Glossary of Construction Payment Management Terms

Contractor

An entity which enters a contract to provide materials or labor to perform a service.

General contractor (GC)

An entity responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of a building project; the liaison between on-site labor and the owner of the project.

Subcontractor (SC)

An entity hired by a general contractor to perform a specific task as part of the overall project and is paid for services provided to the project.

Owner

The initiator of a construction project, assumes the financing of the project, and contracts the services of third parties involved in the design and construction of the project through a general contractor.

Lender

A person or entity who provides loans designed for the construction phase of a real estate development project.

Draw Request

Is the act of requesting funds to be taken from the construction budget to pay contractors and material suppliers. Owners must submit different documentation with each draw request depending upon the lender they are using to finance the project.

Float the Project

An industry term that describes the situation where a contractor is paying for work out of their own pocket before being reimbursed.

Factoring

When a contractor sells their accounts receivables at a discounted rate usually 60 – 75% in order to receive future cash, today. When the factoring company receives payment from the client they pay off the remaining percentage that they withheld, minus a fee for their services.

Lien

A lien is a contractor’s legal rights to own a portion of a piece of property when they have added value to that property and have not received payment for that added value.

Lien Waivers

Legally waive the rights of the subcontractors, subcontractor’s subcontractors, and vendors. Liens are the only legal leverage that subcontractors have over the general contractors.

Partial Lien Waiver

The specific lien waiver signed at each milestone is a partial lien, which states that the lien rights on only the work that has been completed are waived.

Final Lien Waiver

A final lien waiver is signed when the subcontractor has completed all of the work that was scheduled, and they no longer hold any lien rights over the project.

The Chain

Refers to the process of subcontractors submitting payment applications, general contractors submitting billing information to the owner, owner reviewing the information and creating a draw request, the lender receiving and approving the draw request then paying the owner, the owner paying the general contractor, and the general contractor paying the subcontractors.

Field

Refers to the people that are directly related to the labor involved in building a project; this refers to subcontractors and superintendents for general contractors.

Office

Refers to the people that are more related with the administrative, accounting, legality of a construction project; this refers to project managers for general contractors, project owners, and lenders.

ACH (Automated Clearing House)

An electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll, and vendor payments.

Payment Applications (Pay Apps)

Is a construction document that contractors use on a project to request funds from the project owner for some value that they have added to the project. This can include but not limited to materials, supplies, labor, surveys, etc.

Architect

An entity hired by the project initiator responsible for the planning and design of a project. After the initial design phase, many firms continue working with the project owner in an advisory capacity by checking and approving submitted work before payment can be released to any parties.

Project Manager

An individual who works for a general contracting company and is responsible for overseeing all aspects of the construction project from managing financials and project constraints to subcontractor relationships. Project managers are most often tasked with reviewing and approving submitted work from subcontractors and consolidating these payment applications into a single bill to be sent to project owners.

Cloud-Based

Any web-based platform that is made available to users on demand via the internet. Cloud-based software runs from any internet browser and does not require any additional software to be downloaded. Cloud applications do not store data locally on your device, all information is kept remotely on secure servers.

AIA Document

The American Institute of Architects is a professional organization of architects. The AIA created a set of standard industry documents and forms. AIA Documents are often used in the construction payment process and specify the way that subcontractors and general contractors bill for their completed work.

Change Order

Is construction work that is being added or deleted from the original scope of work included in a project contract. Often, these changes result in alteration of the contract amount or scheduled completion date. Change orders require approval by both the general contractor and the project owner before the contract amount or project schedule can be modified.

Construction Loan

Any loan apportioned for use to finance construction of some kind. These loans are commonly offered by an accredited lender, such as a bank.

Task

A task on a construction project is a specific item of work that subcontractors and general contractors designate in a schedule of values. All tasks must be completed for a project to be fully finished. Examples of tasks include clearing and grubbing, rough carpentry, masonry, roofing, drywall, etc. Flashtract is designed to automatically bill and receive payment based on percent completion of tasks with specific dollar amounts assigned to them in the schedule of values.

Milestones

A milestone on a construction project is a defined completion percentage on a specific task.

Schedule of Values (SOV)

A detailed statement that breaks down every line item included in the contract sum. The SOV defines dollar values for different phases of work and is used as the basis for the cost of each task on a project.

Accounts Receivable

Money owed to a company for goods or services delivered but not yet paid for. Slow payments in the construction industry cause subcontractors and general contractors to have large balances in accounts receivable unavailable to them. This necessitates outside financing to remain cashflow positive and stay in business, impacting their bottom lines.

Outside financing

Obtains funds from outside of the company. In the construction industry project parties including project owners, general contractors, and subcontractors often times require outside financing in order to complete a project. Subcontractors and general contractors most often find themselves with poor cash flow and have to resort to outside financing so that they can continue to pay their laborers on a project as well as continue to order materials in order to stay on the project schedule.

Accounts Payable

A company’s obligation to pay off a short-term debt to a creditor or supplier. In the construction industry most services and materials are not paid for at the time of completion or delivery. As a result, many companies have large accounts payable balances.

Days working capital

The number of days it takes a company to convert its operating liquidity into actual revenue.

Bid Prices

Both subcontractors and general contractors submit bids as part of the process of obtaining work. For general contractors a bid price is the price at which they can undertake the management of a construction project. For subcontractors a bid price is the price at which they can complete a task or tasks as part of the project.

Subcontractor Default

When a subcontractor is financially insolvent and can no longer complete work on a project. Often caused by poor cash flow.

Breaking ground

Signifies that construction has officially started. Breaking ground on a project occurs after mobilization of equipment and resources.

Project closeout

Occurs at the end of a construction project and is used to evaluate the project, ensure completion, and derive any lessons learned.

Escrow

A third party that receives and disburses money or documents. This party is uninvested and will work to streamline the transaction process by collecting and holding necessary documents in order to automate the payment process.

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