System of Progress Payment in Contract Costing


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What is a System of Progress Payment in Contract Costing?

Simply put, a system of progress payment in contract costing is a way of invoicing clients for work completed on a project according to specific milestones. This system is commonly used in large construction projects (such as building highways or office buildings) where the final product is too complex to be completed in a single payment.

Under this system, contractors are typically paid at predetermined intervals throughout the project, with payments corresponding to specific markers of progress. For example, a contractor might be paid a certain percentage of the total project cost upon completing the foundation of a building, and then another percentage upon completion of the framing. This system allows for better tracking of project costs and progress, and can help ensure that payments are made in a timely and fair manner.

How does a System of Progress Payment Work?

A system of progress payment typically involves the following steps:

1. Establishing Milestones – Contractors and clients first need to establish specific milestones that correspond to different stages of the project. These milestones should be clearly defined and agreed upon in writing by both parties.

2. Determining Payment Amounts – Once milestones are established, payment amounts are determined based on the percentage of work completed at each milestone. These payment amounts should be clearly communicated to the client ahead of time.

3. Submitting Invoices – Once a milestone is reached, the contractor submits an invoice for payment. This invoice should include a detailed breakdown of the work completed to date and the associated costs.

4. Verification of Work – Before payment is made, the client typically verifies that the work has been completed as specified in the milestone agreement. This ensures that payment is only made for work that has been completed to the client’s satisfaction.

5. Payment – Finally, once the client has verified the work, payment is made to the contractor. Depending on the agreement, payment may be made by check, wire transfer, or other means.

Benefits of a System of Progress Payment

A system of progress payment offers several benefits for both contractors and clients:

1. Increased Transparency – By establishing clear milestones and payment amounts, both parties have a better understanding of the work being done and the associated costs.

2. Improved Cash Flow – For contractors, a system of progress payment ensures a more consistent and predictable cash flow, which can help with budgeting and planning.

3. Reduced Risk – For clients, a system of progress payment reduces the risk of paying for work that has not been completed or that does not meet their specifications.

4. Better Communications – By establishing clear milestones and payment amounts, both parties are encouraged to communicate more frequently and in greater detail, leading to better understanding and cooperation throughout the project.

In conclusion, a system of progress payment in contract costing offers many benefits for both contractors and clients. By establishing clear milestones and payment amounts, both parties can better track project progress and costs, increasing transparency and reducing risk. If you are considering hiring a contractor for a large project, a system of progress payment may be a good option to consider.