What is an Interim Payment in Construction?
Interim payments in construction allow subcontractors to receive payment against works in stages, spreading the value and payment for the works over the length of the whole project rather than waiting for full and final payment at its conclusion.
This has numerous benefits, particularly as construction projects can often be lengthy and complex, requiring weeks, months and even years of time to complete.
Interim payments allow subcontractors to receive financial compensation throughout the project's life span. Subcontractors can cover their costs, pay wages and generally manage their business with a more predictable and regular cash flow.
Construction Law and Interim Payment Applications
Interim payment applications are generally made in construction using Applications for Payment, a process mandated by the UK Construction Act and designed to facilitate regular, interim payment for projects longer than 45 days.
Making interim payments available for longer projects and against lengthy contract payment terms is a measure designed to encourage prompt payment within the construction supply chain, allow subcontractors to access funds regularly to remain liquid and abolish the ‘pay when paid’ approach that flourished in the construction industry.
The UK Construction Act clearly defines a standard timeline for each payment application made within the construction supply chain (with some variation in timings allowed), which both the contractor and subcontractor must follow.
For details on the full Application for Payment process, timeline, terminology and background, visit our Application for Payment: An In-depth Guide article.
Application for Interim Payment
The Application for Payment process allows subcontractors to submit an interim application (which is a demand for payment) for the value of the work they have completed up to a certain point. The specific timelines of when subcontractors submit these applications can vary from project to project and contractor to contractor.
One of the most common scenarios is for the contractor to flow down the valuation dates for their contract period with the end client (this is often monthly or every 30 days in Ireland, but it can vary). Replicating this valuation schedule into their framework for subcontractors’ applications makes logical sense and keeps timings consistent and manageable across a project.
This approach is much more common now that the UK Construction Act mandates interim payment be available in certain circumstances, as in the past, contractors would often wait until they had received payment for the project from the end client before settling what they owed to the subcontractors who worked on delivering the project.
The Subcontract Document
The details of the valuation schedule that a contractor requires its subcontractors to follow, along with other details of when and how they should submit their Application for Payment, will be contained in the Subcontract Document or Agreement.
This document will lay out the schedule for valuations and submissions of applications, along with all the other important terms relating to this project (the services provided, payment terms, insurance, liability etc.).
It may also give details of how to submit applications, their process, system or software, and the format required to ensure that applications are processed promptly and payments made on time.
Interim Payment Certificate in Construction
Once a subcontractor has submitted an interim application, the contractor will value the work up to that point and issue a Payment Notice to the subcontractor with the amount that they consider due (this is called the Notified Sum).
Following this, on the Final Date for Payment (which will usually be detailed in the contract), the contractor will issue a Payment Certificate which will give the subcontractor all the details of the payment they are making to them.
This is a legal document that acknowledges the payment to be made and will also include other relevant information in relation to the application. This can include the gross order value, the value of other applications paid to date, details of the VAT treatment and CIS applied, and any deductions.
Managing Interim Applications in Software
Many contractors now use software (like WebContractor) to manage Applications for Payment. Lengthy projects with lots of subcontractors can generate a high volume of applications, and technology can allow this process to be managed accurately and efficiently.
WebContractor provides a straightforward (and free) process for subcontractors to submit and then track their interim applications against a project, with all the essential information recorded in the system (gross project value, the value of each interim application, among many others), to make management as simple as possible on the contractor side.
A digital process for applications cuts down on paper and emails (which can also be misplaced), keeps all the pertinent information in one central platform and reduces the likelihood of human error, helping to streamline the process and support prompt payment of application amounts.
You can find out more about WebContractor’s subcontractor application management platform here.