Managing the disbursement of funds is the key to ensuring a construction project is completed within budget.

Construction lenders often include specific requirements for progress payment requests in their loan agreements. This is an excellent way to guard against misuse of funds during a construction project. As a developer, you can follow this lead and establish similar requirements for projects that do not involve a lender.

Whether or not a construction lender is involved in your project, it is in your best interest as a developer to outline the specific requirements for the contractor to submit payment applications. When you include these requirements in the construction contract, you establish that the contractor is required to submit proper documentation to receive progress payments. The documentation allows you to accurately track progress, mitigate the risk of having a lien filed against your property, and ensure that funds are applied appropriately throughout the project.

Detailed Budget

Before the start of construction, the first step is to work with the contractor to create a detailed line item budget. The budget should be thoroughly broken down into line-item categories that detail individual items of work to be completed.

Stay away from combined line items such as “office repairs,” if possible. Instead, break this item down into relevant categories such as framing, rough electrical, sheetrock, painting, etc. The budget can be managed using industry-standard forms such as the AIA G702/G703 or on a spreadsheet template.

Once the budget is developed and agreed upon, set a requirement that the contractor needs to submit requests for payment with all individual costs billed to specific line items. This lets you track the progress of individual items of work and the total level of completion for the project.

Complete Set of Invoices

The next requirement is for the contractor to submit a complete set of invoices for all the costs being requested. The invoice package should be organized by items of work, and each invoice or receipt should be labeled with the corresponding line-item name and number from the project budget.

It is ultimately your responsibility as the developer to review this invoice package to verify all amounts are correctly recorded and applied to the budget. If errors are discovered during this review, the request can be returned to the contractor for correction. It is important to thoroughly review all invoices and receipts to ensure all materials and labor are being billed correctly and you are not paying for anything outside the scope of the project.

Lien Waiver Forms

Along with the invoices, require the submission of lien waiver forms. Obtain them from the general contractor and all subcontractors, material suppliers, and other vendors that are granted lien rights against your project by providing service.

For each payment request, you should receive conditional lien waivers for the current request as well as unconditional waivers for the previous request. By requiring lien waivers to be submitted with payment requests, you can verify the contractor is paying subcontractors and vendors on time. Tracking these forms can be tedious, but it is well worth knowing you are protected from a lien being filed against your property.

Building Permits and Inspections

It is also important to verify your project is kept in good standing with local building officials. Asking the contractor to include a copy of the current building permit inspection card allows you to verify work is progressing and the proper approvals are being obtained. This card should be initialed by the building inspector, noting when items have been inspected and approved. This offers an additional layer of security for you to verify that the work you have paid for has been completed appropriately. It is also recommended that you request a copy of the inspector’s comments for any items of work not approved during an inspection.

Change Orders

Your project will naturally encounter challenges and site conditions that may require changes to the budget or use of contingency funds. Requesting that the contractor submit any potential upcoming change orders with the payment application lets you quickly review the changes to costs in the context of the overall budget. By reviewing potential change orders along with periodic payment requests, you can reduce delays and keep your project moving forward smoothly.

It can be challenging to convince a contractor to submit requests for payment with an extensive document package, particularly if they are used to submitting a lump-sum request for overall progress. Enacting these requirements at the beginning of the project and including payment submittal requirements in the contract establishes a baseline for your interactions with the contractor. This also offers the chance to demonstrate to the contractor that a complete and thorough submission package will streamline payment processing and limit owner-caused delays by making prompt decisions about pending change orders.

Managing the outflow of funds from the project budget is one of the most challenging responsibilities for a developer, and those challenges are compounded if payment requests are vague and lack proper documentation. Using a detailed and specific set of payment submittal requirements helps alleviate the stress of disbursing funds and assists in tracking the costs associated with the project.

Categories | Article | Operations
  • David Jacobs

    David Jacobs is a Senior Project Specialist with Owner Builder Advisors. His experience includes construction labor, construction risk management, and sales. David utilizes his background of both on-site and in-office construction work to better assist OBA clients. David is an avid outdoorsman and spends weekends guiding bike and kayak tours.

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