Definition
Progress Payments
Progress payments are interim payments made to contractors, builders, or construction firms at various stages during the progression of a construction project. These payments are made in line with the accomplishment of set milestones or project phases, ensuring that the contractor receives a fair share of the project budget for the work completed thus far. The primary aim of progress payments is to provide ongoing cash flow that allows the contractor to purchase materials, pay labor costs, and manage other project-specific expenses.
| Key Aspects | Details |
|---|---|
| Objective | To provide financial support to contractors during the course of construction. |
| Payment Schedule | Based on predefined milestones such as foundation laid, framing, roofing, electrical work, etc. |
| Risk Management | Ensures that payments closely follow actual progress, reducing risk for lenders and developers. |
| Benefits | Maintains liquidity for the contractor, supports continuous project workflow, helps match expenses with revenue. |
Examples
-
Residential Building Project:
- Progress Payment 1: $50,000 upon completion of site preparation and laying the foundation.
- Progress Payment 2: $100,000 upon completion of the building’s framework and roofing.
- Progress Payment 3: $75,000 upon completion of interior finishing and inspections.
-
Commercial Shopping Center:
- Progress Payment 1: $200,000 after the purchase of the lot and obtaining initial permits.
- Progress Payment 2: $300,000 when structural framing is completed.
- Progress Payment 3: $350,000 upon installation of necessary utilities (plumbing, electrical, etc.).
- Progress Payment 4: $150,000 upon substantial completion, including external facades and parking areas.
Frequently Asked Questions
What are progress payments in construction?
Progress payments are partial payments disbursed to contractors for the work completed on a project by specific stages.
How are progress payments determined?
Payments are typically based on predefined milestones in the project contract, such as laying the foundation, completing the framework, or finalizing electric installations.
Why are progress payments important in real estate development?
They provide a steady cash flow to the contractor, ensuring that work can continue smoothly without significant financial interruptions.
Who monitors progress to authorize progress payments?
Project managers, inspectors, or independent third-party assessors verify the completion of milestones before progress payments are released.
Can a progress payment schedule be altered once established?
Adjustments to the payment schedule can be made but must be mutually agreed upon by both the contractor and the developer or financier.
What happens if a milestone is not completed on time?
Progress payments are typically withheld until the milestone is completed satisfactorily, encouraging the contractor to adhere to the project schedule.
Related Terms
Construction Loan
A short-term loan used to finance the building of a property. The funds are disbursed in stages as the construction progresses.
Retainage
A portion of the contracted payment withheld until the project or a specific milestone is completed, ensuring compliance and quality.
Draw
A portion of the total loan amount disbursed to the borrower at specific stages throughout the construction project.
Milestone
A specific, significant point or event in the project lifecycle, often linked with the performance of a specific phase of work.
Online Resources
- Investopedia on Progress Payments
- Construction Financial Management Association
- National Association of Home Builders
References
- “Understanding Construction Loans and Their Benefits,” Investopedia, URL.
- “The Essentials of Progress Payments for Construction,” CFMA, URL.
- “Financial Management in Construction Contracts,” NAHB, URL.
Suggested Books for Further Studies
-
“Construction Contracts” by Jimmie Hinze
- A comprehensive guide on the essentials of contracts within the construction industry, which includes detailed insights into progress payments.
-
“Construction Planning and Control” by Saleh Mubarak
- Offers in-depth methodologies for planning and controlling construction projects, including managing finances through progress payments.
-
“Financial Management and Accounting Fundamentals for Construction” by Daniel W. Halpin and Bolivar A. Senior
- Focuses on the key financial and accounting principles relevant to construction, including progress payment systems.
