Money in construction flows downhill — from lender to owner to GC to subcontractor to supplier. Each link adds delay and risk. Understanding the chain is essential for protecting your cash flow.
The GC compiles sub pay apps, adds their own general conditions billing, and submits a consolidated pay application (AIA G702/G703) to the architect by the monthly cut-off date (typically the 25th of each month).
The architect reviews the pay app against observed progress, may adjust line items, and issues a Certificate for Payment. This typically takes 7–14 days. Disputes over percent complete are the most common cause of payment delays at this stage.
The owner (often through a construction lender) processes the certified payment. Contract terms typically allow 30 days from certification. The lender may conduct their own inspection before disbursing funds, adding another 7–10 days.
Upon receipt of owner payment, the GC pays subcontractors per the subcontract terms (typically 7–10 days after receipt). Many states have prompt payment statutes requiring payment within specific timeframes regardless of contract language.
Subcontractors pay their material suppliers and equipment rental companies. Net-30 terms with suppliers means the supplier may not receive payment for 90–120 days after delivering materials. This is why lien rights exist.
The Schedule of Values (SOV) is the billing backbone of every construction project. How you structure it determines your cash flow for the entire project duration.
A detailed breakdown of the contract sum into individual line items, each representing a portion of the work. The SOV is submitted at project start and approved by the architect. Each month, you report the percentage complete on each line item to calculate the payment due.
Allocating more value to early-phase work items (mobilization, site prep, foundations) improves early cash flow. While architects scrutinize obvious front-loading, legitimate strategies include properly valuing preconstruction effort, early material procurement, and overhead-heavy early phases. A well-structured SOV can improve cash position by 5–10% in the first quarter.
You can bill for materials purchased and stored (on-site or off-site) before installation. This requires proof of purchase, insurance coverage, and proper storage. Off-site storage requires additional documentation including a bill of sale and evidence the materials are specifically allocated to your project.
Approved change orders are added to the SOV as new line items. The key challenge: billing for change order work performed before formal approval. Best practice is to document directed changes in writing and bill monthly even if the formal change order is not yet executed. Waiting until CO approval to bill can create significant cash flow gaps.
These two forms are the industry standard for pay applications in commercial construction. Understanding every field is critical for accurate and timely billing.
The cover sheet that summarizes the total payment request. Key fields include:
The detailed line-by-line breakdown attached to the G702. Each row contains:
Tip: Keep line items granular enough for accurate progress tracking but not so detailed that monthly billing becomes a burden. 30–60 line items is typical for a $5M–$20M project.
Retainage withholds 5–10% of every payment as insurance against defects and incomplete work. On a $10M project, that is $500K–$1M of your working capital trapped for the project duration.
Most commercial contracts withhold 10% until 50% completion, then reduce to 5%. Some owners maintain 10% throughout. Federal projects (Miller Act) typically hold 5% under the prompt payment requirements. Retainage is released at substantial completion, though punch list holdbacks may continue.
Many states now cap retainage: Texas at 10%, California at 5% on public work, New York at 5% on private work. Some states require retainage to be held in escrow with interest. Know your state's prompt payment act — it overrides contract language. Currently 48 states have some form of prompt payment statute.
Negotiate retainage reduction to 5% at 50% completion. Request release at substantial completion rather than final completion. Ask for retainage to be placed in an interest-bearing escrow account. On large projects, even 0.5% difference in retainage rate equals significant working capital — on a $50M contract, that is $250,000.
GCs typically retain the same percentage from subs as the owner retains from them. When the owner releases retainage, the GC should promptly release sub retainage. Many prompt payment acts require this within 7–14 days. Retaining more from subs than the owner retains from you creates a cash float — but damages vendor relationships.
These two clauses sound similar but have vastly different legal implications. The distinction can mean the difference between getting paid and never getting paid.
If you see language like "receipt of payment from the Owner is a condition precedent to Contractor's obligation to make payment to Subcontractor," this is a pay-if-paid clause. Negotiate to change "condition precedent" to "timing mechanism" or add a reasonable payment deadline (e.g., 45 days) regardless of owner payment status. See the Contract Types Guide for negotiation strategies.
Poor cash flow management kills more construction companies than poor estimating. Forecast monthly and manage proactively.
Map out expected billing (from the SOV), expected collection (billing minus retainage, plus 30–45 day payment lag), and expected outflows (sub payments, material purchases, payroll, equipment). Update monthly with actuals. The gap between collection and outflow is your financing requirement.
Submit pay applications on time every month, without exception. A late or incomplete pay app costs you 30+ days of cash flow. Pre-populate the G703 weekly so monthly billing is a review exercise, not a scramble. Track percent complete daily on high-value line items.
With suppliers, negotiate net-45 or net-60 terms for materials. With the owner, push for 21-day payment cycles instead of 30. Early payment discounts (2/10 net 30) from suppliers can save 1–2% on material costs while also improving your payment reputation.
Maintain a revolving line of credit sized at 10–15% of annual revenue. Draw on it to bridge payment gaps, not to fund operations. The cost of a line of credit (prime + 1–3%) is far less than the cost of late payments to vendors (damaged relationships, higher future pricing, lien exposure).
Payment disputes are endemic in construction. Knowing the common types helps you prevent them through better documentation and contract language.
The architect says a line item is 60% complete; the contractor says 80%. This is the most frequent pay app dispute. Prevention: use measurable milestones instead of subjective percentages, take date-stamped photos, and meet with the architect before submitting each pay app to align on progress.
Work performed under verbal direction but without a signed change order creates billing disputes. The contractor performed the work and deserves payment; the owner says it was not authorized. Prevention: confirm all changes in writing before performing work. Bill under protest if you must proceed without approval.
The GC deducts costs from a sub's payment for alleged defects, cleanup, or damage. Often applied without proper documentation or notice. Prevention: require written notice before any back-charge, document site conditions with photos, and dispute unauthorized deductions in writing immediately.
After substantial completion, owners often delay retainage release citing punch list items worth far less than the retainage amount. A $500K retainage hold for a $15K punch list is disproportionate. Prevention: negotiate a punch list holdback limited to 150% of punch list value, with the remainder released immediately.
Conditional vs. unconditional lien waivers create confusion. Never sign an unconditional waiver until payment clears your bank. Some owners demand unconditional waivers as a condition of receiving payment — this is improper and potentially illegal in states with statutory waiver forms.
Owner refuses to pay for stored materials, claiming insufficient documentation or that materials are not properly segregated. Prevention: photograph all stored materials, maintain bills of lading, provide insurance certificates for off-site storage, and mark materials clearly with project identification.
