If you are a subcontractor working on commercial projects, you are all too familiar with payment applications. They are more complicated than invoices but serve essentially the same purpose. Because the acceptance of your application by the architect or general contractor (GC) releases payment for the work you have completed that month, getting it right affects your cash flow. For most subcontractors, that is a priority — and should be. There are many forms and systems for submitting your application with the required documentation attached. But almost all subcontractors are familiar with the standard forms generated by the American Institute of Architects (AIA G702/G703). The basic form for monthly pay applications is AIA G702.
Because it is crucial to get the form right the first time around, we will discuss how to avoid some classic mistakes. AIA G702/G703, by the way, is by no means the only system for pay applications. It’s also not necessarily the simplest system. But since many architects and GCs insist upon it, this is a checklist for avoiding problems on the form and required accompanying documentation. The complete package might look like this:
- AIA G702/G703 application forms
- An invoice
- Any required backup including photos
- Lien waivers
- Change orders
- Payroll reports
Not every GC requires the same documents with the application. The requirements differ from company to company. They may also vary from project to project. Therefore, as soon as you start working on a project — however much there is to do — you should clarify what will be required with the payment application and when it will be due. Again, you can’t even be sure the same GC will carry the exact same requirements from project to project. It’s best to check.
The AIA G702/G703 Forms: A Quick Overview
Where do you obtain the forms, and why do so many architects and GCs request them? AIA G702 (or sometimes just “the AIA form”) is a billing form created by the AIA. Almost all AIA members use it, but so do many others in the industry. You download AIA forms, but they’re not free. Each time you download, there is a charge, and it can mount up fast. Also, the AIA payment application (G702) usually must be submitted with an AIA Change Order form (G701) and Continuation Sheet (G703). We will discuss each of these, but many common errors and slip-ups apply to all of them.
What is the payment application itself? It is your report on the current contract value, how much you have billed so far for your progress, and how much you are requesting with this application. When the contractor and architect sign off on what you have reported, it becomes a receipt for payment.
AIA G703, the continuation sheet, is your running record of the work required by your contract, its identifiable parts, and your progress each month on each item. This is the record of your scope of work, so any change orders require yet another form. AIA G702/703, and, when needed, AIA G701, give the GC, architect, and accounting department a good sense of:
- How your work is going
- What has been done
- How much you have been compensated
- What is left to do
How to Access the Forms
Are you worried about the not-inconsiderable cost of downloading each form each time you make a payment application? There are alternatives, some free or at much lower prices. Also, some software packages have adapted the form into their programming. For example, our construction software is being adopted by contractors all over America as the new standard in construction billing because its simplicity and effectiveness help ensure budget accuracy.
Meanwhile, since AIA G702/G703 forms remain widely used for construction billing, it is important to devote the time and attention to getting your construction billing AIA application right and ready on time.
5 Common Mistakes With AIA G702 Payment Applications
1. Submitting Late AIA G702 Forms
Most construction billing payment applications have a deadline set by the GC. Your contract should specify what must accompany the payment application. But be aware of additional stipulations by the GC. Also, take note of where to send them; don’t assume the form goes to the GC. It might be the GC, but it might be the owner’s accounting department.
Getting your construction billing straight at the beginning of the project is going to save headaches. For example, if you submit the payment application packet after the deadline or there are missing documents, you might not get paid until the following month’s billing cycle. That means shutting off your cash flow.
Not many subcontractors enjoy completing the payment application packet as much as getting the work done. But resist the temptation to procrastinate until the final hour.
2. Being Tempted to Over-Bill
How many of us have been stuck with a large, possibly unexpected expense and wondered where to get the money? The subcontractor, in a very real sense, controls his pay by completing a certain amount of work under the contract and deciding what to bill.
But your application is not the place to meet a pressing financial need by over-billing. Your billing, on AIA G702/AIA G703 forms or any other construction billing payment application, is for the percentage of work you have completed. Monitoring both the work and the billing is an essential responsibility of the GC or accounting department. Part of that responsibility is to reject any payment application for an amount greater than the percentage of work completed.
If the rejection doesn’t come from the GC, remember that the construction firm accounting department or the owner may also review your payment application. After a rejection, the GC or owners will decide if you can revise your form or must wait until the next month.
Even if you can get paid for a larger percentage of work than you actually have completed, the extra money will come out of your future payments for work. It is far better to be as accurate as possible in billing for work; you will have expenses later on that have to be covered, too.
3. Forgetting Additional Documentation
We have briefly discussed that your AIA G702/G703 application is not just a form. It is a packet that includes one or more forms and other documentation. Leaving out the documentation required in the contract or in supplementary requirements from the GC can be grounds for rejecting the application — or at least for requiring a revision. That isn’t the end of the world on the first payment application you submit on a project or to a new GC. Write it off to the “shakedown cruise.”
But after that, there is little excuse not to include everything requested. Also, keep in mind that a new GC may not be entirely clear about what construction billing documentation should be requested. Expect the first application, review, and payment cycle to have delays while everyone gets the system clear.
4. Not Doing the Math and Checking It Twice
The math itself should be checked and rechecked (if possible, by a third party). You have to take the time to be sure that what does on the forms squares with your records and other documentation. In other words, the whole package must stand up.
This includes the contract, any billing for previous months, and any change orders that have been approved. Some accounting software has formulas that make all this easy and your work more accurate, but, in the end, you still have to take responsibility.
5. Not Knowing How to Handle Change Orders
Requests for changes in the construction plan are part of any project. You might even be the one to spot the need for a change. Wherever the suggestion for change originates, you need approval from the GC for it to become official. Why? Because the GC or the accounting department probably won’t accept billing for change orders that are not official. This is not always a rigid process. Sometimes the GC may give you approval to bill for a change that’s not “official.” But getting the nod from the GC is another form of backing up the change order. Even then, if the change order is unofficial, you can document it in a work diary or by an email to the GC confirming your discussion.
GCs, like many bosses, hate surprises. One such surprise is a bill for work that the GC hadn’t approved before you completed it. If there is a dispute about changes you have carried out, you have to protect your lien rights and see what conflict resolution process is called for in the contract.
What to Do If Your Payment Application Is Rejected
We mentioned some issues if the GC rejects your application. The first step is asking to resubmit it and then completing the revisions right away. If the decision is that you have to wait until the next month to resubmit, you may face a classic cash flow problem. If you are just beginning as a subcontractor, you may not have built up a reserve against this kind of contingency. It is a good idea to build up such a reserve as soon as you can.
Flashtract’s Software for Construction Billing
Flashtract has created software that can bring together all your record-keeping, other documentation, and AIA G702 forms for applying for payment. With our system, cross-checking documents become simpler. You can even export your project budget as an Excel spreadsheet for easy analysis and sending.
Subcontractors, of course, usually cannot choose to use their own payment application software system. But they can express their preference once they establish a relationship with the general contractor. By now, most contractors will have heard of the Flashtract system and know at least some other contractors who are using it. A recommendation from a valued subcontractor may be just the impetus they need to try a better way.
Be sure to check back regularly for information, insights, and updates on all issues related to tracking, reporting, and verifying construction billing and application for payments in one system. Meanwhile, don’t be a stranger. Look for us daily on Twitter for reports, comments, and updates on the new efficiencies in construction reporting.