Being paid in parts is better than being paid long after a credit period. Contractors stay financially solid with a bulletproof progress payment schedule. Learn how.
Progress billing or a construction progress payment schedule reflects work completion on a construction project.
Contractors and sub-contractors utilize a progress payment schedule to facilitate a stable cash flow that helps them pay off workers, direct and indirect costs, and maintain margins as predicted at the beginning of the project. But a common challenge faced by them is owners stalling payments due to a multitude of reasons. Where does that leave contractors and subs?
One option is to stop work with immediate effect until due payment is credited. Or another option is to continue the work with late payment fees accruing on a per-day basis until it’s made. Unfortunately, neither of these options comes without perils.
For a project to keep moving without flouting timelines and cost baselines, responsible parties must release payments per agreed-upon terms. When owners stray from agreed payment schedules, they risk a lot more than losing a contractor’s trust—they could face a career-ending legal action threatening client relationships.
In building a progress payment schedule, professional estimators or experienced contractors use a schedule of values that contains estimates costs attached to each section of their construction work. This provides clarity to an owner about how a contractor has costed their work and can firmly accept or reject their bid based on objective analyses.
Progress Payments Affix Accountability
Missed payment deadlines entitle contractors to stop work. Once contractual terms have been noted and signed, both parties are liable to carry out their commitments.
Either party found to be in breach of the contract is liable to pay off damages to the other to the extent suffered. A dedicated schedule not only details payment installations but what’s getting completed against each payment due date. Despite uncleared payments should a contractor continue work, their right to stop work can be waived at a later time. Simply relying on this thumb rule may be misleading as construction projects are becoming increasingly complex. A progress payment schedule will affix accountability onto owners to the extent of actual work completed. This can be disputed if the contractor and owner disagree on what constitutes completed work by respective due dates.
Oftentimes, contractors resort to seeking loans from banks when forced to make tricky tradeoffs. They may think that to maintain a long-term association with a client, they should continue to work regardless of missed payments. At what cost are they taking on such a risk? Undeterminable—since many lenders disagree to finance land buying and the construction process thereby slimming chances of putting in loan requests. In such a case, locating the right lender will make all the difference. Here’s a great resource to help you shortlist lenders.
Nevertheless, to stay on track with commitments, a progress payment schedule provides firm ground to both parties to resolve conflicts by owning what they promised.
Payment Schedules MUST Factor in a Schedule of Values
No legitimate progress payment schedule was ever built without accurately listing a schedule of values.
Schedule of values show specific amounts listed against all sections of work divided based on the scope of work with respective deadlines. These divisions are usually done in keeping with recommendations by the Construction Specifications Institute Divisions (CSI). For instance, contractors can list cost breakdown by these expense heads: general conditions, sitework, utilities, materials (duct tape, concrete, steel), labour employed and the like. Converting your scope of work into these areas ensures each item you’re paying for is accounted for.
Noting exact costs, you’re required to now assign a percentage value to each item to provide a sense of what progress means. The industry standard for a schedule of values as per AIA form G703. Start early, you’ll beat delays and ensure on-time payment.
Progress Payment Schedules Consider Construction Retainage
An owner or financer will usually need a clause mentioning that “Retainage” be withheld from payment applications to protect them in case a contractor hasn’t completed the project down to the last detail.
Until the project’s punch list is adequately finished, owners can withhold 5% or 10% from each payment due until project closeout. This makes properly factoring retainage into every item of work crucial for contractors.
Progress Billing Includes Payment Frequency
Establishing frequency is half the game since pre-determined work completion percentages will mark project progress once payments get cleared according to stated frequency. Depending on project size, the frequency will change to help you accommodate monthly costs for completing committed work. Your billing will clarify the completion percentage and the cumulative total by also listing it for individual items.
Payment Schedule Contains Percentage of Completion
Each payment application testifies to project completion in percentage terms. The period of completion of each work item will need to be confirmed by the contractor, and can also be the basis of dismissing unfair claims on the part of their parties. The contractor mentions the corresponding amount to the owner or lender and carries out this process for individual scope of work—total completed item percentages.
Progress Payments Take a Hit If Contractor Has Breached
Owners can deny payments if they’ve got reasonable ground and proof to show that the contractor has faltered on their commitments under the following scenarios:
Error-ridden work not rectified
Damage claims from third parties
Not paying subcontractors
Credible evidence proving stated work won’t be finished by deadlines
Damages arising out of completed work
Failure to honour contractual terms with regard to work completion
Carefully reviewing what amount of work has been completed will ensure owners aren’t abusing their right to withhold payments according to the agreed-upon contract. Construction payments have traditionally been more complicated as compared to most industries. This article outlines essential construction payment terms—lien waivers for one—and their potential impact on getting paid on time.
A well-constructed construction progress payment schedule keeps everyone on the same page. Due to their highly disputed nature, progress payments can become grounds for legal action should owners and contractors fail to work out proceedings in keeping contractual provisions. There will always be room for disagreement among them as far as the quality of work is concerned, but one thing is certain that each work item has been quantified considering actuals and is backed by past project data. Reasonable owners will listen to pure logic and honour payment terms without dismantling the professional trust and work ethic with contractors.