. These could be at monthly intervals, for example, or at specific stages of the agreed-upon building work.
While each construction industry contract may have different agreement terms, it should cover what documents must be included for progress claims, as well as details on claim timing and payment deadlines. Make certain that any contracts you sign include these specifics.
Contractors and subcontractors must submit progress claims in accordance with the contract terms and timing, and not before the due date. This is done to ensure contract compliance and the validity of the progress claim.
Read also: A Complete Guide to Extension of Time Claim
What’s the difference between an invoice and a progress claim?
In most industries, we understand invoicing in a direct way. When an agreed-upon amount of work is completed satisfactorily, the supplier is owed money, and a payment invoice is sent to the customer. Payment is then made within an agreed-upon time frame.
Payment processes in the construction industry typically differ from this well-known approach. Participants in any given construction project must file a progress claim for money owed, also known as a payment application in some jurisdictions. The difference between a progress claim and a simple invoice is in the details.
Multiple pieces of documentation are required to prove the legitimacy and validity – or proof – of the payment request. Let’s take a look at the items that are typically required to be included with your progress claim.
What is a progress claim form and what should it include?
The ‘Progress Claim Form,’ which focuses solely on the financial claim in terms of money owed for work completed thus far, is the centerpiece of a Progress Claim. In most cases, the form should be accompanied by additional documentation. But, before we get into that, let’s take a look at the key components of a progress claim form.
The progress claim form should cover the following:
- The original total contract value amount for the project
- The total financial value of all work completed to date, as well as any materials that have been stored on-site.
- Retained money
- The total amount earned so far versus the total amount received so far
- The sum of money that is currently owed
- The remaining balance required to complete the project
Benefits of progress payments
Everyone up and down the payment chain benefits from progress payments. They enable owners and/or prime contractors to review subcontractors’ work before it is completed and resolve disputes before the project is completed.
Get paid as you go
One of the best reasons to use progress payments for subcontractors is that you don’t have to wait until the end of the job for payment. A regular payment schedule makes it much easier to predict and control cash flow. It’s especially useful for small businesses that don’t have a lot of cash on hand to wait for lump-sum payments.
Avoid going into debt
Subcontractors can pay for their expenses on the job as they go. If you have money coming in throughout the project, you will be able to pay your employees and bills on time. You don’t have to wait until the end to pay everyone (assuming they’ll let you), and you’re less likely to go into debt to make ends meet.
Highlight on Payment issues
Furthermore, if you bill as you go, it will be easier to spot a payment problem. For example, if the first couple of payments are extremely prompt, but then they begin to take longer and longer as time goes on, this could be a red flag that the project is experiencing financial difficulties. If you wait until the end of the project, you won’t know whether or not the owner has set aside the funds. By that point, it is too late, and your only options may be to file a mechanics lien or to file a lawsuit.
Stop work if you’re not paid
If there is a payment issue and you are billing as you go, you can pause work until the problem is resolved. Many contracts require you to be able to do this in order to settle disputes. Using this tactic to secure payment is extremely effective. Owners do not want their projects delayed for any reason, even if it is due to their own failure to pay. And if it’s a GC who isn’t paying you, stopping work will quickly get the owner’s attention.
How to Bill for Progress Payments?
To bill clients, the construction industry employs what is known as a payment application. A payment application is more than just a bill. A schedule of values, such as a list of all work items on a project and their associated costs; progress reports of completed work and materials delivered; subcontractor invoices; a timetable of work still to be done; and photos and payroll receipts are typical.
For progress billing, two standardized payment application forms are commonly used in construction. The American Institute of Architects’ AIA G702 form is typically used by general contractors. Subcontractors may use that or the ConsensusDocs 710. A construction contract should specify which form to use. In either case, the payment application must be completed and delivered promptly to the payor, which is the project owner or the contractor who handles subcontractor payments. Payment applications must be notarized.