Your Guide to the Construction Project Payment Process, Including Retainage
Reading Time: 3 minutes
Construction projects at their foundation are no different than any other businesses. Cash is king. Therefore, those who control the cash, often control the process. As a result, lenders and owners have major advantages in negotiation with a certified contractor. However, contractors and sub-contractors who thoroughly understand the process can avoid losing their shirt(s). This video presentation recorded by Charles B. Jimerson covers the flow of money, the construction project payment process, conditions that precede payment, and retainage.
To access the presentation, visit YouTube or click play on the embedded image below. The length of the presentation is 1:00:58.
An Overview Of The Flow Of Money
The money starts with the lender. Next, it flows down to the owner. Then to the general contractor. Finally, it arrives with the sub-contractor. However, the payment process follows the opposite direction, flowing up from the sub-contractor to the general contractor to the owner and to the lender.
The Construction Project Payment Process
You can draw upon a construction loan throughout a project as needed. In this way, it is similar to a normal line of credit. However, the mechanisms for drawing upon a construction loan is very different. Construction loan funds use various forms to request a draw. Also, specific documentation must support each draw, such as invoices and receipts. The payment process is further explained in the presentation through a review of these factors:
- Document flow
- The documents
- Subcontractor cash flow
Conditions Precedent To Payment
Completing specific forms and submitting them on the project schedule allows for payment draws when appropriate. Some forms are considered tantamount to legal documents. Therefore, they must be accurate and factual:
- Contractor application for payment, architect’s certification for payment, and final affidavit
- Contractor/sub-contractor releases
- Sub-contractor contingent payment, time of payment, and other requirements
If there are issues with documentation, that can result in major repercussions to the project. These could include delayed or cancelled payment, or potentially a breach of contract.
Owners, contractors and sub-contractors should set forth appropriate retainage in the construction contract. Otherwise, there is the opportunity for abuse. Sub-contractors are often victim to these circumstances. That’s because the contract may define “substantial completion” as the timing for payment. Or there may be a retained payment clause. In any case, it is never a good position for you to be in where resolution of the payment process results in you being paid years after your work is done. So be sure to read, understand, and know what you are agreeing to before you sign. Or even better, contact Jimerson Birr so we may assist you in the review process.