Paying a contractor for its work might appear straightforward, but actually can be complex. While this issue is sometimes overlooked during contract negotiations, early attention and thoughtful drafting can help mitigate the risk of payment disputes that can derail a construction project.

Few contractors will finance a construction project, so most expect to be paid regularly as work is performed. Issues arise, however, in determining how much the contractor should receive before the work is actually complete. When the contract price is a lump sum, it can be difficult to ascertain how much of that amount the contractor has earned while the project is in various stages of completion. Some contracts address this by establishing specific goals, or “milestones,” that, when achieved, trigger the release of partial payment. Others require the contractor to propose a “schedule of values” that divides the lump sum among the items of work. By estimating the stage of completion of each item, the contractor can calculate an interim payment request, and the owner can have assurances it is not paying for work not performed. The schedule of values can be manipulated, however, by over or undervaluing specific items of work. A contractor’s cash flow can be improved by assigning higher values to work performed early in the project, for example, but this creates exposure for the owner if a default occurs.