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A progress payment is a payment under a contract or client-architect agreement for work partly completed. Under a building contract a progress payment would be made by the client to the contractor on the presentation by the contractor of a progress certificate prepared by the architect.
Planning the cash flow
Many clients are unable to fund their projects in the construction stages without borrowing in some form. There is a frequent need, therefore, to plan the cash flow of their borrowing so that they do not borrow more than they need at a particular time and to avoid costs of borrowing too early. Even in the case of clients who can fund the project from their own resources, there is a need to plan the cash flow so that money is not committed too early and is therefore available for other purposes for part of the project life.
In the case of cost plus contracts, such cash-flow planning may be difficult. In the case of conventional lump-sum contracts , cash-flow planning of the owner's progress payments to the contractor is often quite straightforward. An architect can provide a valuable service to the owner by assisting in the collection and dissemination of the necessary data for the cash-flow plan.
It has been long established in the building industry that in conventional buildings under standard lump-sum contracts, the pattern of progress payments is quite consistent. When represented graphically, this pattern is seen in the form of a lazy 'S'. It is often referred to as the 'S' curve of payments. Diagram 1 below illustrates this pattern.
In practice, the payments would be more likely to be shown as monthly amounts rather than percentage amounts and the periods would more likely be months. The resultant graph would be a different shape from the above, but the lazy 'S' would still be evident.
Diagram 2, below, shows a more realistic shape. Note that in both diagrams, the accumulative payments are not represented by a straight line but by an 'S' curve. This is typically the case, with the potential exception of market anomalies such as the COVID-19 disruption on material supplies and labour market.
It is easily seen (and can be easily explained to a client) that the rate of payments is typically greater in the middle of the contract period than near the start or end of it (notwithstanding potential market anomalies as noted above). Usually, there is more building work in the middle months/years than in the first and last months/years.
It is wise to include in the tender, documentation for the contractor to provide a cash flow for the project, which can be used as a basis for comparison with the cash flow estimated by the consultant team.
A 'ready reference' scale like the one above (Diagram 3) may be prepared by an office for all projects of a similar nature. An office may have several such scales, one for each type of project. (It is unlikely that one scale would be appropriate for all projects). The advantage of such a scale is that it provides an easy-to-read ready reckoner or best estimate for calculating cash flows when providing preliminary advice before receipt of firmer cash-flow data.
Cash flow information provided to a client by an architect and based on information provided by others, should be accompanied by an appropriate disclaimer as to responsibility for incorrect data.
The information referred to in this advice can be extended to form an overall cash flow for all project costs, including professional fees and any other costs which a client may require. Cash flows for total costs (ie not just building-contract costs) can be set up on spreadsheet programs.
Arbitration: progress payments
Architects should ensure that their progress certificates reflect the full value of the contract works completed and are up to date.
In the event of a dispute, architects should advise their clients that if any short payment occurs, it will not only count against them in any subsequent arbitration, but also may affect their client adversely in relation to the costs awarded.
Set-off
Set-off (sometimes called set-off monies) describes the process whereby a contractor's progress claim is reduced by the contract administrator by an amount owed by the contractor to the owner. For example:
- the owner pays for temporary service connections to a site which are the contractor's responsibility under the contract
- the owner supplies an item or a piece of equipment (such as a cook top or a mixer tap which they particularly like) that, under the contract, was to be provided by the contractor.
In the example above, these scenarios could also be processed as contract variations or contract sum adjustments.
Disclaimer
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