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How to correctly complete the AI G702/G703.
Construction Application for Payments
This system was created to provide a standard method of billing for contractors to get paid. The form allows the contractor to invoice, and the architect to certify that the work is complete and correct. If the application is completed correctly (and the work is too!), the architect’s signature is the signal to the owner to release payment to the contractor. (Line 8 is the amount due). In addition, the architect can certify a different amount due.
In order to fill out this form – you must,
The following information will explain what each section of the forms should contain and how to correctly fill out an AIA G702 - Application for Payment and G703 - Continuation sheet.
AIA Form G702 - Contractors Application for Payment is a summary of the information being submitted on the Continuation Sheet (G703).
It requires the contractor to show the status of the construction contract to date; including the Original Contract Sum, Net Change by Change Orders, Contract Sum to Date, Total Completed and Stored to Date, the amount of Retainage (if any) on Completed Work, Stored Material, and Total Retainage to date, the Total Earned Less Retainage, the Total of Previous Certificates for Payment, Current Payment Due, Balance to Finish, including Retainage, and a summary of Current and Previous Change Orders - indicating if the Change Orders were an Addition to or a Deduction from the Original Contract Amount. This document must be signed by the contractor and notarized prior to submission.
HEADER INFORMATION (must be included on each Application for Payment you submit)
To Owner - the name, address, and contact information of the person paying you.
From Contractor - that's you!
Project - the name and location of the project that you are working on; this information is found in the Contract or Subcontract Agreement.
Via Architect - the name and contact information of the Architect that oversees this job.
Application No. - when you number your payment applications, give the first one "1" and then count from there.
If you find that you must revise a Payment Application, do not increase the number - just give it the same number, and then with a bright orange or green highlighter, handwrite REVISED across the top of the header.
Period To - this is the As Of date or the LAST day of the work cycle that you are billing for.
Contract Date - this is the date of your original Contract or Subcontract Agreement
Project # - the Contract or Subcontract number from the Contract or Subcontract Agreement (for example – CP17-1941-2A). There may be additional project numbers - Federal, State, and Architect Project numbers.
Distribution To - this indicates a list of who else will receive a copy of the Application for Payment.
Contract for - this is a brief description of the scope of work that is being performed and can be found in the Contract/Subcontract Agreement
SUMMARY OF WORK
Line 1, Original Contract Sum - this is the price that the General Contractor or Project Owner originally agreed to pay you for the work you agreed to do. This should include all accepted alternatives. Pull out your contract, look at it, find the amount. The amount displayed on this line should NEVER change from your first Application for Payment to your last.
Line 2, Net Changes by Change Orders - ok, here it is, the line that causes so much confusion and frustration. Add up all the Change Orders that have been priced AND FORMALLY APPROVED by the General Contractor or Project Manager.
Line 3, Contract Sum to Date - add the numbers on Lines 1 and 2 above. This is your official contract sum as of the date of this Payment Application.
Line 4 Total Completed and Stored to Date - this number comes from the left side of Column G on the G703, this box is the fourth from the left on the bottom row of the last page of the G703.
Line 5, Retainage (three lines) - retention or retainage is usually a specific percentage (5%) of the total contract that is held back by the project owner in reserve to protect the owner’s interest. Retention is not held in a lump sum, but rather, held at the stated percentage for the amount requested on each application for payment. Your contract should set the terms of retention including the percentage and when the hold-back will be paid. (If it does not, you should insist that no retention be withheld. If the GC failed to specify retention in your contract, do not allow him to use it. If you happen to be providing a Performance Bond, retention is not justified. The bond serves the same purpose as retention).
Line 5a, _% of Work Complete - typically, this is 5%. In the blank spot next to the $ sign, you need to write down the dollar value of retention that applies to your completed work. To figure out this amount, go to the G703 form and add together the values from the bottoms of Columns D and E; multiply this total by 0.1 if the Retainage is held at 10% OR aby 0.05 if the retention is held at 5%.
Line 5b, _% of Stored Materials - repeat the process used for Line 5a, EXCEPT use the value from the bottom of Column F on Form G-703. Usually, the amount of retention for completed work and stored materials is the same.
Line 5, Total Retainage - add together the dollar amounts from Lines 5a and 5b if your retention is a fixed amount. IF your retention varies per line item or phase, then you would not complete 5a and 5b, and instead, just enter the total of Column l on your G703 in this section.
Line 6, Total Earned Less Retainage - what you have earned OR Line 4 MINUS the Total Retainage on Line 5.
Line 7, Less Previous Certificates for Payment - this is Line 6 from the LAST Payment Application you sent.
Line 7 causes a lot of confusion; sometimes because GC's and Owners take so long to pay that you end up submitting your next Payment Application before the previous one is paid. Many people also write down the total payments received to date on Line 7 and ignore pay requests that are being processed. DO NOT make this same mistake! The Payment Application doesn't care whether you've been paid or not -- it only cares that you have EARNED additional payments. Go back and get the last Payment Application that you submitted, write down the dollar amount from line 6 (Total Earned Less Retainage) on that application. Remember, only the LAST Payment Application is considered.
Line 8, Current Payment Due - take the value from Line 7 and subtract the value of Line 6, the difference is written on Line 8. This amount represents the amount you should be paid for work earned during this pay period AND any change in Retainage during the period.
Line 9, Balance to Finish INCLUDING Retainage - take the contract sum to date from Line 3 and subtract the amount from Line 6. This tells the GC or Owner that he is contracted to pay you an additional amount AFTER paying this application.
Line 9 is another confusing section of the G702 because it "acts" as if all Change Orders have been formally processed and that all previous Payment Applications have been paid in full. Frequently, Owners and G's only pay a portion of the Payment Application that you submit. The AIA G702 form NEVER reflects partial (or even full) payments. It just was not designed to keep track of what has been paid, only what has been earned and invoiced for.
Change Order Summary Table - is straightforward. You will need to separate the Change Orders that add money to your contract from those that subtract money from your contract.
The G703 Continuation Sheet is also referred to as Page 2 of the Application and Certificate for Payment (G702 form). It breaks down the contract sum into portions or segments of the work in accordance with a Schedule of Values required by the General Conditions of the contract.
When you look at our plain paper version of the AIA G703; Continuation Sheet, you can see that C should be completed by identifying the various portions of the Project. The Scheduled Values should be consistent with the schedule of values (Estimate or Bid) submitted to the Architect at the beginning of the project. This breakdown should be used consistently throughout the project, using multiple pages when necessary.
HEADER INFORMATION (must be included on each Continuation Sheet page that you submit)
To - the contract owner or the person who will be cutting your checks for payment of work you have performed.
From - the "From" is always you.
Page - the page number of the Continuation Sheet.
Application No. - same as the Application Number from the header of the G702.
Application Date - the date that you are submitting the Application for Payment.
Period To - should be the same as the Period To date from the header of the G702.
Architects Project No. - the project number that the Architect has assigned to this project.
Column A - the line numbers are usually simply numbered sequentially 1 through whatever. Sometimes, you will be asked to make the numbers match the specifications section number found in the specification sheet, alternatively, you may be asked to number each line as 10, 20, 30 etc.
Column B, Description of Work - this column holds a BRIEF description of the phase, portion of work, or cost code. Examples might include: Site Work, Plantings, Drainage, Paving, Striping, etc. If your scope of work is complex, you may wish to match this to the major activities or cost codes from your Estimate/Bid. NOTE: Change Orders are added as either separate line items, as they are approved, and you may be asked to display all change orders on a separate Continuation Sheet.
Column C, Scheduled Value - this is the total amount of money that you were scheduled to receive for this phase of the work or cost code item. For example, your contract might specify that you will receive $100,000.00 for Site Work.
Column D Work Completed from PREVIOUS Applications - this is the Total of Work Completed from the Previous Applications amounts in Column D & E; or the total dollar amount you requested for this line item up through and including your LAST Application for Payment. This amount also includes materials that you previously listed as Stored Materials but have now put in place or installed. Column D does not include any work that you have completed for this period and it does not include any newly stored material.
Column E, Work Completed THIS Period - the value of Work completed at the time of the current application
Column F, Materials Presently Stored - this is the value of Materials Presently Stored on the Job Site for which you are seeking payment. This typically refers to the total value of any materials that are currently stored on the jobsite but are not yet installed.
Usually, in order to be paid for stored materials, they must be either physically stored on the job site OR in a bonded, secure storage facility. In many cases, especially where the government is concerned, you will only be paid for installed materials.
Column G Total Completed & Stored to Date - the Total of the amounts shown in Columns D, E, & F for each line item.
Percentage Complete - this amount is calculated by dividing Column G by Column C for each line item.
Column H, Balance to Finish - calculate the difference between Column C minus Column G for each line item.
Column l, Retainage (IF Variable Rate) - this column is used ONLY for contracts where retainage rates change on a line-by-line basis, where retainage is different on different sections of the contract OR when retainage changes throughout the life of the contract. It DOES NOT need to be completed for contracts that have a consistent rate of retainage held over the entire contract.
Approved contract Change Orders are listed separately, either on their own Continuation Sheet or at the end of the original Schedule of Values.
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The good news is that there are many things you can to do better manage your cash flow so you can take on that next big job:
Managing outflow as well as inflow
Take extra care to manage your contracts with vendors, suppliers and subcontractors. Try to negotiate payment terms which match your cash expenditures as best as you can.
Offer an incentive for paying early
It’s not the best solution, but between missing payroll and impacting overall revenue it may be an option. By choosing to offer your clients a slight discount if they pay their invoices early—say, 1 or 2 percent off if checks are sent within 10 days—chances are you’ll find your invoices will clear faster.
Rather than waiting to get paid, you could also consider making use of a service that allows to advance your outstanding invoices. You’ll have the capital in your bank account the next day, giving you the agility necessary to respond quickly to new opportunities.
Hire awesome project managers and use a time tracking software
As much as 85 percent of the cash construction companies have on hand comes from projects in progress. So don’t forget that stellar project management starts with the people you put in charge and the tools you choose to implement. If your construction company manages all of its projects effectively, it’s likely your cash flow will follow suit.
Don’t overlook your closeout process
It matters how you finish. As you near the end of the project make sure you’ve documented your man-hours and identify any items that might hold up payment with the customer and address them quickly. Customers will release the cash faster if you make the closeout process easier.
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It starts with a vision. A big idea. You know how to do something or make something or provide something better than anyone else. So you start a business. You’ve never taken an accounting class. Maybe you’ve heard of Debits and Credits, but your focus is on your dream, not the numbers. Here are the very basic things you need to know:
Profit and Loss – Also known as an Income Statement, a P&L tells you how much money you made (or didn’t make) in a given time period. It’s a vertical listing of your accounts and how much you took in or spent for each one.
Income or Revenue will be at the top, probably in a category called Sales or something along those lines. Below it will be your expenses in corresponding categories like Insurance, Office Supplies, or Payroll. This is so you can see not only how much money went out, but who got it.
At the very bottom will be a line called Net Income (or Loss). That’s the amount of money that’s left over from the Income after you deduct all of the expenses. Let’s hope it’s a positive number. If it is positive, it’s profit. If it’s negative, it’s a loss.
At the end of your accounting period – usually a year – all of your P&L accounts go to zero and start over. The Net Income (or Loss) turns into Retained Earnings and goes onto your Balance Sheet.
Balance Sheet – this is a list of Assets and Liabilities. Assets are things you have – cash in the bank, inventory, Fixed Assets like vehicles. Liabilities are things you owe – loans, credit card balances, Accounts Payable to your vendors. The difference between your Assets and your Liabilities is your Equity. A Balance Sheet always balances. Assets = Liabilities + Equity.
These are forever accounts. They do not zero out at the end of a period. Your bank balance continues month to month, regardless of your accounting period. So do your loans and your other Balance Sheet accounts. They keep a running balance for the life of your business.
Cash or Accrual – These are two methods of accounting – either by Cash Basis or Accrual Basis. What’s the difference?
Cash Basis means that you count your income or your expenses ONLY when the cash has changed hands. If your customer owes you $100, you don’t consider that income until you GET the $100. If you owe your supplier $50, you don’t count that as an expense until you physically PAY the $50. Your accounting is measured by your CASH in and out of your bank.
Accrual Basis is an attempt to match income and expenses to the appropriate periods when they took place. On Accrual Basis, you have income the moment you sell something and create an invoice for it. If your customer owes you $100, you show $100 of income even if they haven’t paid you. If you buy something from a Vendor today and take it home with you, you recognize that expense even if you have not paid for it yet. Your accounting is measured by what’s happening in time, whether the money has changed hands or not.
Loan Payments – “I paid my mortgage every month! Why don’t I see that in my P&L?” Good question. Loan payments are not expenses. A loan payment is reducing a liability. Let’s say you bought a car for $5000. You put no money down and you financed the entire thing. Your books will show a FIXED ASSET of a Vehicle for $5000 and a corresponding LOAN PAYABLE for that Vehicle for $5000. (remember – your Balance Sheet has to balance, so the entry for the Asset has to equal the entry for the Liability).
Now it’s time to make that first payment. To make it easy, let’s say that the payment is $200 of which $180 goes to pay down the loan (the principle), and $20 is for interest. Then your books will show the loan amount is now $4820, (5000 minus 180), and you’ll see INTEREST EXPENSE on your P&L of $20. The interest that you pay for the loan is an expense. The principle reduces the loan.
“But what about the expense of the vehicle!” Another good question. That shows up as DEPRECIATION. Every asset you own depreciates (lessens in value) over time. There are IRS rules regarding how much depreciation is allowed over what time period. Your CPA will give you an entry at the end of the year called Depreciation Expense. This allows you to deduct part of the vehicle’s value as an expense, and it reduces the value of the vehicle on your Balance Sheet.
Payroll Expense – One common mistake of new business owners is tagging that entire payment to the IRS as an Expense. It’s not. Only the matching taxes are an expense. Let’s look at why. We’re going to use some simple numbers to make it easy to understand. Let’s say your employee earns $1000 per week. The paystub will look something like this:
Wages – $1000
Federal Withholding – $100 (just an example; it depends on a variety of things)
Social Security – $62 (always 6.2 per cent)
Medicare – $14.50 (always 1.45 per cent)
Net Pay – $823.50
There may or may not be state taxes too. For our example, we’ll assume federal taxes only.
The federal government requires employers to match the social security and Medicare payments. So when you file the payroll taxes for this period, the total will be $253.00. How much of that is an expense to you?
Here’s how that $253 breaks down:
$100 – the amount your employee has withheld for his income tax
$62 – the amount your employee must pay for social security
$14.50 – the amount your employee must pay to Medicare
$62 – the amount YOU must pay for social security (matching)
$14.50 – the amount YOU must pay for Medicare (matching)
Now you can easily see how much of that $253 is an expense to you. The top three numbers (100, 62, 14.50) are your employee’s money that you held out of his check and are turning in to the federal government on his behalf. The bottom two (62 and 14.50) are your money that the federal government requires you to pay for your employee. So your expense is $$76.50.
These are just a few examples of accounting things you need to know in recording your income and expenses. There are much more, but master these, and you’re on the way to a better understanding of your company’s numbers.