Many construction companies make progress payments, and progress payments can be a benefit for contractors or a problem when companies fail to pay. What is progress payment? How does progress payment work? Should YOU make progress payment?
What is progress payment?
"Progress Payment" refers to a periodic payment of the contract price by the owner to the contractor, and it covers the measure of work completed up to the point of invoicing. Progress payments are made based on:
- The costs incurred by the contractor in pre-delivery work, including direct labor and production expense etc.
- The percentage of work completed at the time the payment is made
- The stage of performance a contractor reaches
When to make progress payments?
The most common ways of structure progress payments are:
1. Charging by the stage
2. Billing by the level of completion
For example, a contractor and a customer can agree on receiving/sending invoice using the level of completion strategy when 25%, 75%, and 100% of the extend is completed.
Why progress payment is suggested?
In many cases, projects with long timelines require a significant budget. If a contractor receives payment at each stage of completeness, he or she gets a reliable cash flow to arrange more materials and issue finance for other stages of the work to prevent delays or undersupply.
For customers, such payment is an ideal payment strategy. Firstly, customers can break down a significant amount of money. Instead of making a large payment at the end of the work, customers make small, continuous payments when a part is done. Therefore, contractors have more confidence in their customers. Secondly, customers will not concern that "contractors take the money and run". The payment is issued only after a portion of work is done, so customers can have sufficient money to continue the project even if the contractor fails to finish his or her job. Finally, by using progress payments, contractors can wrap up the projects as proficient as possible to receive the next payment.
What to be aware of when considering progress payments?
Progress payments are partial payments that are made as the work progresses, and according to section 7521 of the United States Code, the payments may be made not exceeding the value of the work done. Also, the contract project should involve preparatory period and have predelivery expenditures which affect on contractor's working funds. For instance, the contracts for production or electrical equipments.
In sum, progress payments made in construction projects are beneficial to both contractors and customers if both parties agree on the contracts. Construction Cost Accounting helps plan what is best for your company.
Construction Cost Accounting is located in Irvine, CA, but we are servicing Los Angeles, Orange County, and San Diego.
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