Last month we looked at the project schedules required for California public works construction. This month the discussion is about Progress Payments and the logistics of getting paid for your work. This process differs considerably from that of the private sector, especially for those contractors who have been doing residential construction. The bad news is that it is much more complex and bureaucratic; while the good news is that it is virtually the same for any public works agency.
In each set of contract documents (plans & specifications), there is a section in the specs detailing the exact procedure the prime must follow in order to get paid. By default, 99% of those procedures are the same for the subcontractor. The only difference is that the Prime bills the owner, and the sub sends their invoice to the prime.
The process begins at the time of award. The prime must submit a Schedule of Values to the A/E firm or the construction manager for approval. This document is essentially a cost breakdown of what each portion of the work is worth. Once that cost breakdown is approved, it establishes the template by which the prime can bill against during the life of the project.
There are two different types of Schedules of Values used in the public works construction industry:
1. For Building projects such as schools, fire stations, community centers, etc., the cost breakdown is almost always dictated by the prime who segregates the work by sequence and most often the values are a lump sum amount. For example:
a. Mobilization, b. Sitework, c. Underground utilities, d. Foundation concrete and so on…..
Each of those sequences of work is assigned a dollar value. Near the end of each month, usually on the 25th, the inspector or owners rep will walk the site with the prime and using each task as their checklist, will approve a percentage of completion for the work done in that month. The spreadsheet simply calculates that percentage against the dollar value and that amount is what will be paid by the owner.
The prime does not have final approval on what the owner’s rep will authorize so it is very important that the prime walk the job with that person in order that they can defend the amount of work they will claim as being done.
It is just as important to the subcontractor that they be onsite when the owner’s rep is determining percentages of completion.
2. The process is only slightly different for heavy civil projects such as highway construction, pipeline work, water & wastewater treatment plants, bridges, etc. For these types of projects the Bid Proposal Form serves as the template for the cost breakdown. Each bid item on the form will have a defined quantity and a specific unit cost dollar value.
The format will look like this:
Bid item 1. Clear & Grub Quantity - 1,000 SY - Unit Cost $9.00 / SY Total Value $9,000
Bid Item 2. Curb & Gutter Quantity – 2,500 LF - Unit Cost $30.00/LF Total Value $75,000
Since those values are already determined, the inspection process consists of measuring or calculating the quantities completed.
The two methods above both result in a summary of values for each line item, or task of work which results in a total amount of dollars to be invoiced. As you can see, the process is identical for both the prime and the sub. The difference being that the sub invoices the prime and the prime invoices the owner. On heavy civil projects inexperienced subs sometimes invoice incorrectly because they are not familiar with how the process works.
Supplementing the mathematics of generating the invoice are the contract requirements that both prime and sub must follow in order to get paid. These are critical and are mandatory:
1. The Prime must submit all certified payrolls, including subs for that month prior to invoicing.
2 An updated schedule is almost always required
3. Any Stop Notices filed during that month must be resolved
4. The Pay application is due to the owner by the 1st if prompt payment is expected.
It should be mentioned that many public agencies are often slow to process progress payments. By contract they will have a minimum of 30 days to pay the contractor, so the check usually comes by the third to fourth week of the month. This is the main reason that cash reserves or a line of credit are so important for both primes and subs since you are in effect, fronting the cost of the work for at least 60 days!
By California Public Contract Code, prime contractors are required to pay their subcontractors within five (5) business days after receiving payment from the owner. However, the sub must follow all of the same rules for progress payments as the prime.
By: Ed Duarte, DBE Supportive Services Construction & Public Works Specialist