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Subcontractor Payment Process

Document Type: Procedure
Version: 1.0
Last Updated: February 2026
Distribute To: AP Team, Project Managers

Purpose​

Establish a consistent process for receiving, reviewing, and processing subcontractor pay applications while ensuring compliance with lien waiver requirements and contract terms.

Payment Flow Overview​

Sub Pay App → PM Review → Approval → Lien Waiver Collection → 
AP Processing → Check Run → Distribution

Subcontractor Pay Application Requirements​

What Subs Must Submit​

Required with Every Pay App:

  • Completed pay application form
  • Schedule of Values (if applicable)
  • Conditional Lien Waiver (current period)
  • Unconditional Lien Waiver (previous period paid)
  • Lower-tier lien waivers (their subs/suppliers)

If Prevailing Wage Project:

  • Certified payroll for period
  • Fringe benefit statements

If Stored Materials:

  • Invoices for stored materials
  • Photos of materials
  • Proof of insurance coverage

For Final Payment:

  • Unconditional Final Lien Waiver
  • Warranty documentation
  • O&M manuals (if required)
  • As-built markups (if required)
  • Final certified payroll

Step-by-Step Process​

Step 1: Pay App Receipt​

Who: AP or PM
When: Per contract terms (typically monthly)

  1. Log receipt of pay application

  2. Check for completeness:

    • All required documents included
    • Correct forms used
    • Period matches billing cycle

  3. If incomplete:

    • Notify sub immediately
    • List missing items
    • Set deadline for resubmission

Step 2: PM Review and Approval​

Who: Project Manager
When: Within 5 business days of receipt

Review Checklist:

Verify Work Completed​

  • Percentages match actual progress
  • Work quality acceptable
  • No incomplete/defective work
  • Stored materials properly documented

Check Contract Compliance​

  • Amount within contract/commitment
  • Change orders properly documented
  • Insurance current
  • Certified payroll compliant (if required)

Verify Calculations​

  • Math is correct
  • Retainage calculated properly
  • Previous payments deducted correctly
  • Change orders applied correctly

Approve or Adjust​

  • Sign approved pay app
  • Or note adjustments with explanation
  • Return adjusted pay app to sub for revised submission

Step 3: Lien Waiver Verification​

CRITICAL: Do not process payment without proper lien waivers.

Required Waivers:

Payment TypeFrom SubFrom Sub's Subs/Suppliers
Progress PaymentConditional (current period) + Unconditional (previous period)Same
Final PaymentUnconditional FinalUnconditional Final

Waiver Review:

  • Correct form used (state-specific)
  • Dates match payment period
  • Amounts match payment
  • Properly signed
  • Notarized (if required)
  • Cover all tiers identified

If Waivers Missing:

  • Contact sub immediately
  • Hold payment until received
  • Document communication
  • Set firm deadline

Step 4: AP Processing​

Who: AP Department
When: After PM approval and lien waiver verification

  1. Enter in System:

    • Vendor (subcontractor)
    • Invoice number/pay app number
    • Amount approved
    • Project and cost codes
    • Payment terms
    • Due date

  2. Three-Way Match:

    • Subcontract/commitment (what's owed)
    • Approved pay app (what's billed)
    • PM approval (what's approved to pay)

  3. Schedule Payment:

    • Per contract terms
    • Coordinate with cash flow
    • Note in check run schedule

Step 5: Payment Processing​

Check Run Schedule:

  • Weekly check runs (typical)
  • Friday processing, Tuesday mail (typical)

Payment Methods:

  • Check (most common)
  • ACH/EFT (if set up)
  • Wire (large amounts, expedited)

Include with Payment:

  • Pay app copy or remittance advice
  • Unconditional waiver request (for next period)

Step 6: Payment Distribution and Tracking​

After Payment Sent:

  1. Update sub payment history
  2. Log check number and date
  3. Request unconditional waiver
  4. Update commitment balance
  5. File all documentation

Pay-When-Paid vs. Pay-If-Paid​

Understanding Your Contract Terms​

Pay-When-Paid:

  • Common clause
  • You must pay sub within reasonable time after you're paid
  • Sets timing, but sub is eventually entitled to payment

Pay-If-Paid:

  • More restrictive
  • Your payment to sub is conditioned on you being paid
  • May not be enforceable in all jurisdictions
  • Consult legal counsel

Best Practice​

  • Pay subs promptly regardless of owner payment
  • Maintain good relationships
  • Sub payment delays create lien exposure

Subcontractor Payment Problems​

Problem: Disputed Work​

Process:

  1. Document specific issues in writing
  2. Notify sub within contract timeframes
  3. Withhold only disputed portion
  4. Pay undisputed amounts
  5. Work toward resolution
  6. Document all communication

Problem: Missing Lien Waivers​

Process:

  1. Contact sub immediately
  2. Explain lien exposure
  3. Set firm deadline (2-3 days)
  4. Hold payment until received
  5. Escalate if not resolved

Problem: Certified Payroll Issues​

Process:

  1. Identify specific discrepancy
  2. Notify sub in writing
  3. Request corrected CPR
  4. May need to hold payment
  5. Report to awarding agency if required

Problem: Insurance Lapse​

Process:

  1. Immediately notify sub
  2. Stop sub's work until resolved
  3. Request updated certificate
  4. Hold payment until current
  5. Backcharge for coverage gaps (per contract)

Retainage Management​

Holding Retainage​

  • Per subcontract terms (typically 5-10%)
  • Calculate on each pay app
  • Track cumulative retainage

Releasing Retainage​

Release when:

  • Sub's work complete
  • Punch list items resolved
  • Final lien waivers received
  • Warranties provided
  • As-builts/closeout docs submitted

Partial Release:

  • May release portion at substantial completion
  • Hold final retainage until all requirements met

Joint Check Agreements​

When to Use​

  • Sub has payment issues with their suppliers
  • Supplier sends preliminary notice
  • Protecting against lien exposure

Process​

  1. Receive request (from sub or supplier)
  2. Verify amounts and legitimacy
  3. Issue check payable to:
    • "Subcontractor Name AND Supplier Name"
  4. Both parties must endorse
  5. Get lien waivers from both

Subcontractor Payment Checklist​

Before processing payment:

  • Pay app complete and accurate
  • PM reviewed and approved
  • Work verified complete and acceptable
  • Change orders properly documented
  • Retainage calculated correctly
  • Conditional waiver received (current)
  • Unconditional waiver received (previous)
  • Lower-tier waivers collected
  • Insurance current
  • Certified payroll verified (if required)
  • Entered in accounting system
  • Three-way match completed
  • Scheduled for payment

Metrics to Track​

MetricTargetFrequency
Payment TimelinessPer contract termsMonthly
Lien Waiver Collection Rate100%Monthly
Disputes Outstanding< 5% of paymentsMonthly
Sub SatisfactionRegular communicationOngoing
  • Subcontract Agreement Template
  • Lien Waiver Forms (State-Specific)
  • Certified Payroll Compliance Guide
  • Backcharge Procedure
  • Vendor Setup Procedure

Software Integration​

BLDR Pro Features:

  • Track sub percentages in field
  • Photo documentation of work
  • Digital pay app submission
  • Waiver tracking dashboard
  • Integration with accounting

Template provided by support.construction. Customize with your company information.