INTRODUCTION

One of the most common formats for requesting progress payments is the use of a form that lists the activities and their values. These Schedule of Values typically contain provisions for the description of the work, value of the completed work, value of materials stored and the value of the balance to finish the work. Development of these forms and format is easy when using any of the common commercial spreadsheet programs. If this is not desirable, the American Institute of Architects has a pre-printed Application and Certificate of Payment (AIA Documents G702 & G703).

However, the commonly developed forms and the AIA documents are missing key components for the Owner and/or the Owner's Representative to reliably determine the actual status and values of the completed and remaining work. There may or may not be supporting documentation containing the information required to make the assessment. Due to this, the process of determining the actual and remaining values becomes a highly subjective process.

What is needed is a method that is objective, reliable and easy to verify. This method must also be easy to set up and use; otherwise it may never be implemented. There is a better way to manage the overall project status and to provide for a less contentious method of determining the progress status and contractor "earned values". This can be done with a simple set of modifications to currently used contractor progress payment request forms.

SAMPLE PROJECT

The illustrations used to cover this topic are from an actual project. The project is located in the Midwestern United States. The facility is a high finish quality facility. The project was bid in early 1999. This is the first major project for the Owner. The Owner engaged the services of an Architect for design and construction oversight services. The construction contracts were awarded in three phases. The first contract was for the site work and foundations. The second contract scope was for Phases II & III. The second phase was for a new addition. The third phase concludes the project with a remodel of the existing facility. The contractor was required to submit a Schedule of Values, for approval, prior to proceeding with construction. The contractor submittal was approved as shown (Figure 1E series). The Owner and Owner's Representative did not request any changes to the submittal. The application for payment used in this paper is from Progress Payment Request #2 for the Phase II portion of the contract.

The project engaged the services of a cost estimating firm for the Pre-design Budget Estimate, Schematic Design milestone estimate and the Design Development milestone estimate. Due to budget constraints a Construction Documents milestone estimate was not prepared on the project. At the two design milestones the estimates were used to keep the costs within the budget. During the preparation of the estimates at the schematic and design development phases, the estimating firm made numerous cost and value savings recommendations. All quantities used in the proposed form usage (Figure 1P series) are from the design development milestone estimate. While design development documents normally have a thirty-five to fifty percent completion status of the final documents; there was very little mechanical and electrical information or plans. The quantities used in the commentary may or may not reflect the actual quantities on the project. The quantities do serve to illustrate the benefits of the methodology being proposed.

CURRENT APPLICATION FOR PAYMENT USE

A Contractor's Application for Payment (Schedule of Values) is used by the Contractor to submit to the Owner and/or Owner's Representative the amount due for the progress in construction during the reporting period. This period may be bimonthly, monthly or another period of time identified in the contract specifications. The typical period is monthly. The forms and format for the application of payment by the contractor are also called out in the specifications. In addition to this, the timing of the submittal is defined in the specifications. A usual time is within five days of the period ending date. The calculation of the payment amount due is provided for on the forms themselves.

A typical summary sheet (Figure 1E.1) provides categories for:

The Original Contract Sum (Figure 1E.1, Line 1) is the result of the bid amount. No calculation is required for this since it is derived from the bid amount for the project.

The Net Change by Change Order (Figure 1E.1, Line 2) is calculated by adding and subtracting the amounts of the agreed upon change orders during the course of the project. While there may or may not be disputes over the value of each change order, this amount is only adjusted when the change order scope is agreed upon and made a part of the contract.

The Contract Sum To Date (Figure 1E.1, Line 3) is a simple calculation of adding the Original Contract Sum to the Net Change by Change Order amount.

The Total Completed & Stored To Date (Figure 1E.1, Line 4) is the most complex calculation and is the most disputed area of the entire payment request process on a project. While on the summary sheet this number is simply the totals of the detail, it is the calculation of the detailed items that cause a majority of the problems on a pay request. These calculations are typically found on the supporting detail sheets.

The Retainage (Figure 1E.1, Lines 5a & b) is based upon the contract terms and conditions. Typically it is a percentage calculation based upon the work being invoiced on the progress payment. It may or may not have a cap on the maximum amount. It may have a variable rate, based upon percent complete.

The Total Earned Less Retainage (Figure 1E.1, Line 6) is determined by subtracting the retainage amount from the amount being requested.

The Less Previous Certificates For Payment (Figure 1E.1, Line 7) is the previous approved progress payment total.

The Current Payment Due (Figure 1E.1, Line 8) is the result of subtracting the previous approved payments from the total earned.

The Balance to Finish, Including Retainage (Figure 1E.1, Line 9) is the balance of the contract value to be earned and/or held due to retainage.

It should be noted that the summary sheet does not necessarily represent progress on a project. It simply deals with dollars. These dollars, while "earned", may not represent progress on the project. To reflect progress on a project, the materials and equipment must be installed. General Conditions, Bonding, Permits and related categories are supporting cost activities that do not indicate progress. Stored Materials do not determine progress, only that the materials have been delivered, ready for installation.

To determine progress, one must use detailed information. This information can be found on the detailed continuation sheets of the contractor pay request.

A typical detailed continuation sheet ( Figure 1E.2) provides categories for:

The Item Number (Figure 1E.2, Column A) is used for identification purposes. Many systems abound for determining this number. A simple one in these illustrations uses the common sixteen-division format. Items within each division contain an alpha character to delineate individual line items within the divisions.

The Description of Work (Figure 1E.2, Column B) is used to describe the work.

The Scheduled Value (Figure 1E.2, Column C) is the amount determined for the value of the work. The contractor typically determines this with little or no oversight by the Owner or Owner's Representative.

The Work Completed - Previous (1E.2, Column D) is the amount approved from the prior application for payment.

The Work Completed - This Period (1E.2, Column E) is the amount determined to represent the progress for the current pay request. This is the column that causes the most problems on a project pay request.

The Materials Presently Stored (1E.2, Column F) is the amount determined to represent the value of the materials stored. This column is the second most common cause of pay disputes on the progress payment request.

The Total Completed and Stored To Date (1E.2, Column G) is the total of the Work Completed - Previous, Work Completed - This Period and Materials Presently Stored.

The Percent (1E.2, Column H) is the percent of scheduled value, not the percent complete. This is not a reliable indicator of the project completion status, only of the dollar value.

The Balance to Finish (1E.2, Column I) is the remaining dollar value, not the amount of work to complete.

The Retainage (1E.2, Column J) is the amount to be retained during the performance of the contract. This is typically a percentage calculation. If it is the same percentage for each line item, the calculation may be performed once on the summary sheet, not on a line by line basis.

In addition to this information, many specifications will tie the pay request to other supporting information. A common contract requirement is to coordinate the construction schedule to the pay request. In theory, this will enable the Owner or Owner's Representative to verify the pay request is in line with the progress on the project. In actuality this is not done on a vast majority of projects.

The fallacy of this entire process is the reporting of the progress by using the progress payment schedule. This occurs on far more projects than ones with reliable project control systems in place. It relies upon field determinations made by personnel using subjective methods to determine progress, not quantitative methods. The use of the subjective methodology leads to disputes arising over the job progress and the amount due for the current period. Oftentimes the Owner and/or Owner's representative are at a disadvantage in judging the progress. The contractor has the advantage by having prepared an in-depth cost estimate, a detailed schedule for the project and the schedule of values. As a result of this, the prime contractor and subcontractors know the project details, often better than the Owner and/or Owner's Representative.

PROPOSED APPLICATION FOR PAYMENT USE

The basis for this change is in line with basic project management tenets - Progress is based upon installed quantities. A simple modification to the information contained on the progress payment request will go a long way to assisting the Owner, Owner's Representative and the Contractor in determining the correct amount of the progress payment request. This changes the verification or confirmation of the contractor's information from a subjective process to a quantitative process. This modification involves the addition of five columns and revising the use of another column.

The five new columns (Figure 1P.2) are:

The Contract Quantity (Figure 1P.2, Column C.1) is used to establish the base contract quantities. This amount is used to determine to the percent complete for the detailed pay application line item.

The Unit of Measure (Figure 1P.2, Column C.2) is the description of the units - Cubic Yards, Linear Feet, Square Feet, etc.

The Quantity Installed - Previous (Figure 1P.2, Column D.1) is used to show the accumulated installed quantities as the project progresses.

The Quantity Installed - This Period (Figure 1P.2, Column E.1) is used to show the installed quantities for the progress pay request time period. The number is then used with the contract quantity to determine the completion percentage. This percentage is then applied to the contract value to determine the payment amount for the current period of the project.

The Quantity Remaining (Figure 1P.2, Column G.1) is used to show the quantity remaining to be installed on the project.

The revised column (Figure 1P.2) is:

The Percentage column would be identified as the Percentage Complete. This percent is determined by actual installed quantity. The modification to the percentage column would change its' use from percent of dollars to percent complete based on installed quantities.

OTHER BENEFITS

There are additional benefits to including the additional columns of information. These benefits include being able to determine and/or verify an appropriate amount for each of the line items when the initial progress payment schedule is submitted for approval. Contractors have been known to "front end load" the schedule of values. This is done to recoup costs early in the project. It is used to counter balance the Owner's use of retainage and to begin the "earning" of their profit amount as soon as possible. In other words, it is a cash flow technique. However, in some cases this front end loading has been excessive. With the Contract Quantity added to the form, a unit price can be developed to help determine the validity of the costs for the line items.

Another benefit is that management, without too great an effort, can see the actual completion status of each line item of work contained in the progress payment request. By including the Quantity Installed - This Period and Quantity Installed - Previous Columns and the percentage complete, progress can be benchmarked for the line items. With slight modifications to the form, the overall project can be progressed as a result of the pay request submittal.

COMMENTARY ON SUBMITTED APPLICATION FOR PAYMENT/SCHEDULE OF VALUES

The Schedule of Values submitted by the contractor on the project is by no means a detailed listing of the work to be performed on the project, and it should not be. A listing of work items should identify enough components of a project to determine progress. Overall, with minor exceptions, this example does that for the project. There are line items that could be deleted and items that could be added. The retainage column has been changed to show the Contract Unit Cost for this commentary. This may be a useful change in the base document. Retainage calculations can easily be made on the summary sheet and variable retainage rates are a cumbersome method of calculating retainage.

This schedule of values for the progress payment application is an excellent demonstration of how to recover costs as soon as incurred by the prime contractor and subcontractors. The identification of the Bonds & Insurance, Permits and Mobilization ( Figure 1P.2, Lines 1B, 1C & 1D) enables the prime contractor to recover the costs as they are incurred. The mechanical and electrical subcontractors on the project also use this technique (Figure 1P.9, Line15A and Figure 1P.11, Line 16A respectively). The alternative to this would be to recover the costs over the duration of the project, as is done with the General Requirements and Supervision ( Figure 1P.2, Lines 1A & 1F for the prime; Figure 1P.9, Lines 15B & 15C for the mechanical and Figure 1P.11, Line 16B for the electrical). The separate identification of the materials (Figure 1P.3, Lines 3A, 3L, 4A and 4C) lends its self to recouping the costs on materials when they are delivered to the job site. If not identified in this manner, the material costs would not be recovered until the materials were installed, resulting in a potential cash flow delay to the contractor and subcontractors.

The contractor appears to have carried the material and labor split a little too far in the breakdown between the labor and material on some of the items. An example of this is the concrete work (Figure 1P.3, Lines 3A, 3C, 3E, etc.). Concrete materials consist of formwork, ties and concrete. The "earned" value of concrete does not occur until it has been placed. The cubic yards of the concrete then will form a known quantity to progress for the earnings due to the contractor.

With known quantities and unit prices of work included on the Progress Payment Application (Schedule of Values), the Owner and Owner's Representative can objectively approve installed quantities for payment and judge the progress of the work. An example of this is found with the metals section (Figure 1E.4, Line 5A and 1P.4, Line 5A). In this instance the prime contractor, in the second pay request, has identified $20,000 of payment due. This has been requested as Work Completed rather than Materials Stored. This may or may not be for steel delivered to the site. It could be that this payment is for shop drawings. Unfortunately there is no way to tell what this payment includes or excludes. If there is a defined quantity or a new item listed for shop drawing, this problem could be remedied.

The adding of quantities will also help reduce front end loading by the prime contractor and subcontractors. The front end loading seems to be occurring for several line items (however, since a construction documents estimate was not prepared for the project, this is not certain). Examples of line items that appear to be front end loaded are concrete materials (Figure 1P.3, Lines 3A, 3B & 3M), structural steel (Figure 1P.4, Line 5A) and plumbing fixtures (Figure 1P.9, Line 15N).

In evaluating any amounts submitted by the prime contractor and subcontractors, it is necessary to keep in mind that one important figure is missing from the pay request. This is profit. Profit for the prime contractor, subcontractor and material suppliers. There is "buried" profit into the cost to the Owner for each line item of the pay request.

CONCLUSION

This process is not what could be called a sophisticated project management tool. It is not applicable to all projects. However, if the project conditions do not warrant the use of project management firms, elaborate CPM network diagrams and other high end project control techniques, this simple solution is an effective, easy to use, low cost project management technique. The information required to implement this technique is readily available on each project, it takes a minimal amount of time for inclusion in the initial pay request (in this case two hours) and it provides a quantitative method of determining progress. These factors alone should end disputes over the actual progress and the amount being invoiced on the application for payment. Should more information be required, this form and format can be expanded with minimal time and effort from an existing spreadsheet.

 

Print This Article