Determine Standard Payment Terms and Procedures
As work is completed under the contract, the contractor is paid, but not in full. Part of the value of the work, typically 10 percent, is retained by the program pending completion of the project (see Example 9, “Standard Contract Payment Language”). This amount, representing the contractor’s profit from the project, is then paid to him upon completion. This acts as incentive for timely and satisfactory completion. The amount of the retainage is sometimes reduced after a substantial portion of the contract has been completed. When retainage is used in combination with a Letter of Credit, it is recommended that it remain at a full 10 percent until project completion. Payments for work completed should be made as quickly as possible to assist the contractor in cash flow management and reduce his cost of financing. Contractors will include their cost of financing projects in their bid to programs which are known to be “slow paying.” This payment procedure is covered more completely under Escrow Agreements discussed later on in the manual. (See Step 37.)
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