The concept of getting paid for work completed is universal and expected in any industry. Yet for commercial construction projects, you typically need to submit a payment application.
After the construction pay apps have been approved, then you can get paid.
The process of getting paid in construction can be frustrating, but it’s a must for validation purposes.
When you bill, you need to provide some sort of validation to prove work is completed.
That’s where the construction payment applications come in.
What is a Construction Pay App?
A construction pay app is an application to receive payment for the work that was completed. It needs to contain supporting documentation as required by your contract. These documents will need to be submitted with each progress billing in order to get your company paid.
The pay app is meant to provide general contractors and property owners with protection. It protects them from a contractor overbilling to collect on work unfinished.
When a pay app is submitted to you, carefully review it to confirm its accuracy. The contractor submitting it to you should have all backup documentation as well.
Once you give the approval, the contractor will then send you their invoice. Your construction accounting department will take the invoice to process the payment.
There are many invoice templates available on the web for your accounting services needs.
Note: The pay app is not an invoice. An invoice will have very specific terms on when payment is required and interest on delayed payments. Typically, your pay app needs to be approved before you can send the invoice.
Why is the Construction Pay App Required?
The pay app is a way for you to confirm with the owner or GC that you will get paid for the amount noted. That way you know that your invoice sent will be paid.
You should know that the construction industry has one of the worst turn around for payments received.
In a survey conducted by LevelSet, 53% of subcontractors reported waiting over 40 days to get paid.
From my personal experience, I have seen some payments taking upwards of 90 days to receive.
One reason for this is that a lot of contracts contain a “paid when paid” clause in it. Stating that they will not pay their subcontractors until they have received payment from the owner.
When the pay apps go in from the GC, it takes time for the owner to process the payment. Then, when the GC is paid, they have to process all the construction invoices.
The GC can then distribute the payment to the subcontractors. At this point it’s passed through so many hands, you can begin to see why it can take a while to get paid.
Independent contractors may have an easier time getting paid since they typically have work orders direct to customer.
The Burden of Slow Payments in Construction
The delay in payment creates massive stress on construction companies. After all, they still need to pay to continue their operations.
As a result, small businesses will resort to loans from a construction lender if they don’t have the money reserved. With increasing interest rates on loans, taking out too much can drive construction businesses into bankruptcy.
That’s why it’s important you get the pay apps in early and you’re consistent with it as well. Make sure you’re noting when the application is due each month to avoid further payment delays.
The payment terms in your contract will note exactly when to submit your pay application.
Submit your payment requests too late, then you’ll need to wait until the following month to bill. That could be nearly 120 days to collect on work already completed!
As a project manager, one of your major responsibilities is to get your company paid. So, understand the construction payment application process.
There’s always a chance for potential human error when compiling the pay application. This is one item you do not want to procrastinate and rush at the last minute.
Waiting to submit your pay app until the last minute is a good way to get it declined.
The sooner the pay app is submitted and approved, the sooner you get paid!
What is Required with a Construction Pay App?
Your pay app will usually consist of the following documents:
Remember, each project is different.
Make sure to review your construction contract to identify the specific requirements for your project’s pay app. You will need to include these compliance documents with each pay app you turn in.
A Template for the Pay App Form and Schedule of Values (SOV)
I want to provide you with a template that you can use for your pay application process.
This will only consist of the Pay App Form & Schedule of Values
The template is from the people at the Tober Building Company. I have just simplified it a bit more, removing the continuation sheet.
Make sure that for each payment period, you are creating a copy of the template. Name it with the project name, month, and year for the billing period.
The template is structured around the G702 & G703 documents that you can find from the AIA.
Let’s go into some detail on what should be included on these forms.
The Construction Pay App Form (Payment Application)
The G702 is a required document that is the standard form for a construction pay application.
The document lists some important information all relevant to the billing process. These are items such as:
- The original contract sum
- Total of all change orders for the project
- The adjusted contract value with change orders
- Cost for work completed and material stored onsite
- Retainage for both material and work completed
- Total cost from all previous billings
- The amount owed this payment period
Below you’ll find an example payment application form that I filled out. You’ll need to check this against your SOV to make sure your values line up.
The Project Schedule of Values
Your SOV is a breakdown that needs to be approved by a project owner or GC. You’ll need to get this approved before you can begin billing.
When developing the SOV, think about the phasing in your project. For the example SOV shown below, this is what you could expect to see for an interior renovation construction job.
Notice how I’ve broken it into items such as demolition, rough-in, finishes, and startup. The steps in which the construction will carry out for the project.
The first line item for general conditions is typical for most projects.
It covers most of the administrative items required for the construction project. Items such as:
- Building Permits
- Bonds & Insurance
- Project Management & Admin Time
The SOV is important because it tells the GC or owner what you’re billing for. The document contains the following information that helps with this:
- All activity items for the project
- Cost for work that was completed onsite
- All previous pay applications
- The current pay application
- The billing period
- Cost for materials stored on the job site
- Total cost for all the work completed and material onsite
- The percent complete value
- The remaining cost owed for work not yet completed
Quick Tip: When developing your SOV, make sure you front-load your activities as much as you can. This way you can create a positive cash flow with your project in case it takes a while to get paid.
The Construction Daily Report
A construction daily report will document the progress of work on a project.
It describes the work completed each day, some will also choose to document this using pictures.
You can find the number of people working on a particular day and the number of hours worked.
The daily report serves as a great backup document when issues arise on the project. People are quick to point the finger, so proper documentation will protect you in these cases.
If you want to learn more about daily reports, you can refer to my article here.
Conditional Lien Waivers in Construction
A lien is placed on a building typically when a contractor is not paid for the work they completed. This gives them the right to make a claim on the property so they can be financially compensated.
By signing the conditional lien waiver, the contractor agrees they will not file a lien once payment is received.
Certified Payroll Required for Prevailing Wage Jobs
The certified payroll document serves to verify that the company is paying the field staff appropriately. The rates change every year, so make sure that you stay updated with the latest numbers.
The requirement for certified payroll comes from the the Davis-Bacon act. It was developed to ensure that field staff are being paid a fair wage.
This applies to all federally funded projects. Including city, state, and federal projects.
Note: Some agencies may look at the payroll hours and compare them to the daily reports. This is just an extra step in the verification process that could halt your payment if the hours don’t match.
Understanding how to fill out the construction pay app and what should be included is key to getting paid.
As a project manager, you should be anticipating when the time for progress billing arrives. Think about what jobs you can bill for, and get a percent complete from the field crew for your SOV.
Before you go, please consider checking out my post on subcontract agreements. This will give you some insight into what is included in the contract when it comes to billing.
Thank you for reading.
Table of Contents