Construction Payments: Schedule of Values, Progress Payments, Retention, Prompt Pay Acts, and Related Concepts

Schedule of Values and Payment Structure

Payments are defined up front; architect’s payments are in the architect’s agreement and are generally milestone-based, while contractor payments are more complex and require careful administration.
During construction, payments are made in a sequence called progress payments, not just a single end-of-project payout.
The schedule of values (SOV) is the foundational document for payments; it breaks the project down by divisions and line items, showing what the contractor intends to charge for each portion of work.
- The SOV is reviewed and approved by the architect as part of construction administration; it becomes the standard by which subsequent payments are measured.
- Typical structure (as shown in the example):
- General requirements
- Concrete
- Masonry
- Metals
- Under each division, items are listed with a defined amount.
- On GMP (guaranteed maximum price) projects, the SOV may include an additional column like original estimate, value, and engineered cost; on standard fixed-price projects, there is typically a single column with the amount for each item.
- The SOV defines how much you are entitled to pay as each item is completed.

Progress Payments Process

Construction is financed by a series of progress payments, not by waiting until final completion.
The contract defines a process for applications for payment; usually monthly, but not required to be exactly that.
A typical process includes:
- Contractor submits an application for payment based on work completed to date.
- The application includes a conditional lien waiver from subcontractors (to address mechanics liens, to be discussed later).
- The application/document used is the AIA form (or an owner-produced form with the same principles).
- The document shows: project details, period covered, calculations, and a certification that the amounts are correct.

Calculation of a Pay Application (Example Walkthrough)

Base numbers from the example:
- Original contract sum: $C_0 = 1{,}000{,}000$
- Change orders: $CO = 200{,}000$
- Total contract sum: $C = C_0 + CO = 1{,}200{,}000$
Progress to date (for the pay application in the example): total completed and stored to date (TCD): $TCD = 500{,}000$
Retention (typical 10%):
- Retention amount: $R = 0.10 imes TCD = 0.10 imes 500{,}000 = 50{,}000$
Total earned less retention: $TE = TCD - R = 500{,}000 - 50{,}000 = 450{,}000$
Amount previously certified/paid: $P_{ ext{prev}} = 200{,}000$
Current payment due (before final adjustments):
- Current payment due: $P{ ext{now}} = TE - P{ ext{prev}} = 450{,}000 - 200{,}000 = 250{,}000$
Balance to finish (what remains in the contract after current period, including retention):
- Balance to finish formula (as described): $B = C - TCD + R = 1{,}200{,}000 - 500{,}000 + 50{,}000 = 750{,}000$
Notes:
- The total “earned to date” is the sum of work completed and stored to date, not just the amount in the current period.
- Retention is withheld from each progress payment and is released later under agreed terms (often at substantial project milestones or final completion).

Timeline for Certification and Payment (AIA General Conditions)

After submission, the architect has seven days to review and certify or object to portions of the pay application.
Reasons to withhold certification (examples of seven items):
- Defective work or non-compliant installation
- Unresolved claims or disputes
- Subcontractor not paid or evidence of non-payment
- Evidence that required insurances or bonds are not compliant
- Other contractually defined issues (as specified in the general conditions)
If the architect withholds certification in part or in whole, the owner pays only the certified amount; the remainder is not paid until issues are resolved.
If the owner fails to pay the certified amount on time, the contractor has remedies:
- Suspend work with notice
- Terminate the contract in serious cases
- Both remedies require notice and an opportunity to cure, per contract terms

Final Payment and Documentation

Final payment triggers a separate procedure with additional requirements:
- Affidavit that all workers, subcontractors, and suppliers have been paid and that there are no encumbrances on work performed
- Evidence of continuing and compliant insurance, with dedicated coverage for the owner’s needs
- Consent of the surety (for bonded projects) to ensure the surety has no claims against the funds
- Warranties, guarantees, and other transfer of warranties to the owner
- O&M manuals, as-builts, and other project documentation as required by the contract
- Any other documentation required by the contract or owner (e.g., maintenance manuals, warranties, certifications)
The consent of surety is important because the surety may have claims against the contractor; without consent, paying the contractor could leave funds at risk of claim by the surety.

Prompt Pay Acts and Their Effects

Many states have prompt pay acts to prevent owners and contractors from withholding payments unduly, recognizing that slow payments burden subcontractors and material suppliers.
Typical structure (as described for Arizona example):
- The payment application is issued, and there is a review period (e.g., 14 days) for the owner and architect to review and determine if the amount is correct.
- If there is no timely written objection within that period, the amount is deemed certified (deemed certified status).
- The owner must pay the certified amount within a defined period (e.g., 7 days after certification, totaling 21 days from pay application to payment in AZ).
- The contractor then has 7 days to pay his subcontractors, creating a ripple effect to ensure downstream payment.
Penalties and remedies:
- If the owner does not pay on time, statutory penalties apply (e.g., 18% interest per year in Arizona) and the contractor may suspend or terminate for nonpayment.
- Interest accrues daily; daily rate approximates $i_{ ext{day}} = \frac{0.18}{365} ext{ per day}$
Conflicts with contract terms:
- If the contract requires longer payment periods than the act, the act controls; you cannot contract out of the act to impose less stringent terms.
- Contracts may attempt to outsourcing opt-out provisions, but statutes generally render those ineffective if they are less stringent than the act; the act takes precedence.
Practical considerations:
- While the act provides leverage, financing the project via prompt pay penalties can deteriorate owner-contractor relationships; decisions may balance legal rights with business relationships.
- Model contracts may require extensive opt-out language if parties wish to avoid the Act; however, such opt-out provisions are deliberately difficult to implement and often deemed ineffective.
Potential conflicts:
- If a contract says one thing but the statute requires something stricter, the statute governs. Practically, you must ensure contracts comply with the Act to avoid penalties and disputes.

Retention and Alternatives (Securities in Lieu of Retention)

Retention is the amount withheld from each progress payment, typically 10%, to ensure performance and timely completion.
- Example: On a $100{,}000 progress payment with 10% retention, the owner would pay $90{,}000 and hold $10{,}000 as retention.
Purpose of retention:
- Acts as a leverage tool to ensure proper performance, timely delivery of shop drawings, and correction of defects.
- Provides a backup fund for the owner to cover incomplete work or defects, or to pay for remedies if the contractor fails to perform.
Public works vs. private projects:
- Public works frequently require retention (often up to 10%), with staged reductions as progress milestones are met (e.g., step-down from 10% to 5% after ~50% completion).
- Private contracts may or may not require retention; the amount and the possibility of reduction should be negotiated.
Securities in lieu of retention:
- Contractors can offer securities (e.g., a bank certificate of deposit) equal to the retention amount instead of money being held directly by the owner.
- The owner can cash the securities if needed to cover funds due, while the contractor retains the cash flow and earns interest on the securities he owns.
- In public projects, statutes often define when and how securities may be used; in private projects, this must be negotiated in the contract.
- The arrangement can generate additional fees or interest for the contractor, and the owner still gains assurance of funds through the securities.

Accord and Satisfaction (Quality/Value Adjustments)

Accord and satisfaction occurs when the owner and contractor agree to resolve a dispute about the value of work by agreeing to a reduction in price rather than full correction of the work.
- Example scenario: Tile looks off or grout is imperfect; it may be too costly to fully redo, so the owner offers a price reduction instead of requiring full remediation.
- The owner might include language in the transmittal/check indicating that accepting the reduced amount constitutes full and final payment for that item.
- This may not directly correspond to the cost of the remediation; the discount may be greater than the actual remediation cost, reflecting negotiated settlement or judgement.
Jurisdictional variability:
- Accord and satisfaction terms depend on local law; consult legal counsel to confirm enforceability in your jurisdiction.
Practical note:
- Using accord and satisfaction can affect future claims; once accepted, you may be barred from pursuing additional payment related to that item.

Nonpayment Scenarios and Payment Protections (Joint Checks)

When owners pay the contractor but the contractor fails to pay some subcontractors or material suppliers, those unpaid parties can potentially assert mechanics lien rights against the owner.
- Even if the owner already paid the contractor, subcontractors who were not paid can place liens against the property to recover what they are owed.
Joint checks (two-party or multi-party checks) are a risk-management tool:
- The owner requires the contractor to provide a list of who is entitled to what and issues checks that are made out to both the contractor and each subcontractor/material supplier.
- Each check requires both the contractor and the respective subcontractor to sign; the subcontractor then signs before depositing.
- The goal is to ensure that funds flow directly to each party owed and reduce the risk of nonpayment downstream.
Same concept applies in reverse: if a subcontractor pays a supplier but the contractor fails to pass funds to others, the owner can insist on similar joint-check practices and cure for the owner’s risk.

Practical Implications and Negotiation Tips

Alignment of contract terms with statutory requirements (Prompt Pay Acts) is essential; failure to align can create legal and financial exposure.
Retention terms should be negotiated to balance owner protection with contractor cash flow; options include:
- Reducing retention gradually as milestones are achieved (e.g., 10% down to 5% after 50% completion).
- Using securities in lieu of retention, especially if the project will benefit from the contractor maintaining cash flow and earning interest on securities.
For prompt pay and lien protection:
- Use prompt pay provisions to ensure timely payments and avoid cascading financial delays to subcontractors.
- Consider joint-check provisions to reduce the risk of mechanic’s liens and ensure that all parties are paid.
Documentation and auditability:
- Keep precise and complete documentation for all pay applications, certifications, change orders, and retainage calculations.
- Ensure affidavits, insurance evidence, and surety consents are collected and organized for final payment.
Legal counsel recommendations:
- Given the jurisdictional variance in prompt pay acts and accord-and-satisfaction rules, consult counsel to tailor terms to the project’s location and contract suite.
Ethical and practical considerations:
- While legal remedies exist, maintaining a good working relationship with the owner and subcontractors often yields better long-term outcomes for ongoing and future work.
Real-world relevance:
- Understanding these payment structures helps prevent cash-flow crises on large projects and provides tools (like joint checks and retention securities) to protect all parties involved.

Quick Reference Formulas and Key Values (LaTeX)

Original contract sum: $C_0 = 1{,}000{,}000$
Change orders: $CO = 200{,}000$
Total contract sum: $C = C_0 + CO = 1{,}200{,}000$
Total completed and stored to date: $TCD = 500{,}000$
Retention rate: $r = 0.10$
Retention amount: $R = r imes TCD = 0.10 imes 500{,}000 = 50{,}000$
Total earned less retention: $TE = TCD - R = 500{,}000 - 50{,}000 = 450{,}000$
Prior payments: $P_{ ext{prev}} = 200{,}000$
Current payment due (before adjustments): $P{ ext{now}} = TE - P{ ext{prev}} = 450{,}000 - 200{,}000 = 250{,}000$
Balance to finish: $B = C - TCD + R = 1{,}200{,}000 - 500{,}000 + 50{,}000 = 750{,}000$
Prompt Pay Act timing (Arizona example): review period $t{ ext{review}} = 14 ext{ days}$ ; payment period after certification $t{ ext{pay}} = 7 ext{ days}$ ; total $t{ ext{total}} = t{ ext{review}} + t_{ ext{pay}} = 21 ext{ days}$
Daily interest rate if the Act imposes 18% annually: $$i_{ ext{day}} = rac{0.18}{365} \