Progress payments in the construction world are rooted in an incremental approach to a construction project. Instead of a lump sum payment upon completion of the project, progress payments are partial payments made to a contractor after the completion of a predefined stage of the work. These types of payments are provided for in the contract between the project owner and contractor, and help contractors recover and pay for a portion of their costs during the construction project. They also give project owners a chance to assess whether the billed portion of work has been completed satisfactorily before the project proceeds.
Various methods can be used in a contract to designate when and how progress payments are due. The payments may be based on a percentage of the overall scope completed as the work progresses based on a schedule of values (lump sum contract) or payments may be made based on a cost of the work (typically a cost of the work plus a fee with a guaranteed maximum price). Progress payments can also be keyed to the completion of specific stages of the project, such as when roofing and electrical systems have been put in place, although this is much less common.
The precise format and method of progress payments must be articulated clearly in the contract between the project owner and contractor. Project owners should determine the timing of these payments before a project starts, keeping in mind that too long of a payment period could stall the project, while too short of a payment period could create administrative difficulty with timely review and processing. Per Section 8800 of the California Civil Code, unless otherwise agreed in writing, the project owner must pay the contractor “any progress payment due as to which there is no good faith dispute between them … within 30 days after notice demanding payment pursuant to the contract is given.” This 30-day time period is a good balance.
From the above statute, unless the parties agree otherwise in the contract, progress payments must be made by the project owner within 30 days of notice from the contractor. Typically, a notice comes in the form of a Request for Payment Application. The contract should provide detailed information that the contractor must provide in connection with its applications for payment so that the project owner can assess the progress of the project, project expenditures, and payments to subcontractors.
It should be noted that should a client violate the terms of Civil Code Section 8800 they can be penalized at two percent per month, in lieu of interest, on the amount wrongfully withheld. Further, in any action to collect amounts wrongfully withheld, the prevailing party may collect reasonable attorney’s fees.
A project owner and contractor should draft a clear contract detailing how progress payments will be invoiced, requirements for submission of pay applications, the timing of payment, and reasons that payment may be withheld in order to minimize payment disputes and keep the project moving.