Certain types of contracts provide for periodic payments based on the progress of the job. This type of arrangement is common in construction, where the size of the project makes it difficult for a contractor to complete the entire job without receiving additional funds during the process. Setting up a progress payment schedule ensures that the contractor will have the necessary funds without exposing the property owner to undue financial risk.
Types of Contracts
The amount and frequency of progress payments may vary for each contract. In some cases, the payment amounts and dates are fixed, regardless of the progress made on the job. A contract may also tie the payment amount to the completion percentage of the project or the percent of total costs invested to date.
If a company agrees to a $1 million contract billed based on completion percentages of 25, 60 and 100, it will owe the contractor $250,000 after the first 25 percent of the job is finished. After the project is 60 percent completed, the total amount billed would be $600,000 ($1,000,000 x .60 = $600,000). Taking out the $250,000 already billed, the company will owe $350,000 for the second progress payment, leaving a balance of $400,000 to be paid upon completion.
- Digital Vision./Photodisc/Getty Images