Progress claims during construction projects are vital for facilitating regular payments to contractors based on completed work. They ensure that the contractors and the builder receive payment for work completed to date, according to the contract terms. These claims are carefully evaluated and processed through a structured and transparent process, ensuring cash flow and funding of ongoing operations is maintained and well managed. This article provides a detailed review of the progress claim process for a developer and explores a case study of progress claims during the construction of a residential development project.
The progress claim process plays a crucial role in managing the finances of construction projects, ensuring that payments are justified and made for actual work completed, thereby protecting the interests of all parties involved. The steps below provide an overview of the process.
1. Progress Claim Submission
A builder submits a progress claim to the financier, which includes a detailed invoice for the work completed during a specified period. This claim includes supporting documentation such as updated schedules, lists of materials used and purchased, labour records and other related costs.
2. Evaluation by a Quantity Surveyor
Once a progress claim is submitted, a quantity surveyor (QS) or project manager evaluates the claim to verify the work completed and the associated costs. This evaluation often involves site inspections to confirm that the work has been performed as claimed and meets the quality standards specified in the contract.
3. Adjustment and Recommendations
The QS may adjust the claim based on their findings. For instance, if the work is not up to standard, the payment may be withheld or reduced until issues are rectified. They prepare a recommendation report for the client or financier, detailing the payment to be released.
4. Client or Financier Review
The client or financier reviews the recommendation report. They may discuss the claim with the QS if there are discrepancies or concerns. This step ensures transparency and agreement on the work completed before releasing funds.
5. Payment Release
Once approved, the financier releases payment to the contractor. The payment terms are predefined in the contract, typically stipulating that the financier will hold a portion of the payment (retention) to cover potential defects or incomplete work.
6. Documentation and Record Keeping
All communications and transactions are documented thoroughly. This documentation includes the original contract, claims submitted, evaluation reports, recommendation reports and records of payments. These documents are crucial for resolving disputes and auditing associated project costs.
7. Monitoring and Reporting
Throughout the construction project, the progress is continuously monitored against the schedule and budget. Regular progress reports are prepared by the project manager, keeping all stakeholders updated on the project status.
A residential development project that consists of 20 townhouses and 10 terrace units is managed by a professional QS. The developer has settled the land and construction has started, with a non-bank lender relying on the QS to process the progress claims and to pay the invoices as requested by the developer. The QS is instructed to prepare a progress payment report (also known as a progress claim report) by the non-bank lender, which is usually requested monthly. The project commenced with an initial contract sum of $5,876,363 with development costs of $1,743,850 and was initially expected to run for 13.5 months. However, due to unforeseen delays and changes, the project's duration has been extended to 15 months.
Progress Claim Evaluation
The QS has inspected the site to prepare the progress claim report, outlined as Progress Claim No. 3 with an excerpt of the report below:
Construction Work Value: The gross value of construction completed as of this claim is $925,953 (excluding GST). After accounting for retentions and previous payments, the amount payable to the contractor for this claim is set at $75,636 (excluding GST).
Development Costs: Development costs are closely monitored against the funding table budgets. Invoices totalling $49,212 (excluding GST) have been submitted for this period, bringing the total recommended development costs for payment to $1,120,259 (excluding GST).
The total amount payable (excluding GST) by the non-bank lender is $124,848, being the amount payable for construction works ($75,636) and development costs ($49,212).
Variations and Contingencies
The QS progress claim report also captures three construction variations totalling $27,481 (excluding GST) which have been approved and included in the payment for this period. Variations are common adjustments during a project, however, need to be well documented and justified for the lender.
In this case study, the variations have been approved and covered by the contingency allowance, which is a monetary amount added to the base estimate of a tender to account for unfavourable future events. The contingency allowance is usually set at 5% of the of construction costs; it can however be more or less than 5% depending on several factors that the QS might consider, such as the nature of the project, Environmental Protection Agency (EPA) report or the ability of the developer to deliver success projects based on prior developments.
The initial contingency allowance for this project is $290,910 (excluding GST), which is then reduced to $263,428 once the three variations of $27,481 are factored in. As a rule of thumb, lenders usually prefer to hold a fixed percentage of the cost to complete (CTC) as their contingency allowance. This is reflected in this case study as the lender accepts to cover the three variations from the contingency allowance because the contingency allowance remains at least 5% of the CTC. With $263,428 as the unspent / remaining contingency allowance, the lender is aware that this provides a buffer for any unexpected costs that may arise as the construction work progresses.
The progress claim process in this residential development project illustrates the detailed and structured approach needed to manage large-scale construction financing effectively. Regular monitoring, transparent reporting and adherence to contractual obligations ensure that the project remains financially managed and on track to meet deadlines. This case study exemplifies how rigorous process management can lead to successful project outcomes in the construction industry.
Image by LEANDRO AGUILAR from Pixabay
Andy Wong is a co-founder at PropertySensor and has more than a decade of experience diving into Finance and Construction Lending while working at Payton Capital and Australian Securities Limited.