They seem simple, but pay applications aren’t just one document. They’re a bundle of related documents, and it’s important to get the pay app right in order to get paid. Any mistakes on a payment application could lead to delayed payments, cash flow issues, and potentially even soured business relationships.
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Common mistakes on pay application
Getting paid for what you’ve earned and maintaining steady cash flow is crucial for any construction project. Unfortunately, preparing a full pay application and gathering all of the necessary documentation is a long, tedious process. Making a single mistake on one of these pay apps can cause it to be denied, sent back for revisions, then resent for approval. That wastes a lot of time and stunts the project’s cash flow. Let’s take a look at some common mistakes made on pay applications.
Forgetting to include lien waivers
Practically every construction project will require lien waivers in some fashion or another. The contract will typically state that lien waivers (conditional ones!) be sent with pay applications in exchange for payment. Not only from the contractor seeking payment, but also from their subs and suppliers as well. Waivers should be gathered at every tier of the payment chain, and failure to do so could slow down the payment process.
Keep in mind that they must all eventually reach the top, and the owner may be hesitant to release funds to the project if any are missing. Plus, a payment delay will slow down payment for everyone along the payment chain.
Not accounting for change orders
Change orders can cause nightmares for subcontractors if not handled properly. No matter which form of pay application is being used, there is certainly a space to add change orders. If not, be sure to add it yourself.
Subs often go unpaid for undocumented change orders, so it is crucial to fill these numbers out properly. The pay app should break down and account for any additions or deductions to the contract price. Add all these up to reach a net total of changes caused by change orders. Also, when filling out a pay application, be sure to reference and include all change order requests, associated invoices, and any other documentation of the additional work.
Inaccurate schedule of values
A copy of the schedule of values (or continuation sheet) should be submitted along with the pay application. Besides acting as a budgeting tool, it is also meant to act as a reference for the person evaluating pay applications. The pay app amounts should match up with the cost of each line item and the corresponding progress percentage.
That being said, tinkering with the schedule of values is never recommended. Many contractors do attempt to frontload their SOVs in order to obtain more money on an earlier pay application. This could lead to all sorts of problems. Unexpected cost overruns might be hard to recoup, subbing out work could lead to messy disputes regarding their payment application, and a litany of other issues could pop up. Therefore, when including an SOV in the payment application, make sure it’s accurate and reflects actual costs of performance.
Insufficient evidence of work performed
This is an important inclusion to a pay app bundle. Every pay application should include as much supporting evidence of the labor or materials furnished as possible. This can include a number of different documents. The more obvious ones being any and all invoices, payrolls, and delivery confirmations. Other supporting documents that can speed up the process are documentation about the actual progress of the work; most notably daily construction reports. Attaching photos of the work progress to daily reports can also reduce the time it takes to verify the work and get payment released.
Failure to notarize
Putting aside my personal grievances with this incredibly unnecessary practice, there are many instances where a pay application must be notarized. Legally speaking, there is never a requirement for pay apps to be notarized. Unfortunately, it is not uncommon for project managers to require that they are. In fact, two of the most prominent standardized pay apps that are used in construction (AIA & ConsensusDocs) both include a notary block.
Bottom line, if the contract requires that pay apps be notarized, the best option may be to just do it. It’d be a shame to have a perfectly valid pay app rejected because the notary stamp was left off.
Certified payroll records (for public projects)
Working on public projects can mean big money, but it also means more requirements and regulations. All federal and most state projects impose prevailing wage requirements. Essentially, these are protections in place to ensure that contractors, subs, and suppliers on such jobs are adequately paid. One specific requirement on prevailing wage jobs is the submission of certified payrolls with pay applications.