Progress Payment

A progress payment is a payment made to a contractor based on the stage of work completed at a specified date, as certified by an agreed authority. It is commonly used in long-term contracts such as civil engineering, shipbuilding, or large items of plant and machinery.
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Definition

A progress payment is a partial payment made to a contractor or subcontractor during a large project based on the percentage or phase of work completed and verified by an agreed-upon authority, such as a project manager or engineer. This type of payment is commonly utilized in extensive projects like civil engineering works, shipbuilding, and the construction of large items of plant and machinery.

Examples

  1. Construction Projects: In a construction project, a contractor may receive progress payments every month based on the amount of work completed. For example, if 25% of the work is verified as completed, the contractor will receive 25% of the contract’s total value.

  2. Shipbuilding: A shipyard building a new vessel might receive milestone payments upon reaching specific stages, such as completing the hull, installing the engines, or the launch of the ship.

  3. Manufacturing Large Machinery: When manufacturing large pieces of machinery, a company might set progress payments when certain critical components are completed, ensuring the supplier has the cash flow to continue the project.

Frequently Asked Questions (FAQs)

What is the purpose of a progress payment?

The purpose of a progress payment is to ensure that contractors have sufficient cash flow to continue work on a project. It also provides a method for project owners to verify work completion before making payments.

How are progress payments calculated?

Progress payments are typically calculated based on the percentage of work completed or specific milestones achieved. These are often verified by a project manager, engineer, or other agreed authority.

Can progress payments vary from project to project?

Yes, the structure and terms of progress payments can vary depending on the nature of the project, the contract terms, and negotiations between the project owner and the contractor.

What safeguards are in place with progress payments?

Project owners often require detailed documentation and certification of completed work before making progress payments. This might include site inspections, reports, or other forms of verification.

Are progress payments applicable to all industries?

Progress payments are most commonly used in industries involving long-term contracts and large-scale projects, such as construction, civil engineering, shipbuilding, and manufacturing. However, the concept can be applied to any extensive project requiring staged payments.

  • Retention Payment: A portion of the payment withheld until the project is completed satisfactorily to ensure the contractor fulfills all obligations.
  • Milestone Payment: Payments made upon reaching predefined project milestones or deliverables.
  • Certified Payment: Payment made after verification and certification of the completed work by an authorized entity.
  • Contractual Payment Schedule: A predefined timeline and condition under which payments will be made as per the contract terms.

Online References

  1. Investopedia: Progress Payments
  2. The Balance Small Business: Construction Progress Payments
  3. Plaform Procurify: Understanding Progress Bills

Suggested Books for Further Studies

  1. “Construction Project Administration” by Edward R. Fisk and Wayne D. Reynolds.
  2. “Project Management for Construction” by Chris Hendrickson.
  3. “Construction Contracts: Law and Management” by John Murdoch and Will Hughes.
  4. “Construction Scheduling: Principles and Practices” by Jay S. Newitt.
  5. “Civil Engineering Contracts: Practice and Procedures” by Stephen Wearne and Keith White-Hunt.

Accounting Basics: Progress Payment Fundamentals Quiz

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Progress Payments
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