A crucial component of the construction payment process is the General Contractor’s Application for Payment. This application is usually filed using AIA G702 and AIA G703 forms, requests payment for work completed during a specific period, typically on a monthly basis. Properly reviewing this application ensures that the payment amounts align with work completed, contract terms, and any changes in scope. All documentation must be verified and provided for record in order to have the proper controls in place and to minimize risk.  We seek to quickly identify any discrepancies and missing documentation so that they can be resolved prior to the issuance of our construction monitoring reports with our funding recommendation so our client can be assured that the Application for Payment package is complete.

During our review of the general contractor’s application for payment we seek to verify that the payment is fair, accurate, and in compliance with the contract. This includes a review of the calculations on the AIA G702 Cover Page and AIA G703 Schedule of Values as well as the subcontractors’ applications for payment. We focus this review on any discrepancies and reasonableness. The Schedule of Values is reviewed line by line to compare the progress billing to our site observations and to identify any reallocations within the line items as they must align with the contract terms. Each application should be reviewed to verify that specific items are billed in alignment with the terms outlined in the construction agreement including but not limited to:

General Conditions and Requirements are billed per the requirements of the contract, whether at cost or as a fixed monthly amount.

Contractor’s Fee is calculated according to the agreement, and note any changes. Increases in the contractor’s fee should only occur with an approved change order.

Additionally, we verify that all necessary documentation has been received and appropriately incorporated. This includes subcontractor and offsite stored material backup, lien waivers, and owner change orders.

Owner Change Orders

The change orders must be properly reviewed by the developer, the consultant, such as PR&A, and the equity partner before incorporation. During this process, we are able to leverage our experience, technical knowledge, and industry standards to review these documents.

Deposits and Offsite Stored Materials

Deposits for long-lead items or offsite materials can create additional financial risks for the owner. We review the applications for Deposits or Offsite Stored Materials and verify that adequate documentation and insurance are in place. A delivery timeline should also be established for tracking purposes.

Deposits: For items like elevator equipment, electrical gear, countertops, or tile including materials sourced overseas, verify if deposits are being requested and if invoices have been provided. These are often defined in advance within the construction agreement.

Offsite Stored Materials: For materials such as lumber, steel, and reinforcing bars that are often purchased and stored offsite we verify that proper documentation is provided, such as bills of sale, invoices, photos, and insurance certificates. A fine point to remember is that the owner should be named as an Additional Insured Party on the insurance certificate to adequate cover the owner.

Delayed receipt of the proper backup often results in a conditional funding recommendation or short pay depending on the client’s preference.

Retention

Retention is typically held by the owner to ensure the general contractor and subcontractors complete the work to satisfaction. The amount is determined based upon the construction agreement and is typically 10% on the cost of work. Agreements may sometimes have clauses for no retention to be held on general conditions, general requirements, direct purchased materials, or other specific scopes. In general, retention is held until the end of the project when all work, punch items are complete, and closeout documents are received. However, the agreement can include provisions for early release of retention for individual scopes of work or subcontractors at the owner’s discretion.

Each period we review the overall amount of retention held and any changes in retention held on the individual line items or subcontractors.  If there is a retention release, we review the scope of work to verify that it is complete and that the designing architect or engineer of record has accepted the work.

Resolve Discrepancies Before Giving Funding Recommendations

Any identified issues are immediately reported to the contractor and developer for resolution and the client is kept notified of our communications and the progress towards resolution. We typically strive to resolve all issues so that we can unconditionally recommend full payment, but if we have outstanding items we may conditionally recommend payment or for significant discrepancies, we may consider recommending a short pay (reducing the payment amount) until the issue is resolved.

Conclusion

Reviewing a general contractor’s Application for Payment is a critical part of the construction payment process that deserves a focused and detailed review. We verify that payments are accurate, align with the work completed, and comply with the construction agreement. Addressing discrepancies early and maintaining clear documentation facilitates the relationship between the owner and the contractor, minimizes risk,  and ensures the success of the project.