Construction Progress Payments: What You Need to Know
The construction process entails different stages, regardless of the type of project. Construction firms need to keep their whole supply chain in check, in which their cash flow is pivotal to a project’s success.
Spending money for project-related expenses is no joke; many contractors don’t get paid until the job is complete.
This is where progress payments come in.
All construction contractors are entitled to progress payments to support and protect cash flow and project security. Progress payments are sometimes called interim payments, progress billing or partial releases and are defined as partial reimbursements to the contractor for completed work during the construction project.
In this article, we will discuss everything you need to know about progress payments in the construction industry, including:
· What is a progress payment?
· How do progress payments work?
· How Progress Payments are Determined
· The Benefits and Drawbacks of Progress Payments
What is a Progress Payment?
A progress payment is a payment made by the client to the builder at set intervals during the construction process. The total amount of the bill is divided into progress payments, which are paid out in portions as the project progresses.
Progress payments enable contractors to manage cash flow and put money back into the business to pay for building materials, project expenses and staffing requirements.
Increasing legislation across Australian States and territories requires progress payments to be made in certain circumstances.
Governed under the Building Industry Fairness Act (Security of Payment) Act, 2017, all construction contracts entered into after 1 December 2018 must make progress payments.
New South Wales
The Building and Construction Industry Security of Payment Act, 1999 (SOPA) applies to all building work in New South Wales with a value exceeding $20,000 (including GST).
Also, as stated by NSW Fair Trading, all contractors that do construction work or provide goods or services under a construction contract have the right to receive progress payments for the work they deliver.
How Do Progress Payments Work?
Progress payments are made at intervals throughout the construction process, as specified in the contract. The client will make partial payments to the contractor as work is completed, with the final payment made once the project is complete.
Progress payments are based on the value of work completed, as certified by the principal (the person or company who engaged the contractor)
The contract will specify the value of work to be completed before each progress payment is made. The value of work completed is generally calculated by using a percentage of the total costs of the project.
How Progress Payments are Determined for Total Contract Price
The most common method to determine progress payments is based on a designated stage of building work that is completed. However, the method chosen will depend on the complexity of the building work, the cash flow impact on the business, and the necessary project-related expenses.
In short, the client and the contractor will discuss a certain percentage of the total cost of the project, to be paid on a monthly bases and submitted for review for the work completed.
The percentage is determined by the relationship between the client and the contractor and the terms agreed upon in the contract between the two parties.
For example, the contract might state that the client will pay a progress payment of five per cent of the total project cost for the first phase, ten per cent for the second phase, and 15 per cent for the final phase.
How Progress Payments are Determined for Building Contract
The progress payment process might differ from company to company, but contractors typically bill the client through an invoice, and invoices are issued every time the contract price is made.
An invoice will contain necessary payment details, such as the amount of money being made as part of the progress payment, the contact person, and the phone number.
Sometimes, the client might also need to fill out a progress payment form. The form will be reviewed by the accounting department and processed by the firm’s payroll department.
Platforms such as IPEX provide a fully-digital project bank account to provide greater transparency and security. This means all progress payments are made and tracked online, so there is no scope for human error or fraud.
The Benefits of Progress Payments
There are many benefits to using progress payments. What are they?
Secure and Transparent Cash Flow
The primary benefit of progress payments is the stable and viable cash flow it provides to contractors. This is because the biggest challenge for contractors is not having enough cash to cover project-related expenses.
Progress payments allow contractors to stay afloat by providing stable cash flow throughout the project’s duration.
Reduce Delays and Have a Solid Progress Payment Schedule
Delays are another major problem for construction companies, especially for projects in high-pressure environments. These delays can come from various sources such as material shortages, weather, quality control issues, and more.
One of the things progress payments can help with is controlling the flow of money throughout the project. As a result, this can help reduce delays from project-related expenses such as the purchase of materials, payroll, and more.
Reduced Risk for the Client
Progress payments don’t just benefit a construction business but the client as well. In fact, the risk is minimal with progress payments.
On the surface, the building contract between the company and the client appears to be the same as one where the client pays the entire sum of money upfront.
However, there is a significant difference between the two types of contracts. In the payment-up-front contract, the risk of loss of the entire payment is greater for the client, and in the progress payments contract, the client is only at risk for the funds already paid.
In other words, the client has already received benefits for the last progress payment on the construction project.
The Drawbacks of Progress Payments
Progress payments don’t come without their own set of drawbacks. Many contractors don’t like using progress payments because it requires them to keep track of a great deal of data, which is used to prepare the progress payment invoices. Often, invoicing is outsourced to accounting firms, which can also be costly and time-consuming.
Another drawback is that it may create disputes over the work done. Contractors and clients may have varying opinions about the work completed and the amount reflected in the invoice.
Furthermore, since progress payments involve an agreement to ensure all parties are on the same page, it could take some time. The time it takes to come up with an agreement for all parties may lead to delays in project completion. Therefore, having a clear construction contract and constant communication is essential.
Where to Next?
The benefits of progress payments are more than enough reason to start using them for your projects.
Even if it takes a little effort to get started, progress payments are the easiest way to manage cash flow for your construction firm.
Construction is a fast-paced industry, and learning to keep up with the flow of money for your projects is a skill every contractor should have.
Progress payments in the construction industry can be used for different types of contracts, whether for a residential building contract or other construction projects. This ensures cash flowing for construction projects without waiting for a lump sum payment from the client.
IPEX, Providing Transparent and Secure Project Bank Accounts
IPEX is an industry-leading payments platform designed to protect the cash flow of construction projects across the building and construction industry. With IPEX, all project payments are distributed through a centralised account, ensuring transparency and security of a project’s funds.
With IPEX, project owners, head contractors, builders and subcontractors can rest assured knowing that a project’s funds are held securely in a project bank account. Our platform reduces financial risk for all project stakeholders, making it the ideal solution for a smoother and more successful build for everyone involved.