The construction payment application is the GC’s formal request for payment for work completed during a billing period, the document that triggers the draw disbursement from the construction loan and the payment from the owner to the GC. It is also the document most susceptible to the errors, optimistic completion claims, and deliberate misrepresentations that cost owners money and give lenders inaccurate information about their loan’s funding status.
Understanding what a construction payment application contains, what verification it requires before approval, and what the most common problems look like gives owners and construction managers the tools to review payment applications with the rigor the amounts involved justify.
What the AIA G702/G703 Payment Application Contains
The American Institute of Architects’ G702 and G703 forms are the industry standard for construction payment applications. The G702 is the cover sheet, a summary of the project’s financial status through the current billing period. The G703 is the continuation sheet, the line-by-line schedule of values that supports the G702’s summary.
The G702 shows: the original contract sum; the net change from all approved change orders; the current contract sum (original plus changes); the total completed and stored to date; the retainage withheld; the total earned less retainage; the total previously paid; the current payment due; and the balance to finish including retainage.
The G703 shows each line item in the schedule of values, with: the scheduled value (the amount allocated to that scope in the contract); the work completed in prior periods; the work completed in the current period; any materials presently stored; the total completed and stored to date as a percentage of the scheduled value; the balance to finish; and the retainage withheld on each line item.
The payment application is signed by the GC certifying that the work represented has been completed or will be completed with the amount requested, and by the Architect certifying that the work has been reviewed and appears to be in accordance with the contract documents.
What to Verify Before Approving a Payment
Schedule of values completion percentages. The most important verification step for any payment application is assessing whether the completion percentages claimed for each line item are supported by field conditions. A claim of 75% complete on MEP rough-in should reflect 75% of the MEP rough-in work actually being complete in the field, not 75% of the billing period elapsed, not 75% of materials delivered to the site, but 75% of the work physically installed.
When a construction manager or owner’s representative has conducted a field inspection before the payment application is submitted, they can compare the application’s claimed completion percentages to the conditions observed during the inspection. When the application is submitted without a recent inspection, the verification relies on the Architect’s certification, which is a professional opinion but not a field measurement.
Front-loading identification. As described in the schedule of values article, some GCs allocate values to line items in ways that allow them to bill a higher percentage of the contract amount early in the project than the actual cost distribution supports. Payment application review should include comparison of the GC’s claimed completion percentages to the reviewer’s understanding of what percentage of each line item’s value has actually been earned. A line item showing 100% complete when field conditions suggest 80% is a front-loading signal that requires investigation.
Stored materials verification. Payment applications that include stored materials claims, materials that have been procured and are stored on site or in a bonded warehouse, pending installation, require verification that the materials exist, are appropriately protected, are insured, and are clearly identified for this specific project. A stored materials claim without documentation of storage location, quantity, and identification is a claim the owner should not fund until the documentation is provided.
Change order reconciliation. The payment application should reflect all approved change orders as adjustments to the contract sum. If an approved change order is not reflected in the payment application, or if the application reflects a change order amount that differs from the approved amount, the discrepancy requires resolution before the application is approved.
Lien waiver collection. Before approving a payment, the owner or their representative should confirm that the required conditional lien waivers for the current payment have been received and that the required unconditional waivers for prior payments are in hand. A payment application that is approved without lien waivers in place creates lien exposure that the payment was intended to extinguish.
Common Payment Application Problems
Overbilling on general conditions. General conditions costs, supervision, temporary facilities, equipment, utilities, are often billed as a percentage of time elapsed rather than as a reflection of actual costs incurred. Because general conditions are consumed throughout the project without producing a physical installation that can be independently verified, they are the most common category for optimistic billing. An owner’s representative who understands the project’s general conditions budget and compares the billed amount to the actual costs incurred will identify overbilling in this category.
Incomplete change order documentation. Payment applications that include billing for change order work without the underlying approved change order, billing for work that has been performed and requested as a change but that has not yet been formally approved, create a situation where the owner has funded work that has not been contractually approved. The owner’s representative should verify that every item billed as a change is supported by an approved change order.
Billing for materials not on site. Materials that are claimed as stored but that have not actually been delivered to the project are a fraud risk that is rare but real. Physical verification of stored materials, or confirmation from a bonded warehouse, is appropriate when stored materials represent a significant portion of a payment application.
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Related: Construction Management Services · Owner’s Representative Services · Construction Schedule of Values · Construction Management Guide
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