Pay applications and the schedule of values, done right

On most commercial jobs you do not invoice. You submit a pay application: a request for payment that shows, line by line, how much of the contract value is complete to date, how much was billed before, and how much is due now, less retainage. The pay application is built on the schedule of values, a breakdown of the contract sum into line items that you submit near the start of the job and then bill against for its whole life.

Two things follow from this. First, the schedule of values is a cash-flow document, not a cost document, and it deserves more thought than most contractors give it. Second, a pay application that is rejected or marked down costs you a full billing cycle. This guide covers both.

What the schedule of values does

The schedule of values splits the contract amount into line items, usually by trade, system or phase, each with a scheduled value. Each billing period you report the percentage complete on each line. The sum of completed value, less what you have already billed and less retainage, is the amount you request.

The owner's representative, often an architect or construction manager, reviews the percentages against the work in place. If they agree, the application is certified and the payment clock in your contract starts. If they do not, they cut the percentage or reject the application, and you wait for the next cycle.

Building the schedule for cash flow

The percentages you bill later are limited by the values you set up front, so the structure matters.

• Front-load legitimately, not fictitiously. Early activities carry real cost: mobilization, bonds and insurance, submittals, layout, temporary facilities. Give each its own line with a defensible value so that early pay applications recover early spending. Inflating early lines beyond their cost is the kind of front-loading reviewers watch for, and it tends to come out at the end when late lines are starved.
• Separate items you can finish early. A line that reaches 100 percent in month two gets billed in full in month two. If the same work is buried in a larger line that will not finish until month eight, your cash waits with it.
• Break out stored materials if your contract allows billing for materials delivered but not yet installed. Most do, with conditions: stored on site or in a bonded warehouse, insured, with invoices attached. A separate line makes that billing clean.
• Split long-duration items by area or floor so that completion in one area is billable even when the whole scope is far from done.
• Match your subcontractors' schedules to yours. If a sub's breakdown has different lines, you will spend every month translating between them. Have subs submit in your format.
• Keep it defensible. Every line should map to a cost you can show if asked. A reviewer who trusts the schedule approves faster for the rest of the job.

Submit the schedule early and get it approved in writing. An unapproved schedule means the first pay application is argued on two fronts at once.

The pay application itself

Most jobs use a standard form or the owner's version of one: a cover sheet with contract sum, approved changes, total completed and stored to date, retainage, previous payments and the current amount due; and a continuation sheet that lists every line of the schedule with scheduled value, previous work, this period's work, stored materials, percentage complete and balance to finish.

What gets applications approved the first time:

1. Agree the percentages before you submit. Walk the job with the owner's representative near the end of the billing period and settle each line in person. Submitting a number they have already agreed to turns review into a formality.
2. Bill approved change orders only. Add executed change orders as new lines or as adjustments to the contract sum, with the change order number shown. Work performed on an unsigned change order usually cannot be billed as contract work and invites rejection of the whole application.
3. Attach what the contract requires. Commonly: lien waivers from you and your subs and suppliers for the prior period, certified payroll on public work, stored materials documentation, updated schedule, and sometimes a sworn statement listing everyone you owe. One missing attachment can hold the whole application.
4. Carry retainage correctly. Apply the contract percentage to work completed and, where the contract says so, to stored materials. Show the cumulative amount held. If the contract reduces retainage at a milestone, bill the reduction the first period you are entitled to it.
5. Meet the cutoff and the submission method. Applications typically must be submitted by a date in the contract, often with a notarized signature and through a specified portal or to a named person. Late by a day means waiting a month.
6. Reconcile to your last application. Previous-billed amounts must match what was certified last time, not what you asked for. A mismatch gets kicked back.

Where the cash leaks

• Billing behind the work. A crew that is 60 percent done on a line you bill at 50 percent has left ten percent of that line's value in the owner's account for a month. Keep superintendents honest about progress in both directions.
• Unbilled change work. Extra work performed without an executed change order is financed by you until paper catches up. See the change order process in your contract and follow it.
• Rejected applications. Each one costs a full billing cycle plus the time to resubmit. Track your first-time approval rate; if it is low, the fix is usually in the pre-submission walk.
• Subcontractor paperwork. Your application is late if your subs' lien waivers are late. Make waivers a condition of paying them and chase them before the cutoff.

A monthly routine

Ten days before cutoff, update percentages with the field. Seven days before, walk the job with the reviewer and settle the numbers. Five days before, collect sub waivers and attachments. Submit on time, in the required format, and confirm receipt. Log the certification date, the payment due date under your contract, and the date the money arrives. The gap between the last two is your float on this job, and it is the number the next bid should be priced around.

The Float is general information, not legal or financial advice. Pay application requirements and retainage terms are set by your contract and by state law; read your contract and confirm the rules with your attorney.