Ch. 1: Construction Industry Fundamentals 101

Owner

The person or company ultimately responsible for funding and commissioning the construction project. Example: A real estate developer hires a GC to build a $50M apartment building.

Developer

A person or company that develops real estate, often serving as the owner or representing the ownership entity. Example: A developer purchases land and hires a GC to construct a new office building.

General Contractor (GC)

The company hired by the owner to manage and execute the overall construction project. The GC may perform some work itself and subcontract other work. Example: The owner hires a GC for $20M, and the GC hires electricians, plumbers, and concrete contractors.

Subcontractor (Sub)

A company hired by the GC to perform a specific portion or trade of the construction work. Example: The GC hires an electrical subcontractor for $2M.

Specialty Contractor

A subcontractor that specializes in a particular construction trade or type of work. Example: An HVAC contractor, electrical contractor, roofing contractor, or plumbing contractor.

Vendor / Supplier

A company that provides materials, equipment, or other goods used on the construction project. Example: An electrical supplier sells $100K of wire and equipment to the electrical subcontractor.

Architect

The professional responsible for the building's design, drawings, and architectural specifications. Example: The architect creates the plans showing what the building should look like and how spaces should be laid out.

Engineer

A professional responsible for technical aspects of a project, such as structural, civil, mechanical, or electrical engineering. Example: A structural engineer designs the steel and concrete structure.

Construction Manager (CM)

A person or company responsible for coordinating and managing construction activities. Depending on the project, the CM may represent the owner or have other contractual responsibilities. Example: A CM coordinates the GC, architect, schedule, budget, and project stakeholders.

Prime Contract

The main contract between the owner and the general contractor. Example: The owner signs a $20M prime contract with the GC to build the project.

Subcontract

A contract between the GC and a subcontractor for a specific portion of the project. Example: The GC signs a $2M subcontract with the electrical contractor.

Purchase Order (PO)

A formal document authorizing a vendor to provide specific goods or services for a specified price. Example: The GC sends a $50K PO to a supplier for construction materials.

Scope of Work (SOW)

A description of exactly what work a contractor or subcontractor is responsible for performing.
Example: "Install all electrical wiring, outlets, lighting, and electrical panels on floors 1–10."

Change Order

A formal modification to an existing contract that changes the scope, price, schedule, or other contractual terms. Example: The owner asks the GC to add a parking garage, increasing the contract by $1M.

Contract Value

The total dollar amount associated with a contract. Example: The GC has a $10M contract with the owner.

Original Contract Value

The value of the contract when it was initially signed, before subsequent changes. Example: The GC originally signs a $10M contract.

Current Contract Value

The current value of the contract after approved changes have been incorporated. Example: The original contract was $10M, and there are $500K of approved change orders, so the current contract value is $10.5M.

Budget

The amount a company plans or expects to spend. Example: The GC budgets $7M for labor and materials.

Committed Cost

A cost the company has committed to through a contract, subcontract, PO, or other obligation, even if it hasn't been paid yet. Example: The GC signs a $2M subcontract. That $2M is a commitment.

Actual Cost

The cost that has actually been incurred or recorded. Example: The GC has incurred $500K of costs on the electrical subcontract so far.

Forecast

An estimate of what the company expects to happen financially in the future. Example: "We currently forecast that the project will cost $7.5M."

Billing

The process of requesting payment for work, goods, or services that have been provided. Example: The GC bills the owner $500K for work completed during March.

Invoice

A document requesting payment for an amount owed. Example: A subcontractor sends the GC a $100K invoice.

Pay Application / Pay App

A construction-specific request for payment that typically documents work completed during a particular billing period. Example: A subcontractor submits Pay App #4 requesting $250K for April work.

Progress Billing

Billing periodically based on the amount of work completed rather than waiting until the entire project is finished. Example: A $1M subcontractor bills $200K after completing approximately 20% of its work.

Draw

A request for funds from a project funding source, often a construction lender, based on project costs or progress. Example: The owner submits a $1M draw request to the construction lender.

Draw Request

The formal documentation submitted to request a draw of project funds. Example: The owner submits invoices, pay applications, and supporting documents to request $1M from the lender.

Cash Receipt

An accounting record showing that money was actually received. Example: The GC receives $500K from the owner and records the receipt in its accounting system.

Payment

The actual transfer of money to satisfy an obligation. Example: The GC sends the subcontractor $200K.

Retainage

A portion of a payment that is withheld until later in the project or until certain contractual conditions are satisfied. Example: On a $100K billing with 10% retainage, $10K is withheld and $90K is paid.

Net Payment

The amount actually paid after deductions such as retainage. Example: $100K gross billing − $10K retainage = $90K net payment.

Outstanding Balance

The amount that remains unpaid. Example: A $1M contract has $600K paid, leaving $400K outstanding.