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
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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.
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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.
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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.
- 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
- Investopedia on Progress Payments
- Wikipedia on Construction Loans
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
### What are progress payments?
- [ ] A lump sum payment after the project completion.
- [x] Scheduled payments made at various stages of a construction project.
- [ ] Payments made to suppliers for materials.
- [ ] Bonus payments made to workers for milestones achieved.
> **Explanation:** Progress payments are scheduled payments made to contractors at various stages, or milestones, throughout the construction project to finance ongoing development.
### What is typically required to process a progress payment?
- [x] Progress report and project inspection.
- [ ] Only the final invoice.
- [ ] A letter from the bank.
- [ ] Contract between the parties.
> **Explanation:** Contractors usually need to submit a progress report, photographs of completed work, invoices for materials, and sometimes an updated schedule and inspection approval.
### What does "retainage" refer to in the context of progress payments?
- [ ] A cancellation clause in construction contracts.
- [x] The portion of the payment withheld to ensure project completion.
- [ ] Additional payment for early completion.
- [ ] Payments to subcontractors.
> **Explanation:** Retainage refers to a portion of the progress payment that is withheld as a security measure until the project is completed satisfactorily.
### For what purpose are progress payments given?
- [x] To provide funds to contractors to continue working on the project.
- [ ] To pay off the total contract value upfront.
- [ ] To reward workers for their performance.
- [ ] To settle disputes between contractors.
> **Explanation:** Progress payments are meant to provide the necessary funds for contractors to cover ongoing material and labor costs, reducing their financial burden.
### What is a "draw" in the context of construction financing?
- [x] A request for a portion of the total loan amount associated with a completed stage of the project.
- [ ] A blueprint for the construction project.
- [ ] Final payment at project completion.
- [ ] Payment for unexpected delays.
> **Explanation:** A draw is a request for a portion of the total loan amount, disbursed to fund continuing phases of the construction project.
### Can progress payments be withheld?
- [x] Yes, if work does not meet contract expectations or there are defects.
- [ ] No, they must be paid regardless of the project status.
- [ ] Yes, based on the contractor's financial situation.
- [ ] No, they are always paid ahead of work done.
> **Explanation:** Progress payments can be withheld if the work does not meet contract specifications, is delayed, or has defects.
### Which documents are typically not necessary for processing a progress payment?
- [ ] An updated project schedule.
- [ ] Photographs of completed work.
- [ ] Invoices for materials.
- [x] The completed blueprint of the entire project.
> **Explanation:** While progress documentation, schedule updates, photos, and invoices are necessary, the completed blueprint of the entire project is not typically required for a progress payment.
### Why is the concept of progress payments crucial in project management?
- [ ] It allows for only partial completion of projects.
- [ ] It reduces the loan amount.
- [x] It ensures that contractors have necessary funds and helps maintain cash flow.
- [ ] It guarantees project profitability.
> **Explanation:** Progress payments ensure that contractors have the necessary funds at each stage, which helps them maintain cash flow and continue progressing with the project.
### What does a "milestone payment" usually align with?
- [x] The completion of specific project deliverables or stages.
- [ ] A random interval in the project timeline.
- [ ] Completion of paperwork.
- [ ] Supply deliveries.
> **Explanation:** Milestone payments are typically aligned with the completion of specific project deliverables or construction stages and milestones.
### Who typically holds the retainage portion of progress payments?
- [x] The client or lender.
- [ ] The contractor.
- [ ] The subcontractors.
- [ ] The insurance company.
> **Explanation:** The client or lender typically holds the retainage portion to ensure the contractor completes the project satisfactorily.
Thank you for exploring our comprehensive guide on Progress Payments. Keep developing your construction finance knowledge and ace those quizzes!
