Measurement and Billing

Introduction
Like most businesses, construction depends on cash flow. As a result, terms of and
procedures for payment are of extreme interest to all concerned.
Most contracts specify the procedures for submitting an application for payment and specify
when the owner must pay the contractor. The same is true of contracts between general
contractors and subcontractors. Many sub-contracts have “pay when paid” (or the harsher
“pay if paid”) clauses which means that subcontractors will be paid when the owner pays the
GC (or within a reasonable period).
Progress payment, also known as interim payment, is a payment made to a contractor during
the construction process for work that has been completed or for materials that have been
delivered to the site. Progress payments are typically made on a regular schedule, such as
monthly or at certain stages of the project, and they are usually based on the percentage of
work completed or the value of the materials delivered.

Importance of progress payments in construction projects:

Proper management of payments for construction work is a very important responsibility of
site administration for a contractor. An understanding of the process is necessary to
efficiently manage the payment process. Having progress payments accurate and on time
helps in following areas:
1. Financial management: Progress payments allow the contractor to manage their cash
flow, by providing them with regular payments for work completed or materials
delivered. This helps to ensure that the contractor has the funds available to continue
working on the project, and to pay for any materials or labour required. Prompt,
accurate and efficient processing of the payment requests can literally save the
contractor lakhs of rupees on each project. A brief payment processing period will
reduce interim financing costs incurred by the contractor.
2. Project management: Progress payments can be used as a tool for project
management, by providing a way to track the work that has been done and to ensure
that the project is progressing as planned. Progress payments can be linked to specific
milestones or stages of the project, and they can be used to forecast the project's cash
flow.
3. Cost control: Progress payments can be used to ensure that the project is kept within
budget, by providing a way to track the costs associated with the project and to
identify any areas where costs are running over budget.
4. Quality control: Progress payments can be linked to the quality of the work, by
withholding or delaying payments until the work meets the specified quality
standards. This helps to ensure that the contractor is motivated to maintain high
standards of quality throughout the project.
 5. Dispute resolution: Progress payments can also be used to resolve disputes between
the contractor and the client. For example, if the contractor claims that they have
completed a certain amount of work, but the client disputes this, the progress payment
can be used as a way to resolve the dispute.

Methods of payment
Several methods of payment are available for construction work, depending on the project
delivery method, the owner’s financial conditions, and the arrangements made for payment
and payment frequency. The most common method of payment in commercial building
construction in the traditional owner-contractor contract, is by monthly progress payments,
which are partial payments for work completed during a portion, usually a month, of the
construction period. By agreement, this payment frequency can be modified. In India, there
are several payment processes available for construction projects. Some common methods
include:
1. Advance Payment: This is a payment made by the client to the contractor before the
work begins.
2. Running Account: This is a payment made to the contractor as the work progresses. It
the standard approach for progress payments. Typically, the general contractor is paid
monthly for all work completed during that billing period.
3. Retention Money: This is a percentage of the contract value that is withheld by the
client as a guarantee for the satisfactory completion of the work.
4. Payment against Performance Guarantee: This is a guarantee provided by a bank or
financial institution to the client, assuring the satisfactory completion of the work by
the contractor. Usually, retention amount is released by client in lieu of Performance
Bank Guarantee.
5. Milestone Payment: This is a payment made by the client to the contractor based on
the completion of specific milestones in the construction project. For example,
completion of the foundation, closing in the structure, or completing a floor might all
generate payments. The milestones are determined and agreed to at the time the
construction contract is signed.
6. Final Payment: This is the final payment made by the client to the contractor after the
completion of the work.
As the monthly progress payment is the most common method of payment, typical building
construction projects, our discussions will primarily deal with procedures concerning these
periodic payments.

Progress payments can be used as a tool for project management:

A) Controlling Project Cost
1. By making regular progress payments, the project manager can ensure that the
contractor is adequately financed and can continue to work on the project without
interruption. This can help to minimize delays and keep the project on schedule.
 2. Progress payments can be used to track the progress of the project and compare it to
the project schedule and budget. By monitoring the progress of the payments, the
project manager can identify any areas where the project is over or under budget, and
take corrective action to keep the project on track.
3. Progress payments can be used as an incentive for the contractor to complete the work
on time and to budget. By linking payments to the completion of specific milestones
or stages of the project, the project manager can encourage the contractor to work
efficiently and minimize delays.
4. Progress payments can also be used as a tool for quality control. By withholding
payments until the work meets the specified standards, the project manager can ensure
that the contractor is motivated to maintain the quality of the work throughout the
project.
5. Progress payments can be used to manage the cash flow of the project, by releasing
payment as per the schedule. This can help the project manager to manage the budget
and ensure that there is sufficient funding available to cover the costs of the project.
6. Progress payments can also be used to ensure that the project is delivered within the
specified budget. By monitoring the payment schedule, the project manager can
identify where the project is over budget and take corrective action to bring the
project back on track.
B) Maintaining Project Quality
1. By linking payments to the achievement of quality standards: Progress payments can
be linked to the achievement of specific quality standards, such as the completion of a
certain amount of work to a certain level of quality. This can help to ensure that the
contractor is motivated to maintain high standards of quality throughout the project.
2. By using a payment schedule that includes quality inspections: A payment schedule
can include regular quality inspections, which can be used to assess whether the work
meets the specified quality standards. Payments can be withheld or delayed until the
work has been deemed to be of the required quality.
3. By using quality management system: By implementing a quality management
system, and linking the progress payment to the system, contractors can ensure that
the quality of the work meets the project's standards.
4. By using performance measurement: Progress payments can also be linked to the
performance measurements, like Earned Value Management (EVM) or Earned
Schedule (ES) method, which can be used to assess whether the work meets the
specified quality standards.

Progress Payments
Progress payments reflect payment for the work in place and material delivered during the
applicable period. Under the progress payment method, an estimate of the work complete is
made and payment is made for that amount. Most contracts deduct an amount for retainage
(Retention Amount) from the amount earned during the period. Retention is an amount held
by the owner until the final completion of the contract. It can be held for a number of reasons,
depending on the owner and the owner’s contracting rules. In some cases, retention is held by
the owner to complete the project, if necessary. Some owners, particularly public owners,
retain an amount as a reserve fund to cover materialman and subcontractor liens on the
project. Varying amounts of retainage are held by owners, usually 5 or 10 percent. This
amount is expressed in the contract documents and is established in the agreement between
the owner and contractor. Some contracts do not retain funds, as the performance bank
guarantee is intended for the same purpose as retention. When retention is held, it is normally
released in the final payment, when the contract requirements are completed.
Material delivered to the site, even when not actually incorporated into the work, is usually
included in the progress payments. Special care is normally taken to inventory the material
stored at the jobsite. Some owners will also include material stored away from the jobsite in
the progress payment, with special provisions. It is necessary to assure the owner that the
material is insured and will be installed during the project. Some reluctance may occur on the
owner’s part in paying for material stored off-site that could be used for other projects. The
owner’s primary concern with stored material is whether it will actually be incorporated into
the project.
Varying method of inspection and verification are done by the owner to determine accuracy
of the payment request. This verification process, also referred as Bill Certification, can vary
from a meticulous measurement of work in place and material stored to an approximation of
the percentage completed for the activities. Owners and their agents, such as architects,
engineers and construction managers, are concerned that the proper amount be paid, without
overpayment.
The actual payment period varies from contract to contract. The frequency of payment is
generally on a month, or 30-day, basis, but the actual cutoff dates can vary. Generally, the
payment period extends from the first to the last day of the month. There are however, many
variations regarding the exact start and cutoff date, depending on the owner’s processing
requirements. If the owner requires the verified payment on the first day of the month, the
actual cutoff dates may be twentieth day of the month to facilitate compilation and review the
progress payment request. This type of payment period is relatively easy to incorporate into
the project procedures however each supplier and subcontractor must be made aware of the
cutoff dates used for the project.

Schedule of Value (SOV) {or Bill of Quantities (BOQ)}

The Schedule of Values (SOV) is a written list in tabular form of the value amounts relating
to the activities of work, associated with appropriate monetary amounts for each activity. The
schedule of values is not time-related, but is merely a list of the value of the construction
activities, upon which progress payments are based.
The items for the schedule of values are selected to accurately monitor the progress of the
project. The activities listed should be adequately detailed to facilitate estimation of the
percentage of completion of the item. Too many items in the schedule of values unnecessarily
complicate the payment process. Some project use the activities in the construction progress
schedule as the the schedule of values.
The schedule of values normally will list construction activities that are identifiable as a
system or installation. The list in the below mentioned Figure 1 shows two fairly typical
schedule of values, with varying detail.

Figure 1 Comparison of detail in a schedule of value

Here, Example 1 is a broad scope example of detail in the schedule of values. Example 2
takes the broad scope of items in Example 1 and divides them into further detail, matching
actual work activities. Estimates of actual progress will be more accurate using the detailed
breakdown in Example 2 as it provides a more accurate activity breakdown for estimating in
a given period.
The values for these construction activities normally include all material, labour, equipment,
subcontracts, and distributed overhead and profit for each item.
Schedule of Value (SOV) is referred as Bill of Quantities (BOQ) in Indian construction
context. BOQ of repair & miscellaneous works is shown below in Fig. 2
 Fig. 2. BOQ of repair & miscellaneous works (Source: Central Coalfields Ltd.)

Unit Price Contracts

Some contracts require that the bid be presented in unit prices for particular items of work.
These types of contracts usually are in engineering construction and are found frequently in
public work contracts. In these contracts, the unit price breakdown is used as the schedule of
values. Each unit price includes labour, material, equipment, subcontracts, direct overhead,
indirect overhead and distributed profit. A finite quantity is usually furnished in the bid
forms, and the contractor supplies the unit price. A variety of strategies is used in allocating
overhead and profit to the unit, including front-loading.
Figure 3, is an example of a typical unit price breakdown contained in the bid form. The
contractor normally would furnish the unit price and extension. These unit prices would be
used as the schedule of values. Quantities of each item complete are measured and tabulated,
then multiplied by the unit price to determine the amount due for each work activity.

Fig. 3. Example of unit price breakdown

Payment procedures
The agreement and/or the general and supplementary conditions outline the time frame and
procedures for payment. Several of the payment procedure terms are important to both the
contractor and the owner and are typically negotiated as part of the owner-contractor
agreement. These terms might include:
  What day of the month the contractor’s application for payment must go to the
architect / consultant?
 The number of days allowed for the architect to review the application
 When the owner must pay the contractor?
 The conditions under which payment can be withheld
 Procedure for final payment at completion of the contract
 Procedure for the release of “retention”

Example:
A) CPWD progress payment procedure
The Central Public Works Department (CPWD) is responsible for the construction and
maintenance of government buildings in India. The CPWD has a specific procedure for
progress payments to contractors. The procedure is as follows:
1. The contractor submits an invoice for the work completed to the CPWD, which is
then examined by the CPWD's Engineer-in-Charge (EIC) and the Assistant Engineer
(AE).
2. The EIC and AE assess the work completed and certify that it is in accordance with
the contract and the approved drawings.
3. The EIC and AE then calculate the value of the work completed based on the
Schedule of Rates (SOR) and the approved drawings.
4. The EIC and AE then prepare a certificate of the value of the work completed and
submit it to the CPWD's Executive Engineer (EE).
5. The EE then approves the certificate of the value of the work completed and forwards
it to the CPWD's Chief Engineer (CE).
6. The CE then approves the certificate of the value of the work completed and forwards
it to the CPWD's Director General (DG) for final approval.
7. Once the DG approves the certificate of the value of the work completed, the CPWD
will release the payment to the contractor.
8. The contractor should also submit a statement of account, including the work carried
out, the value of work completed, the amount paid and the balance remaining.
It is important to note that the payment is made based on the work completion percentage,
and the payments are made on the certification of the executive engineer and the chief
engineer.
Additionally, retention money is also held back by CPWD, it is generally 10% of the bill
amount and is released only after the defects liability period (DLP) is over.
First and Final Bill Payments (Form No. 24)
Form No. 24 is used for making payments both to contractors for work and to suppliers. A
single form may be used for making payment to several payees, if they relate to the same
work (or to the same head of account in the case of supplies) and are billed for at the same
time. Specimen of First and Final bill form is as mentioned below:

B) A typical private client project progress payment procedure

The construction progress payment procedure for a private client may vary depending on the
specific project and the terms of the contract between the client and the contractor. However,
in general, the following steps are typically followed:
1. The contractor submits a request for payment to the client, outlining the work that has
been completed and the associated costs.
2. The client or their representative, such as an architect or project manager, will inspect
the work and confirm that it meets the requirements outlined in the contract and that
the costs are accurate.
3. The client will then approve the request for payment and authorize the release of
funds to the contractor.
4. The contractor will invoice the client for the approved amount, and the client will
make the payment, either by check, electronic transfer, or other agreed upon method.
 5. The contractor should also keep records of the work completed, the costs incurred,
and the payments received, to ensure that they are paid in full for the work they have
completed.
6. Retention money is also held back by private clients, it is generally 5% of the bill
amount and is released only after the defects liability period (DLP) is over.
It is important for both the client and the contractor to have a clear understanding of the
payment schedule and the terms of the contract, so that there are no misunderstandings or
disputes regarding payments.

The construction progress payment procedure can differ between government and private
construction projects in a few ways:
Table 1: Difference between Government (Public) construction project and Private
construction project payment procedure
Government (Public) construction project Private construction project
1. Government projects typically have 1. In private construction projects, the
more strict regulations and payment process is often more
procedures in place for progress flexible and can be negotiated
payments, which can include between the contractor and the
specific forms that need to be filled client. The payment terms are
out and submitted, and detailed usually included in the contract and
documentation that needs to be can be based on a variety of factors,
provided to support payment claims. such as the completion of specific
2. In government projects, payments milestones, the submission of
are often made on the basis of the invoices, and the client's cash flow.
work done, as per the schedule of 2. In private construction projects,
rates, which is a document that lists payments can be made on mutually
the rates for different types of work. pre-decided (as per contract terms)
The schedule of rates is usually based on the work done, material
prepared by the government agency supplied, keeping in mind the agreed
in charge of the project, and it is Bill of Quantities (BOQ).
binding on the contractor. 3. In private construction projects the
3. Government projects may also have payment process may not be as
a formal system for approving strictly regulated as in government
payments, which can involve projects, which can allow for more
multiple levels of review and flexibility and faster payments.
approval. This can slow down the However, this also means that there
payment process and make it more may be a higher risk of disputes and
complex. disagreements between the
contractor and the client.

It's important to note that the payment process may vary depending on the specific laws and
regulations of the region, and the contract agreement between the parties involved in the
project.
Common Disputes related to progress payments
Some common disputes that can arise in relation to construction progress payments include:
1. Disagreements over the value of work completed: This can happen when the
contractor and the client disagree on the amount of work that has been completed and
the associated costs.
2. Delays in payment: This can happen when the client is slow to approve and make
payments, causing financial difficulties for the contractor.
3. Disputes over the quality of work: This can happen when the client is not satisfied
with the quality of the work and refuses to make payments until the issues are
resolved.
4. Disputes over change orders: This can happen when the client requests changes to the
scope of work and the contractor is not willing to make the changes without additional
compensation.
5. Retention money disputes: This can happen when the client hold back a percentage of
the payment and release it after a certain period of time, and the contractor disputes
the release of the retention money.

Use of Technology for progress payment

Use of Technology for progress payment process and ensure transparency in a number of
ways:
1. Electronic invoicing and payment systems: These systems allow for the creation,
submission, and approval of invoices and payments electronically, reducing the need
for paper-based processes and increasing the speed and efficiency of the process.
2. Project management software: These systems can be used to track the progress of the
project and the associated costs, allowing for more accurate and timely progress
payments.
3. Document management systems: These systems can be used to store and share
documents related to the project, including invoices, receipts, and other financial
documents, making it easier for all parties to access the information they need.
4. Mobile apps and online platforms: These tools can be used by contractors and clients
to access project information and approve payments remotely, increasing the
efficiency of the process.
5. Blockchain technology: This technology can be used to create an immutable and
transparent record of all transactions, including progress payments, making it easier to
track and verify the integrity of the payment process.
6. Artificial intelligence and machine learning: These technologies can be used to
automate the process of analysing invoices and detecting any discrepancies, reducing
the risk of errors and fraud.
By using technology, the progress payment process can be more efficient, accurate, and
transparent. It can also be used to reduce the risk of disputes and ensure that all parties have
access to the information they need to make informed decisions about the project.

Cash flow projections

Cash flow projections relate the schedule of values to the construction schedule, projecting
the progress payments through the duration of the project. The cash flow projection
approximates the progress payments for each payment period during the construction
contract. This projection is used by the owner to make financial arrangements, which creates
available funds for the payments and optimizes investment opportunities. The contractor also
can use the cash flow projection for anticipating revenue for future periods. They are used to
forecast the inflow and outflow of cash over a specific period of time, usually on a monthly
or quarterly basis. These projections are used to ensure that the project has enough cash to
pay for expenses, such as labour and materials, as well as to cover any unexpected costs that
may arise.
Because the cash flow projection is based on the construction schedule, the projections are
estimates only, as many fluctuations exist in the construction schedule. Several factors can
affect the actual amount of progress payments at each period, producing a variance from the
projection: late or early delivery of materials; late or early completion of work activities;
revision in sequencing of work activities; and the disproportionate completion of work
activities in their schedule time period.
The cash flow projection relates to the amounts that will be requested for each progress
payment; some factors differ from those relating to the construction schedule. The actual
payments may not be equally distributed in the work activity period.
Here are some best practices that can be followed to ensure timely and smooth progress
payments in a construction project:
1. Clearly define the payment terms in the contract: The payment terms should be
clearly defined in the contract, and should include details such as the frequency of
payments, the percentage of the contract price to be paid at each stage, and the
conditions that need to be met before payment can be made.
2. Establish a payment schedule: A payment schedule should be established that aligns
with the project schedule, and should include details such as the completion of
specific milestones, the submission of invoices, and the client's cash flow.
3. Use a progress payment application: A progress payment application can be used to
streamline the process of tracking and approving payments, and to ensure that all the
necessary documentation is in order before payment can be made.
4. Create detailed invoices: Invoices should be detailed and include all the relevant
information, such as the work that was done, the materials used, and the cost of each
item. This can help to ensure that the payments are accurate and that the contractor is
being paid for the work that was done.
5. Communicate effectively: Regular communication between the contractor, the client,
and the project manager is essential to ensure that any issues or concerns are
 addressed in a timely manner. This can help to minimize delays and ensure that the
project stays on schedule.
6. Provision of retention money: Having a provision of Retention money ensure that the
contractor maintains the quality of the work and rectifies any defects that may appear
after completion.
7. Use technology to ensure transparency: Progress payments can be tracked, recorded
and audited using technology like blockchain, which helps to ensure transparency and
accountability in the process.
8. Have a dispute resolution mechanism: Having a dispute resolution mechanism in
place can help to quickly and efficiently resolve any disputes that may arise in relation
to progress payments.

Example of cashflow computation

For the following data of a project, the following information is illustrated: (a) the month-
wise running account bill, (b) the cash inflow diagram for the contractor, (c) the cash outflow
diagram for the contractor, and (d) the net cashflow diagram for the contractor.
Contractor has prepared the construction schedule, which has been approved by the owner.
The construction schedule is shown in Table Q3.1.1. Also shown are the estimated quantities
that are likely to be executed during each month.
 Value of contract: Rs. 76,25,000 (Rupees Seventy-six lakh twenty-five thousand
rupees only)
 Duration: Four months
 The owner makes an advance payment of Rs. 5 lakh, which is to be recovered in four
equal instalments.
 The owner also supplies materials worth Rs. 3.2 lakh, which is also to be recovered
equally from each running account (RA) bill.
 The owner will recover from the payments made to the contractor two per cent of the
value of the work done as income tax deducted at source, and remit this amount into
the account of the Central Government.
Additional Conditions and Assumptions
 The cost for the contractor to execute a particular item is 90 per cent of their quoted
rates.
 The total cost for a particular item consists of labour (20 per cent), material (60 per
cent), plant and machinery (10 per cent), and subcontractor cost (10 per cent).
 Assume that there is no delay in payment to labour, but a delay of one month occurs
in paying to the subcontractors, material suppliers, and plant and machinery supplier.
 Retention is 10 per cent of billed amount in every bill. Fifty per cent retention amount
is payable after one month of practical completion, while the remaining 50 per cent is
payable six months later.
Table A: Construction Schedule
Table B: Computation of RA Bill (Value in Rs.)

The R.A. bill computation is shown in Table B. The computation for cash inflow for the
contractor is shown in Table C.
Reconciliation
Payment to be received for work done Rs. 76,25,000
Less TDS at 2% (-) Rs. 1,52,500
Less advance payment (-) Rs. 5,00,000
Less materials issued by owner (-) Rs. 3,20,000
Actual payments to be received Rs. 66,52,500
Actual payments made Rs. 11,37,000 + Rs. 20,83,000 + Rs. 17,53,000 + Rs. 9,17,000 +
Rs. 7,62,500 = Rs. 66,52,500 (Hence, reconciled)
The cash inflow diagram for the contractor is as shown in Figure 4.
Table C. Computation of Cash inflow

RA Bill will be:

 Fig.4. Cash inflow diagram for contractor

A contractor is also supposed to pay to his subcontractors, suppliers for the materials, and
labour for the work done during a month. These factors are taken into account while
preparing the cash outflows of a contractor. The computation for cash-flow diagram is
performed in Table D.
Based on the above computation, the cash outflow diagram for the contractor is shown in
Figure 5.
Table Computation for cash outflows

Fig. 5. Cash outflow diagram for the contractor

Net cashflow is calculated using Net cashflow = (Cash inflow – Cash outflow) and the net
cashflow diagram for contractor is shown in Fig. 6.
Fig.6. Net cashflow diagram for the contractor

Project payment processing

Construction project payment processing typically follows a specific procedure, which may
vary depending on the type of project and the terms of the contract. However, in general, the
following steps are typically followed:
1. The contractor submits a bill or invoice to the client for the work completed and the
associated costs.
2. The client or their representative, such as an architect or project manager, will inspect
the work and confirm that it meets the requirements outlined in the contract and that
the costs are accurate.
3. The client will then approve the bill and authorize the release of funds to the
contractor.
4. The contractor will invoice the client for the approved amount, and the client will
make the payment, either by check, electronic transfer, or other agreed upon method.
5. The contractor should also keep records of the work completed, the costs incurred,
and the payments received, to ensure that they are paid in full for the work they have
completed.
6. Retention money is also held back by private clients, it is generally 5% of the bill
amount and is released only after the defects liability period (DLP) is over.
7. The contractor should also submit a statement of account, including the work carried
out, the value of work completed, the amount paid and the balance remaining.
It is important for both the client and the contractor to have a clear understanding of the
payment schedule and the terms of the contract, so that there are no misunderstandings or
disputes regarding payments.
Additionally, the government of India has implemented the e-payment system for all
government contractors to ensure transparency and speed up the payment process. This
system is called the e-billing and e-payment system (EBPS).
Figure below illustrates the progress payment process. A good relationship between the
owner and contractor can facilitate prompt payment of applications.

Additional readings:
Mincks, W. R., & Johnston, H. (2016). Construction Jobsite Management. Chapter 17 – Progress
Payments. Cengage Learning.

Jha, K. N. (2015). Construction Project Management: Theory and Practice. Pearson Education India.