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Applications for payment in the construction industry can be tricky for both contractors and subcontractors. The process has typically relied on tracking complex details through lengthy manual processes, meaning it can be challenging to follow the stage of an application.
Additionally, managing contract compliance can present another set of challenges for payers and payees. The good news is that this process doesn’t have to be a burden when armed with the correct information.
So, if you find yourself submitting or managing construction payment applications, this blog post and the accompanying eGuide available by completing the form below explores everything you need to know about managing applications for payment in construction projects.
Due to the size and complexity of construction projects, most standard forms of construction contracts expressly provide for an ‘application for payment’ from the payee.
But, what does this mean?
An application for payment refers to a request for interim payment, or complete payment, by a contractor or a subcontractor in the construction industry. In simple terms, an individual or organisation brings documents and evidence together - in line with the contract - before asking for payment on the work completed to date.
Once the project has reached a pre-agreed time interval milestone, the payment application can then be issued for the money due. An important note is that an application’s validity is only as good as the contract that covers it, so any agreement should include contractor payment terms along with an appropriate payment schedule.
Working with a construction payment schedule means interim payment applications can offer remuneration to contractors and subcontractors to assist with cash flow until the job is complete. These payments may be at monthly intervals or specific stages of the agreed building work.
While most construction industry contracts will include varying agreement terms, the types of contract are usually split into the two following categories:
Regardless of the contract type, any contracts you sign should feature payment schedules and outline the documents that need to be included in payment applications.
For most industries, invoicing is simple. We probably don't need to explain to you how that process works but in the construction industry, payment processes usually differ from the traditional approach.
An invoice usually deals with VAT collection on goods and services provided to a purchaser or client under the VAT regulations. An invoice does not deal with contractual entitlements to payments or valuation.
However, there is no reason why an invoice may not also qualify as an application for payment alongside accounting for VAT. For this to happen, it must comply with the contract requirements, alongside meeting the Construction Act / Construction Contracts Act and, in England and Wales, the Scheme for Construction Contracts [The Scheme].
Payment applications are more complex than a simple invoice, requiring multiple pieces of documentation to prove the legitimacy and validity behind the request for payment.
Let’s examine the items which typically need to be included with your application.
For an application to be valid, it must be issued within the timeframe outlined in the requirements of the particular contract. It should be clear to the recipient that it is a demand for money and that action is required in respect of it.
The payment application should also use the language of the agreement. For example, if the contract refers to an ‘Interim Payment Application’, then use the same title to ensure the payer is in no doubt what you’re submitting.
Additionally, your application should also contain the following, as a minimum:
When it comes to submitting additional evidence, here is a list of documentation and information that you should include:
Given the detail required, most parties in the construction industry tend to submit or receive payment applications monthly, but each application is unique to each project and current status.
This fact alone determines the trend toward monthly submissions. But you should always be guided by the terms of your contract, which may stipulate more exact timing for submitting your application for payment.
Following this guide should keep you on the right track, but, if you want to maintain relationships while avoiding delays or cashflow issues, it’s certainly worth avoiding these common mistakes:
As you’ll most likely be able to tell, the construction payment process can be tricky to stay on top of. Whilst this guide will help, there are solutions to making the whole process far simpler.
Payapps is a simple, intuitive and easy-to-use online software solution that helps you manage the entire application for payment process up and down the construction supply chain.
Whether you’re submitting or approving and certifying applications for payment, Payapps empowers you to prepare, submit and track your applications for payment with much greater ease versus a manual process.
