Definition
Progress Payments are scheduled payments made to a contractor or builder at various stages of a construction project. These payments correspond to the completion of specific milestones or phases of the work, and they serve to finance the ongoing development of the project. In construction finance, lenders release loan funds in increments as certain parts of the construction are completed and verified.
Examples
Residential Construction: A homeowner building a new house agrees with the contractor to disburse payments when the foundation is laid, the framing is complete, the roof is installed, and the interior finishes are done.
Commercial Development: A bank financing the construction of a shopping mall disburses funds when the site is cleared, after installing utilities and when the buildings’ structural frameworks are completed.
Government Contracts: An infrastructure project funded by a municipal government provides periodic payments to the contractor after the completion of certain project segments, such as bridge pylons or road paving sections.
Frequently Asked Questions
Q1: What is the purpose of progress payments?
Progress payments ensure that contractors have the necessary funds to continue work on a project without fronting all material and labor costs upfront. It minimizes financial risk for the contractor and ensures the project progresses as planned.
Q2: How are progress payments typically calculated?
Progress payments are often calculated based on a percentage of completion basis, where an assessor evaluates the work done to date and releases a proportional amount of the total contract value.
Q3: What documents are necessary to process a progress payment?
Typically, contractors need to submit a progress report, photographs of completed work, invoices for materials, and sometimes an updated project schedule. The lender or client may also require an on-site inspection.
Q4: Can progress payments be withheld?
Yes, progress payments can be withheld if the work does not meet the contract expectations, deadlines are not met, or if there are defects and issues that need resolution.
Q5: Are progress payments subject to retention?
Yes, sometimes a portion of each progress payment is retained by the client or lender as a security measure until the project reaches satisfactory completion.
Related Terms with Definitions
- Draw: A draw is a specific request for a portion of the total loan amount, typically associated with the completion of a stage in the construction project.
- Retainage: A portion of the progress payment withheld to ensure the contractor completes the project satisfactorily.
- Milestone Payment: Similar to progress payments, these are payments made upon achieving specific project milestones or deliverables.
- Construction Loan: A short-term loan specifically for the purpose of financing a construction project.
- Invoice: A document issued by the contractor detailing services provided and the amount due for those services.
Online References
Suggested Books for Further Studies
- “Construction Funding: The Process of Real Estate Development, Appraisal, and Finance” by Nathan S. Collier, Courtland A. Collier, and Don A. Halperin
- “Construction Project Scheduling and Control” by Saleh A. Mubarak
- “The Construction Project Management Success Guide” by Andreas P
Fundamentals of Progress Payments: Construction Management Basics Quiz
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