Progress payments
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Progress payments are payments made to contractors for work completed at certain points in time throughout the duration of a project. Progress payments are usually made in regular intervals and are based on the percentage of work completed. Progress payments provide contractors with a steady stream of income during the project and also provide assurance that the project is progressing as expected.
Progress payments are beneficial for both contractors and clients. For the contractor, progress payments provide working capital to cover costs in the early stages of the project, as well as a steady stream of income as the project progresses. For the client, progress payments reduce the risk of overpayment and provide assurance that the project is moving forward.
Progress payments are typically calculated based on a percentage of the total cost of the project. This percentage is agreed upon before the start of the project and is often based on milestones such as completion of certain stages of the project. For example, a contractor may receive 10% of the total cost when the project begins, 25% when the groundwork has been completed, 35% when the project is halfway done, and the remaining 30% upon completion.
Example of Progress payments
Progress payments can vary greatly depending on the type of project. Generally, progress payments are structured in four stages:
- Initial Payment: This is typically 10-20% of the total cost of the project and is due upon signing of the contract.
- Mid-Project Payment: This is typically between 25-40% of the total cost of the project and is due when the project is halfway complete.
- Final Payment: This is typically between 35-50% of the total cost of the project and is due when the project is nearing completion.
- Final Payment: This is typically the remaining balance of the total cost of the project and is due upon completion of the project.
When to use Progress payments
Progress payments are beneficial when a project is large or is expected to take a long time to complete. They provide contractors with the capital they need to start the project and a steady stream of income as the project progresses, and provide assurance to the client that the project is progressing as expected.
Progress payments can also be useful when a contractor needs to purchase materials or hire subcontractors to complete the work. They provide the contractor with the necessary capital to purchase materials, hire subcontractors, and pay workers.
Types of Progress payments
Progress payments can take several forms, including:
- Lump-sum payments: A lump-sum payment is a single payment made at the completion of the project. This type of payment is typically used when the project is of a short duration and the contractor can easily complete the project within a set time frame.
- Milestone payments: Milestone payments are periodic payments that are made after certain stages of the project have been completed. This type of payment is typically used for longer-term projects, where the contractor needs to be paid for each stage of the project in order to cover costs.
- Progress payments: Progress payments are periodic payments that are made based on the percentage of the project that has been completed. This type of payment is typically used for longer-term projects, where the contractor needs to be paid for each stage of the project in order to cover costs.
Steps of Progress payments
- Agree on the payment terms: The payment terms should be agreed upon and documented before the project begins. This should include the percentage of the total cost that will be paid at each stage of the project.
- Calculate the amount to be paid: The amount to be paid can be calculated using the following formula: Amount to be paid = Total cost of project × Percentage of payment.
- Make the payment: Once the amount to be paid is calculated, the payment can be made.
Advantages of Progress payments
- Progress payments provide contractors with working capital to cover costs in the early stages of the project. This helps contractors cover the cost of materials, wages and other expenses associated with the project.
- Progress payments provide contractors with a steady stream of income throughout the duration of the project.
- Progress payments reduce the risk of overpayment and provide assurance to the client that the project is moving forward.
Limitations of Progress payments
Progress payments come with several limitations. Firstly, progress payments may not cover all costs associated with the project. Contractors may still need to cover certain costs up front or take out a loan to cover these costs. Additionally, progress payments are based on estimates of the total cost of the project, and if the final cost of the project differs the contractor may not receive the entire amount due. Finally, progress payments may not cover all costs associated with the project, and the contractor may need to come out of pocket for certain costs.
Other approaches to progress payments include the use of advance payments, retention payments, and performance payments.
Advance payments are payments made to contractors before any work has been completed, typically to cover initial costs such as materials and equipment. These payments are often made in two installments, with the first being a smaller advance payment and the second being a larger payment once the project is underway.
Retention payments are payments made to contractors at the completion of the project, usually amounting to between 5% and 10% of the total cost of the project. These payments are intended to ensure that any defects or outstanding works are addressed.
Performance payments are payments made to contractors based on the quality of the work completed. These payments are typically based on a predetermined metric such as cost, time, or quality.
In summary, other approaches to progress payments include advance payments, retention payments, and performance payments. Advance payments are made to cover initial costs, retention payments are made at the completion of the project to ensure that any defects are addressed, and performance payments are made based on the quality of the work completed.
Suggested literature
- Choudhry M. (2018), An Introduction to Banking: Principles, Strategy and Risk Management, John Wiley & Sons, Sussex
- Istrate L. G. (2019), The Role of Credits and Bank Guarantee Letters in Financing Trading Companies, "Ovidius", volume 19
- Kao J. C. M. (red.) (2015), Green Building, Materials and Civil Engineering, CRC Press, London
- Luoa P., Wang H., Yang Z. (2015), Investment and financing for SMEs with a partial guarantee and jump risk, "European Journal of Operational Research", no.249
- Tsounta E. (2011), Home Sweet Home: Government's Role in Reaching the American Dream, International Monetary Fund, Western Hemisphere
- Vliet K., Reindorp M. J, Fransoo J. C. (2013), The price of reverse factoring: Financing rates vs. payment delay, "European Journal of Operational Research", no. 242
