Construction billing methods.Six contracts. One pay app.

The six primary construction billing methods

The choice of billing method determines who carries price risk, how change orders get priced, and what documentation each invoice requires. Most public-bid commercial work is lump sum. Most negotiated commercial work is GMP. Most civil and heavy-highway work is unit price. T&M and cost-plus fill the gaps where scope is undefined.

The American Institute of Architects (AIA) G702 Application and Certificate for Payment is the most widely-used progress invoice form in U.S. construction. It is a single page summarizing nine lines of payment math. The G703 Continuation Sheet is the line-item backup, breaking the contract into individual Schedule of Values items and tracking each one column by column.

Five steps. Same structure every month. The G703 is filled out first, then totals are carried to the G702 summary page. The architect or owners representative certifies the requested amount.

1. 1

   Update the G703 Continuation Sheet

   Walk line by line through the approved Schedule of Values.

   For each SOV line, fill Column D with cumulative work billed in prior applications, Column E with work completed in the current period, and Column F with the value of materials properly delivered and stored either on site or in a bonded offsite location. Be conservative on Column E claims; under-billing is easier to correct than overbilling, which can trigger architect adjustments and Stop-Work Notices in some contract forms.

2. 2

   Calculate completion and balances

   Sum, divide, and subtract to produce Columns G, H, and I.

   Column G is D + E + F. Column H is G divided by C, written as a percentage. Column I is C minus G, the remaining contract value for the line. Owners scrutinize Column H closely. A foundation line showing 95 percent complete in month two when the slab has not been poured is a front-loading signal that invites a back-charge audit.

3. 3

   Apply retainage per line

   Withhold the contracted retainage percentage on Column G.

   Column J retainage is typically 5 to 10 percent of Column G per line. Sum Column J at the bottom of the G703 to produce the total retainage carried to the G702 Line 5. Some contracts reduce retainage to zero after 50 percent project completion, or release retainage on early-completing line items (so-called retainage release on substantial completion of a defined scope).

4. 4

   Complete the G702 summary

   Carry G703 totals to the G702 nine-line payment summary.

   G702 Line 1 is the original contract sum. Line 2 is net change by approved change orders. Line 3 is the contract sum to date (Line 1 + Line 2). Line 4 is total completed and stored to date (G703 Column G total). Line 5 is retainage. Line 6 is total earned less retainage (Line 4 minus Line 5). Line 7 is less previous certificates for payment. Line 8 is current payment due. Line 9 is the balance to finish including retainage.

5. 5

   Sign, certify, and submit

   Contractor signs first. Architect certifies second.

   The contractor signs the certification block attesting the work has been completed in accordance with the contract documents and that all sums previously paid have been used to pay for work, labor, and materials. The architect or owner reviews, may adjust the certified amount downward, and signs the architects certification block. Per A201 General Conditions 9.6.1, the owner must pay the certified amount within seven days after issuance.

A mid-size general contractor on a $2,400,000 lump sum commercial project. Eight Schedule of Values line items. Month 6 of construction, with structural steel and roofing in active work. 5 percent retainage. ACH payment, net 30.

Three concepts surface on every monthly invoice regardless of contract method: the retainage withheld, the Schedule of Values that anchors the G703, and any change orders that adjust the contract sum.

These show up in nearly every payment-application audit. Each one either delays the certified amount, triggers a back-charge, or leaves money on the table at closeout.

1. 01

   Front-loading the Schedule of Values

   Assigning higher values to early line items (mobilization, demolition, foundations) to recover cash sooner. Owners and architects scrutinize SOVs for front-loading because it shifts financial risk to the owner if the contractor walks off mid-project. Most contracts require unbalanced SOVs to be flagged and rejected at SOV approval.

2. 02

   Forgetting to track retainage release at substantial completion

   Retainage is withheld throughout the project. At substantial completion, a partial release is typical (often half), with the balance released at final completion. Contractors who do not track retainage by line item find themselves chasing release of $50,000 or more six months after move-in.

3. 03

   Wrong markup calculation on cost-plus and T&M billings

   Cost-plus contracts define which costs are markup-eligible (direct labor, materials, subcontracts) and which are not (home office overhead, project management, certain equipment). Marking up an excluded cost is the most common source of cost-plus audit disputes. Read the cost definition section before invoicing.

4. 04

   Missing the state Prompt Payment Act deadline

   Most states require payment within 7 to 30 days of an approved invoice. If the owner is late, the contractor is entitled to statutory interest (typically 1 percent per month) and may suspend performance after notice. Contractors who do not invoke their rights leave money on the table.

5. 05

   Billing for materials stored offsite without the right documentation

   Materials stored offsite require: (1) proper insurance with the owner as additional insured, (2) title transfer upon payment, (3) bonded storage or segregation, and (4) evidence of payment to the supplier. Missing any of these gets Column F of the G703 rejected, and the contractor finances the materials until they reach the site.

6. 06

   Not pricing change orders correctly under the contract method

   AIA A201 Section 7.3.3 defines four allowable change-order pricing methods: lump sum, unit price, cost plus fee, or another method agreed upon. Pricing a change order by the wrong method (using cost-plus when the contract requires unit pricing) gives the owner grounds to reject or negotiate down.

Most states cap the time an owner can hold approved invoices and impose statutory interest for late payment. Subcontractor pay-when-paid clauses are enforceable but cannot indefinitely defer payment. Five representative states below; consult your specific state statute before suspending performance.

Frequently asked questions

• AIA Contract Documents — A201 General Conditions, A101 Standard Form Agreement, G702 Application and Certificate for Payment, G703 Continuation Sheet.
• ConsensusDocs — ConsensusDocs 200 Owner-Contractor Agreement and ConsensusDocs 290 Multi-Family Form. Industry-coalition standard contracts.
• AACE International — Recommended Practice 84R-13 Planning and Accounting for Adverse Weather and related cost-engineering RPs.
• FAR Part 32 (Contract Financing) — Federal Acquisition Regulation rules for progress payments, retainage, and contract financing on federal projects.
• FHWA Federal-Aid Project Contract Administration — Unit-price contracting, measurement and payment, and federal-aid prompt payment requirements.
• State Prompt Payment Acts cited: California Civil Code 8800 and Public Contract Code 7107; Florida Statutes 715.12 and 218.74; New York General Business Law 756-a and State Finance Law 139-f; Texas Property Code 28.002 and Government Code 2251; Illinois 770 ILCS 60/0.01 and 50 ILCS 505/1.
• Associated General Contractors of America (AGC) — Industry guidance on payment-application practices, change-order administration, and Eichleay formula application.