In the construction industry, it's often not enough to send an invoice as a request for payment. Instead, contractors submit lengthy pay applications to be approved for payment.
A construction pay application is a collection of documents showing other project stakeholders the work and expenses a contractor has completed that they must reimburse.
Construction payment applications may look different on every project. The contract specifies the requirements for pay apps based on what the owner, lenders, or investors want to see.
This article will discuss what to include in a successful construction payment application and best practices for the payment application process that get contractors paid faster.
Why send payment applications?
The complexity of construction projects and the number of stakeholders involved require more information than mere invoices can cover. Instead, construction companies must complete payment applications to get approved for a payment, which makes payment applications a cornerstone of good financial management. Any missing information could delay payment, even until the next payment cycle.
To maintain healthy business finances, contractors need to understand and provide all the necessary elements for a complete payment application.
Step-by-step Process for submitting payment applications
1. Understand all the requirements
Payment applications include a payment application form and any supporting documents the owner, construction manager, lender, or investors require to approve payment.
The process of submitting a payment application begins long before the first milestone check is due. It begins with fully understanding the contract specifications for payment application. Construction contracts should stipulate which documents need to be included and even which pay app form to use.
Even after carefully reading through the contract, it's a good idea for contractors to meet with all the contract stakeholders about payment applications. Even though a builder might have an understanding with an owner about pay app expectations, other stakeholders may require more information before they sign off on a section of work.
2. Gather necessary information
As soon as it's clear what information is required, the contractor can start to track expenses for the first payment. Gathering information early and consistently can help alleviate difficulties later.
For instance, a construction manager may ask to see a specific materials invoice as part of the payment application. The general contractor may not have gathered that information from the subcontractor. If the subcontractor has moved on to other work, it may be difficult to obtain the invoice. It's much easier to understand what's needed early on in the project and gather the documents as work progresses.
3. Create a payment application
When it's time to request a payment, contractors should gather all necessary documents together.
The following are some of the most common elements in a completed construction pay app.
Payment application forms
The pay application form includes all of the identifying information to help the owner and other project stakeholders understand what the contractor expects to be paid for. It should include:
- Project name
- Names of the project owner, architect, construction manager, and lenders or investors involved
- A payment application number
- Original contract amount, as well as value of work completed to date
- Change order information and forms
- Total of prior payments, the total amount currently due, and the balance remaining on the project
The project contract should stipulate the specific pay application form contractors should use for the project. The AIA has created standardized construction documents, including pay application forms, but using the correct one in each pay app is important.
A schedule of values
The schedule of values is a construction business accounting document that contains a list of every work item and materials expense involved in the project, allocating each one a portion of the project sum. It also assigns time expectations for each aspect of the job, allowing owners and architects to assess project progress.
The schedule of values generally appears as a table with rows, each assigned to a portion of the project work, along with a short description. Columns may be added to detail the work already paid out.
Invoices and payroll reports
Back up your purchase claims with invoices and receipts for materials, equipment rentals, and labor. Construction businesses must include prevailing wage reports on government-contracted jobs to prove they pay workers an adequate hourly wage and overtime in an accepted range for the particular area where the work is taking place.
Photos and drawings as required
Photos and drawings may be submitted as evidence of the work completed on a job or as proof of the proper care of stored materials. Luckily, current technology enables any site staff to take photos or videos of project progress and post them in cloud-based software for easy accessibility.
Lien waivers
Owners and general contractors may need to see lien waivers before releasing payment. These may include conditional lien waivers for expected payments and unconditional lien waivers for payments received during previous pay cycles.
Change orders
Change orders are documents detailing any changes to project scope from original project contracts. Owners must sign off on change orders that describe what work is changing and the resulting impact on the budget and schedule. Any change order included in the payment application should be backed up with supporting documentation.
Information about stored materials
Some contracts allow contractors to be paid for materials they've purchased for the project, even if they haven't installed them yet. Before releasing payments for stored materials, owners may want to see evidence that the materials are being properly stored where they are safe from weather damage or are at risk of theft. They may even require proof that the contractor has taken out insurance on the stored items.
4. Submit the application for payment
The contract between the owner and builder should outline the exact payment timelines and deadlines for submitting payment applications. In many cases, the construction billing schedule allows for monthly pay applications to allow contractors to maintain consistent cash flow throughout the project. If a construction company fails to meet the deadline or has missing or incorrect information on the application, payment could be delayed until the next payment cycle.
Remember that just because a payment application is submitted doesn't ensure payment will happen right away. Some contracts allow for extended payment terms that allow anywhere from 30 to 90 days between payment application and payment delivery.
How to make payment applications more manageable
Each monthly pay application could involve hundreds of pages of forms and documentation for some contractors and subcontractors. The process can be overwhelming, particularly for smaller construction businesses.
Investing in technology that can help streamline these processes could alleviate the stress of submitting consistent and timely pay applications. Truss can help to streamline many of the processes involved in pay apps.
For instance, contractors can make materials purchases with Truss cards, organize spending for a particular project and simplify expenditure documentation.
Construction companies can send secure, instant payments to their subcontractors using just their email to expedite the process of getting lien waivers back to include in payment applications to owners.
Once pay apps have been approved, Truss can streamline the payment process by allowing contractors to send payment requests to their clients via email that can be paid online instantly. Clients sign in with their banking credentials to securely pay directly from their bank account or credit card.
Common mistakes to avoid in payment applications
Payment applications can be daunting. With so many people involved, the process can become complex, making it ripe for errors and omissions.
Missing forms
Pay application forms are a critical part of the application process. They detail who the pay app is from, what project it is for, and how much of the project balance is due during the current payment cycle. Without the payment application form, owners may have no idea what they're looking at.
Contractors should ensure that all change orders are properly documented on the payment application, including approvals and backup evidence. Change orders can offer a great way to increase profits on a construction project or be a black hole for profits to get lost.
Missing documents
A payment application is a chance to show a general contractor or an owner exactly what work has been completed on-site to be properly reimbursed. Contractors should provide as much proof as possible so that they get paid on the first application, including photos, drawings, receipts, invoices, and anything else that proves your case for payment.
Not following the proper payment application process
Contractors who don't follow the pay application process dictated in the contract risk having their payment application put off until the next payment cycle. Common process errors are missing project deadlines, not having key forms notarized, or tinkering with the schedule of values in an attempt to get money earlier in the project.
Pay applications are a lot of work, can be complicated, and may be very difficult to organize each pay cycle. However, they are a critical part of getting paid, so it's worth following the rules as well as possible to help encourage timely payment.
Payment applications are critical for the success of a project
What happens if monthly installment payments are delayed thanks to a botched pay app? The result can be a domino reaction of added costs, financial distress, and finally, failing project health.
A contractor who doesn't get paid regular progress payments may experience cash flow issues, and either have to float the sub's pay out-of-pocket or else not have enough in the bank to pay the sub on time.
The sub then either floats the cash to pay workers and materials suppliers, or those invoices go unpaid.
Eventually, a new expense will arise that either the GC or the sub can't cover, and the construction work will go on hold until payments resume.
Conclusion
Preparing a pay app begins with negotiating the contract documents, where the required processes and forms should be laid out in detail. From there on, contractors are responsible for gathering all of the necessary information, submitting the proper pay application forms, and finally submitting payment applications in full and on time.
Contractors should make every effort to include all the necessary documents and follow the pay app process to the letter to better their chances of timely payment.
Construction payment software can help construction accounting teams keep all of their payment information together. Truss cards can help keep spending all in one place to improve purchase records. Payments through Truss are secure and make the funds available to recipients instantly so that the cash can flow to keep construction projects moving.
