Progress payments: Overview, definition, and example
What are progress payments?
Progress payments are partial payments made at different stages of a project or contract as work is completed, rather than a single lump sum at the end. These payments are typically used in long-term projects, such as construction, manufacturing, or service contracts, to ensure steady cash flow for the contractor or service provider.
For example, a construction company building an office complex may receive progress payments after completing key milestones, such as site preparation, foundation work, and structural framing.
Why are progress payments important?
Progress payments are important because they provide financial stability for contractors and service providers, reducing the risk of cash flow shortages during a project. They also help clients ensure that work is completed according to contract terms before making full payment.
For businesses, clearly defining progress payments in contracts helps manage financial expectations, reduces payment disputes, and aligns incentives for timely and quality work completion.
Understanding progress payments through an example
Imagine a software development company is hired to build a custom application for a client. The contract specifies progress payments based on project milestones:
- 30% payment upon completion of initial design
- 40% payment upon delivery of a working prototype
- 30% payment upon final software deployment
These progress payments ensure that the development company receives compensation at each stage, while the client can verify work completion before making additional payments.
In another scenario, a manufacturing company contracts a supplier to produce custom machinery. The agreement includes progress payments tied to production milestones, such as material procurement, assembly, and final testing. This structure allows the manufacturer to manage costs while ensuring the supplier continues production without financial delays.
An example of a progress payments clause
Here’s how a progress payments clause might appear in a contract:
“The Client agrees to make progress payments to the Contractor as follows: [X]% upon completion of [Milestone 1], [X]% upon completion of [Milestone 2], and the remaining [X]% upon final acceptance of the completed work. Failure to make progress payments may result in suspension of work.”
Conclusion
Progress payments help businesses and contractors maintain steady cash flow while ensuring work progresses according to contractual milestones. Clearly defining progress payment terms in agreements promotes financial stability, minimizes payment disputes, and keeps projects on track.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.