Understanding Progress Payments in Construction [Guide]

When managing construction projects, financial control is critical to ensuring everything runs smoothly. Enter progress payments, a cornerstone of modern construction contracts. In this article, we’ll explain what progress payments are, how they work, and why they’re essential for both contractors and clients.

You'll discover how to establish a progress payment schedule for a progress claim, view practical examples, and learn best practices for effective payment management. New to construction management or refining your process? This guide has you covered.

What is Progress Payment in Construction?

Progress payments are periodic payments made during a construction project, reflecting completed work. They maintain cash flow, preventing delays and stress from waiting for a lump sum at the end.

Progress payments are essential for steady cash flow, providing contractors with partial payments for completed work. These payments mitigate non-payment risks by aligning financial support

How Progress Payments Work

1. Defined Milestones: Payments are tied to specific project milestones or a percentage of work completed.
2. Inspections: Work completed is verified through inspections or reports before payment approval. These reports often culminate in a progress certificate for transparency.
3. Payment Schedule: A predetermined progress payment schedule outlines when payments will be made.

A systematic approach for preparing a progress payment request is crucial to streamline documentation, facilitate approvals, and ensure compliance with contract stipulations.

Why Progress Payments Matter

• Keeps cash flow steady for contractors.
• Reduces financial risk for clients by ensuring payment aligns with progress.
• Encourages accountability and transparency between all parties.

Setting Up a Progress Payment Schedule

A well-structured progress payment schedule is essential for project success. It minimizes confusion, aligns expectations, and ensures fairness in payment distribution.

A contractor's request must be substantiated with sufficient documentation and receive approval from the head of the contracting activity or their designee before unusual progress payments can be made.

Let’s explore how to create and implement an effective schedule that works for all stakeholders.

Steps to Create a Progress Payment Request Schedule

1. Define Key Milestones:

• Break the project into phases, like foundation work, framing, and finishing.
• Assign percentage values to each milestone based on its contribution to the project.

2. Draft the Schedule:

• Include dates for inspections and payment releases.
• Ensure flexibility for potential delays without disrupting the overall timeline.

3. Include Contingency Clauses:

• Address disputes or delays in meeting milestones.
• Provide a clear resolution process to avoid conflicts.
• Outline the conditions under which contractor requests for adjusting the liquidation rate can be made, emphasizing the necessary criteria and circumstances that must be met for such requests to be considered by the contracting officer.

Progress Payment Schedule Example

Here’s a simplified table example for a residential construction project:

Determining Progress Payments

Progress payments are determined by the completion of specific work portions or percentages, as agreed upon in the construction contract. The method depends on project complexity, expense outlay, and business cash flow impact.

Common methods include:

• Completion of a Designated Stage: Payments are made when a particular stage of the project, such as foundation work or roofing, is completed.
• Percentage of Project Completion: Payments are based on a certain percentage of the total project being completed, ensuring that financing payments align with the work done.
• Designated Time Periods: Payments are made at regular intervals, such as monthly, to provide a consistent cash flow.

These methods ensure that progress payments are fair and reflective of the work completed, helping to keep the project on track and financially viable.

Types of Contracts That Use Progress Payments

Progress payments are commonly used in various construction pricing structures, each designed to provide a steady influx of money to cover costs and maintain a healthy cash flow. These include:

• Time and Material (T&M) Pricing: Payments are based on the actual time spent and materials used, with progress payments ensuring that contractors are compensated regularly.
• Lump-Sum Pricing: A fixed total contract price is agreed upon, with progress payments made as specific milestones are achieved.
• Cost-Plus Pricing: Payments cover the actual costs incurred plus a predetermined fee, with progress payments helping to manage cash flow.
• Unit Pricing: Payments are based on the number of units completed, with progress payments ensuring that contractors are paid as work progresses.

These pricing structures, combined with progress payments, help maintain financial stability and ensure that construction projects proceed smoothly.

Examples of Progress Payments in Construction Projects

Understanding how progress payments work is easier with real-world examples. Let’s look at two scenarios to see how they ensure smooth project execution.

Scenario 1: A Smooth Payment Process

A commercial building project is divided into five phases. The contractor and client agree on a progress payment schedule, ensuring that each phase is inspected before releasing payment.

This proactive approach prevents any financial disruptions and ensures that all involved parties remain satisfied, allowing the contractor to maintain a steady cash flow and complete the project efficiently.

Scenario 2: Handling Delays and Disputes

In a residential project, unforeseen delays in material delivery push back framing work. The progress payment schedule includes a contingency clause that allows for adjusted inspection and payment dates.

Estimated costs eligible for progress payments can be adjusted based on contract performance and compliance factors, ensuring flexibility and preventing conflicts. Accurate documentation, including a well-maintained subcontractor statement.

Scenario 3: Adapting to Change Orders

During a large infrastructure project, the client requests additional features not initially included in the contract. This results in change orders that alter the original progress payment schedule.

The contractor submits a revised progress payment request, detailing the additional costs incurred and the new completion timeline. By maintaining clear communication and providing additional supporting

Best Practices for Managing Progress Payments

Managing progress payments efficiently requires clear communication, documentation, and a proactive approach to potential issues.

It is crucial to handle financial matters and inventory disposition in the ordinary course of business to ensure smooth operations and compliance with standard practices.

Tips for Success

• Communicate Early: Discuss payment terms and schedules during contract negotiations.
• Use Technology: Construction management software can simplify tracking and documentation, such as using payapps to streamline the approval process.
• Be Transparent: Share progress reports, photos, and invoices to maintain trust.
• Stay Proactive: Address delays or issues as soon as they arise to avoid disputes.
• Understand Special Provisions: Contracts with small business concerns may have different payment rates and terms compared to larger businesses, emphasizing the regulatory framework that supports such distinctions.

Tools to Streamline Payments and Improve Cash Flow

• Cloud-based project management platforms.
• Digital invoicing systems.
• Real-time progress tracking apps.
• Real-time progress tracking apps. Using construction payment software can also make managing invoices and schedules more efficient.

Retainage & Progress Payments

Retainage, or retention, is a standard practice in the construction industry where a portion of payment is withheld from contractors or subcontractors. This ensures project completion aligns with contract terms before the final payment is made.

Typically, the amount held back ranges between 5% and 10% and is specified in the construction contract. Retainage serves as a financial incentive for contractors to complete the project to the required standards, protecting

Maximizing Success with Progress Payments

Progress payments are essential for maintaining momentum and building trust in construction projects. By establishing a clear schedule and fostering open communication, stakeholders can confidently manage payments and ensure project success

A smooth payment process is crucial for successful collaboration and project delivery. Understanding the final claim in construction can further simplify the handover process and ensure alignment among stakeholders.