Progress Payments facilitate cash flow to the contractor as the work progresses, supporting the ongoing costs of labor and materials needed to continue work without interruption. Progress payments are typically based on the percentage of the project completed at the time of each payment and are detailed in the contract terms agreed upon by the project owner and the contractor.
Key components and functions of Progress Payments include:
- Scheduled Payments: Progress payments are usually made according to a predetermined schedule outlined in the construction contract. This schedule is often based on reaching certain milestones or phases of the project, or it can be a monthly payment cycle.
- Certification of Work Completed: Before a progress payment is made, the work completed is usually assessed and certified by an architect, engineer, or construction manager. This certification ensures that the work has been completed to the specifications and standards outlined in the contract.
- Percentage of Completion: Payments are calculated based on the percentage of the project that has been completed. This often involves an evaluation of the work done and a comparison with the schedule of values (SOV) which breaks down the contract sum into component parts of the work.
- Applications for Payment: The contractor typically submits an application for each progress payment, detailing the work completed and the value of that work. This application is reviewed by the project owner or their representative to ensure accuracy before processing the payment.
- Withholding and Retentions: To ensure that all aspects of the project are completed to the required standards, a portion of each progress payment may be retained by the owner. This retention is usually released upon final completion of the project and after any defects are rectified.
- Change Orders: If there are changes in the scope of the project, progress payments may be adjusted accordingly. Changes that increase the scope will typically increase the amount of each progress payment, while reductions in scope will decrease them.
- Dispute Resolution: Progress payments can sometimes lead to disputes, particularly regarding the valuation of completed work or the timing of payments. Clear contract terms and effective communication are essential to manage and resolve such disputes.
Progress Payments are crucial for maintaining a positive cash flow throughout the construction process, enabling contractors to manage their resources effectively and maintain a steady work pace. This payment method also helps reduce financial risks for contractors and provides an incentive for timely and quality work, as payments are directly tied to the progress of the project.
