Pay application

How a pay application works

A pay application is a progress invoice that restates the whole contract each time. Rather than billing a single amount, it shows where every line of the schedule of values stands, how much has been earned to date, how much is being held as retainage, what was paid before, and what is due now.

Most contracts set a monthly cycle with a cutoff date. Many general contractors ask subs for a draft first, often called a pencil copy, so the numbers can be agreed before the formal version is signed. The formal pay app then goes to the architect, owner’s representative or general contractor for review.

In the AIA format, the G702 Application and Certificate for Payment is the summary page. It runs down the original contract sum, the net change from change orders, the contract sum to date, the total completed and stored to date, retainage, the total earned less retainage, previous certificates for payment, the current payment due, and the balance to finish. It also carries the contractor’s signed certification and a space for notarization, which some owners require.

The G703 Continuation Sheet holds the detail behind those totals, one row per line of the schedule of values.

The reviewer compares the pay app to the site, often with a walk-through, and certifies the amount or marks it down. The owner then pays the certified amount on the contract’s timeline.

On a job with subs, the deadlines stack. Subs submit to the general contractor first, the general contractor folds their numbers into its own pay app, and the owner reviews the combined version. A sub that misses the general contractor’s cutoff usually misses the owner’s too, and waits for the next cycle.

Why pay applications matter to each party

For contractors and subs

The pay app is how money arrives on most commercial jobs, and its accuracy sets the pace. A clean pay app with the right backup gets certified on the first pass. One with math errors, missing waivers or optimistic percentages comes back, and the payment may slip a full cycle.

For owners and architects

The pay app is the owner’s running record of the contract. Because it restates everything each month, the owner can see at a glance what has been earned, what’s being held and what’s left to finish. The architect’s certification gives the owner a check that payments match the work.

For lenders

When the project is financed, the certified pay app often becomes part of the owner’s draw request to the lender. Lenders rely on it, along with their own inspection and lien waivers, before releasing loan funds.

How to prepare a pay application step by step

1. Confirm the billing cutoff date, the required forms and the backup the contract or owner wants with each pay app.
2. Walk the job and record the percentage complete for each line of the schedule of values.
3. Add any stored materials, with the invoices and proof of storage and insurance the contract calls for.
4. Add approved change orders as their own lines; leave out changes that haven’t been approved.
5. Work the totals: completed and stored to date, less retainage, less previous payments.
6. Attach conditional lien waivers from your company and, if required, from your subs and suppliers.
7. Send a draft for review if the owner or general contractor accepts one, then submit the signed version by the cutoff.

Keep the previous pay apps for the job open while you work. Each new one has to carry forward the last one’s totals exactly, and most errors come from a number that didn’t carry over.

Pay application example with numbers

Say a contractor is on its third monthly pay app for a $320,000 contract with $14,000 in approved change orders and 10% retainage. Work completed and stored to date is $201,000, including $9,000 of materials stored on site. The first two pay apps covered $143,000 of work, and the contractor was paid $128,700, which is $143,000 less 10%.

The math: $320,000 + $14,000 = $334,000. Retainage is 10% of $201,000, or $20,100. $201,000 − $20,100 = $180,900, and $180,900 − $128,700 = $52,200 due. The balance to finish is $334,000 − $180,900 = $153,100.

Now say the architect walks the site and finds one line overbilled by $6,000. The certified total drops to $195,000, retainage to $19,500, and total earned less retainage to $175,500. The certified payment is $175,500 − $128,700 = $46,800, which is $5,400 less than requested: the $6,000 cut, less the $600 of retainage that would have been held on it.

If nothing else changes, retainage at completion will be 10% of $334,000, or $33,400. That amount is billed and paid at closeout, usually on a final pay app submitted with the closeout documents and final lien waivers.

Common pay application mistakes

• Missing the cutoff date, so the pay app waits for the next cycle.
• Billing percentages ahead of the work on site.
• Including change orders that haven’t been approved in writing.
• Totals that don’t carry forward from the previous pay app.
• Billing stored materials without the invoices, storage proof or insurance the contract requires.
• Forgetting the lien waivers, notarization or other backup the owner asked for.
• Calculating retainage on the wrong base, such as only this period’s work instead of total completed to date.

Reviewers process many pay apps, and the ones that match the site, add up and arrive complete are the ones that get paid on time.