Does your payment application stand up?
Ben Cussons, Associate Partner, looks at the thorny issue of getting paid on time.
The construction industry is like no other, and possibly the most difficult to understand the inner workings of, particularly when it comes to finances. It is the only sector I am aware of where the system of applying for a payment rather than raising an invoice for work done is in common practice.
Why are payment applications raised rather than an invoice? The answer comes down to how the construction work is performed and completed on site and the time it takes for jobs and much larger projects to complete. Payment applications are more complex than a simple invoice, requiring multiple pieces of documentation to prove the legitimacy and validity behind the request for payment. For construction businesses, these applications are a much-needed source of finance required to successfully undertake a project and are essential to the ongoing working capital of a construction business. Working capital is the lifeblood of any business and is defined as the money the business has available to meet its short-term obligations. It is therefore crucial that these payment applications are completed correctly, and have all the necessary information and supporting documents to substantiate payment.
How does the application work? The working capital cycle of a construction project contract is that cash leaves the business for a period of say a month, an application is made at the end of that month and the cash received say another 30 to 60 days after issue. It is therefore very important that these applications are made at regular intervals and are a fair reflection of the value of work performed so that there is a constant flow of cash into the business, and (of course) enough working capital in the pot to continue with the project and keep the business trading. Unfortunately it is not uncommon for a profitable business to go under, simply by running out of cash.
What should a payment application include? As with any legal contract, a payment
application must be clearly laid out and it must be issued within the timeframe outlined in the contract document. It must be plain that the application is a demand for payment, and what the recipient needs to do to meet that demand. The terms used in the payment application should mirror those in the contract. For example, if you refer to ‘interim payment application’ in the contract then you should use the same form of words in the payment application. The key is to be as clear and unambiguous as possible. The payment application must include:
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