Progress Payment

Definition

A progress payment is a partial payment made to a contractor or subcontractor during a large project based on the percentage or phase of work completed and verified by an agreed-upon authority, such as a project manager or engineer. This type of payment is commonly utilized in extensive projects like civil engineering works, shipbuilding, and the construction of large items of plant and machinery.

Examples

Construction Projects: In a construction project, a contractor may receive progress payments every month based on the amount of work completed. For example, if 25% of the work is verified as completed, the contractor will receive 25% of the contract’s total value.
Shipbuilding: A shipyard building a new vessel might receive milestone payments upon reaching specific stages, such as completing the hull, installing the engines, or the launch of the ship.
Manufacturing Large Machinery: When manufacturing large pieces of machinery, a company might set progress payments when certain critical components are completed, ensuring the supplier has the cash flow to continue the project.

Frequently Asked Questions (FAQs)

What is the purpose of a progress payment?

The purpose of a progress payment is to ensure that contractors have sufficient cash flow to continue work on a project. It also provides a method for project owners to verify work completion before making payments.

How are progress payments calculated?

Progress payments are typically calculated based on the percentage of work completed or specific milestones achieved. These are often verified by a project manager, engineer, or other agreed authority.

Can progress payments vary from project to project?

Yes, the structure and terms of progress payments can vary depending on the nature of the project, the contract terms, and negotiations between the project owner and the contractor.

What safeguards are in place with progress payments?

Project owners often require detailed documentation and certification of completed work before making progress payments. This might include site inspections, reports, or other forms of verification.

Are progress payments applicable to all industries?

Progress payments are most commonly used in industries involving long-term contracts and large-scale projects, such as construction, civil engineering, shipbuilding, and manufacturing. However, the concept can be applied to any extensive project requiring staged payments.

Retention Payment: A portion of the payment withheld until the project is completed satisfactorily to ensure the contractor fulfills all obligations.
Milestone Payment: Payments made upon reaching predefined project milestones or deliverables.
Certified Payment: Payment made after verification and certification of the completed work by an authorized entity.
Contractual Payment Schedule: A predefined timeline and condition under which payments will be made as per the contract terms.

Online References

Suggested Books for Further Studies

“Construction Project Administration” by Edward R. Fisk and Wayne D. Reynolds.
“Project Management for Construction” by Chris Hendrickson.
“Construction Contracts: Law and Management” by John Murdoch and Will Hughes.
“Construction Scheduling: Principles and Practices” by Jay S. Newitt.
“Civil Engineering Contracts: Practice and Procedures” by Stephen Wearne and Keith White-Hunt.

Accounting Basics: Progress Payment Fundamentals Quiz

### What is a progress payment? - [ ] A final payment made to a contractor after project completion. - [x] A payment made to a contractor based on work completed at a specified date. - [ ] A payment deducted from the total cost of the project. - [ ] None of the above. > **Explanation:** A progress payment is a respective payment made to a contractor based on the level of work completed at a specified time. ### Why are progress payments important in long-term contracts? - [ ] They guarantee the contractor makes a profit. - [x] They help ensure sufficient cash flow for ongoing project work. - [ ] They are a legal requirement for all contracts. - [ ] They eliminate the need for detailed project planning. > **Explanation:** Progress payments help ensure that contractors have sufficient cash flow to continue working on the project, which is crucial for long-term projects. ### In which industry is the practice of progress payments most common? - [ ] Retail - [ ] IT Services - [ ] Healthcare - [x] Construction > **Explanation:** Progress payments are most common in the construction industry, where long-term contracts and substantial financial outlays are typical. ### How is the amount for a progress payment determined? - [ ] It's a random figure decided by the contractor. - [x] It's based on the percentage of work completed and certified. - [ ] It's always a fixed amount specified at the start of the project. - [ ] It's determined by the contractor's expenses. > **Explanation:** The amount for a progress payment is usually a proportional figure based on work completed and certified by an authority. ### What prevents contractors from receiving excessive progress payments? - [ ] The contract always specifies a fixed low amount. - [x] Work completion must be certified by an agreed authority. - [ ] Progress payments are capped at minimal times during the project. - [ ] The project owner decides when to pay. > **Explanation:** Certification by a neutral authority ensures that progress payments reflect the actual work completed. ### Which term is closely related to progress payment? - [ ] Retention Payment - [ ] Gross Payment - [ ] Net Receivable - [x] Milestone Payment > **Explanation:** Both progress and milestone payments are related as they involve partial payments based on project completion stages. ### What is a retention payment? - [x] A portion of the total payment withheld until project completion. - [ ] An upfront payment before project initiation. - [ ] A progress payment minus expenses. - [ ] A cancelled payment due to project delays. > **Explanation:** A retention payment is a withheld portion to ensure satisfactory project completion. ### What could be a potential risk of improper progress payment management? - [ ] Increased project financing. - [x] Project delays due to cash flow issues. - [ ] Enhanced contractor performance. - [ ] Immediate project termination. > **Explanation:** Improper progress payment management can result in cash flow problems, leading to project delays. ### Who can certify work completion for progress payments? - [ ] Any project stakeholder. - [ ] Only the contractor. - [x] An agreed authority, such as a project manager or engineer. - [ ] An external auditor. > **Explanation:** Certification for progress payments usually requires an agreed-upon qualified authority to verify the work completed. ### What is the general benefit of progress payments for contractors? - [ ] Increased tax deductions. - [ ] One-time large payments. - [x] Improved cash flow throughout the project. - [ ] Immediate work commencement. > **Explanation:** Progress payments ensure a steady cash flow for contractors during the project ensuring ongoing financial support.