It’s all about The Contract Conditions: How to build a Project Payment Plan.
Updated: Jan 7, 2021
How much money you need to execute the activities in the upcoming month?
"Creating a payment plan is a crucial factor that affects project success. You may have a great execution plan, but without financial support, the project is under risk."
The Payment plan is a foundation for the financial stability of the project. For a client, the Payment plan is a cash-out plan, and for a contractor, it is considered a cash-in plan.
The contractor will challenge this payment plan against his cash-out plan, and he should be sure that the payments will cover all spending along the course of the project without any gaps or shortages. This means that the contractor must do accurate cost evaluation to his BOQ and compare the same against the accurate financial plan.
What is a payment plan should look like?
It is not that chart that is produced by Primavera or any planning software, after doing the schedule, it is more than that. The Payment Plan may be developed based on the output of a cost loaded schedule, but still, there are more to do.
Build Up The Basis of Your payment Plan.
First, You have to distribute the project cost along the project time. this step may be developed by using the schedule's output or any other method. Some professionals may utilize a manual distribution using Microsoft Excel.
Second, read your contract and apply its condition on it.
The Contract Conditions
There are no fixed procedures towards establishing a payment plan, as I mentioned above, payment plans are related to the contract conditions, and we know that each project has its contract, and each contract has its nature and conditions. Therefore, we can expect that some of the different conditions may change the whole of the plan. For example; we may face a lump-sum contract which fixes a unique procedure to assess the payments along the course of the project; also, we may read another lump-sum contract with a condition that the payments shall be released based on fixed milestones. So, it is mandatory to read and assimilate the contract condition before diving into any analysis.
Payment Plan Estimation.
What is a payment plan for a lump-sum Contract?
Each contract has its own plan, but in simple common lump-sum contract, payments may go as follow.
First Payment is paid before the project starts 10% Advanced Payment
The First Progress Payment is paid during the second month of the project, or the third month if the time allocated for payment review is more than (1) Month.
Each progress payment should be paid with less 10% advanced Payment and 10% Retention.
last payment paid the month which follows the project completion date combined with a reimbursement the first 5% retention.
Finally, the remaining 5% Retention should be paid after the defects liability period.
Get In The Whole matter
To keep up with all things, you have to study each project as a unique case. It is important to match your real cost as a contractor against your payment plan, even during the tender phase. This action will minimize your risk.