Oct 3, 20183 min read

Understanding Progress Payments: A General Guide for Contractors and Clients

Introduction

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In the world of construction and contracting, progress payments play a pivotal role in maintaining financial stability and ensuring project momentum. For both contractors and clients, navigating the intricacies of progress payments is crucial to fostering a successful working relationship and seamless project execution.

What Are Progress Payments?

Progress payments are installments made from a disburser of funds (in the context of a residential construction project typically an owner) to the contractor throughout the duration of a project. Unlike a lump sum payment which is paid upon project completion, progress payments are disbursed which are made at various stages of the project's completion, typically which are tied to milestones or predetermined stages of work (the timing of which are defined by the contract governing a project).

Why Are Progress Payments Important?

For Contractors:

1. Cash Flow Management: Progress payments ensure a steady inflow of funds, allowing contractors to cover necessary ongoing expenses such as labor, materials, and subcontractors.

2. Risk Mitigation: By receiving payments at intervals, contractors reduce the risk of non-payment and minimize financial strain, thereby enhancing project stability.

3. Boosted Morale: Timely payments help maintain morale among the workforce (lower tier contractors/subcontractors and suppliers), fostering a positive work environment.

For Disbursers of Funds (Residential Owners):

1. Quality Control: By tying payments to project milestones, disbursers can ensure that work is progressing satisfactorily (and in a quality manner)before making further payments.

2. Transparency: Progress payments provide transparency in financial transactions, allowing disbursers to track the project's advancement.

3. Motivated Contractors: Regular payments, requiring substantiation, can incentivize contractors to maintain project timelines and quality.

Determining Progress Payment Structures

The structure of progress payments is typically outlined in the contract between an owner (disburser) and the contractor. It usually involves:

1. Percentage of Completion: Payments may be linked to the percentage of work completed. For instance, a contract may stipulate a 30% payment upon reaching a specific project milestone.

2. Milestone-Based Payments: Payments can also be tied to specific project milestones, such as completion (and approval by an inspector) of foundation work, framing, electrical installations, etc.

3. Time-Based Payments: Some contracts may specify payments based on a timeline rather than project milestones, such as a monthly payment schedule.

Best Practices for Progress Payments

1. Clear Contractual Agreements: Contracts should clearly outline the payment schedule, including the amount and timing of progress payments.

2. Accurate Documentation: Maintain accurate records of completed work, including photographs, reports, and invoices, to support payment requests.

3. Communication and Transparency: Regular communication between the owner (disburser) and contractor is crucial to address any concerns or changes in the project scope that might affect payment schedules.

4. Adherence to Regulations: Ensure compliance with local laws and regulations governing progress payments to prevent disputes or legal issues.

Resolving Disputes

Despite careful planning, disputes over progress payments can arise. To avoid polarization between the parties, It is crucial to initially and early on attempt resolution through:

1. Open Dialogue: Communicate openly to understand each party's perspective and resolve misunderstandings.

2. Mediation or Arbitration: If communication fails, mediation or arbitration can provide a structured approach to resolving disputes without litigation.

3. Legal Counsel: Consult legal professionals specializing in construction law to navigate complex disputes and protect your interests.

Conclusion

Progress payments serve as a cornerstone in construction projects, providing financial stability, ensuring project progression, and fostering trust between contractors and clients. By establishing clear payment structures, maintaining open communication, and addressing issues promptly, both parties can navigate progress payments effectively, leading to successful project completion.

At Miller & Law, P.C., our expertise in construction law empowers both contractors and clients to establish fair and transparent progress payment agreements, ensuring smooth project execution while safeguarding their interests. If you have any questions or need legal guidance regarding progress payments, don't hesitate to reach out.

*This article is intended for informational purposes only and should not be construed as legal advice. Individuals involved should consult with legal professionals for specific guidance tailored to their circumstances.