Interim payments: Overview, definition, and example
What are interim payments?
Interim payments are partial payments made during the course of a contract, typically in construction, services, or large projects, before the final payment is due. These payments are made to cover the costs incurred by the contractor or service provider as the work progresses. Interim payments allow the service provider or contractor to maintain cash flow and continue work while the project is still ongoing. These payments are usually based on milestones, work completed, or a percentage of the total contract value, and they are agreed upon in the terms of the contract. Once the project is completed or the final deliverable is provided, a final payment is made to settle the remaining balance.
Why are interim payments important?
Interim payments are important because they help maintain the financial stability of contractors or service providers during a long-term project. Without these payments, service providers might face cash flow problems, especially in large-scale projects where the total cost is high, and the work is completed over an extended period. Interim payments also ensure that work continues without delay, as contractors have the financial means to purchase materials, pay laborers, and cover other operational costs. For the client or project owner, interim payments provide an opportunity to review the progress of the work and ensure it is being completed as agreed before releasing further funds.
Understanding interim payments through an example
Imagine a construction company, BuilderCo, that has been contracted to build a commercial building. The total project cost is $1,000,000, and the project is expected to take 12 months to complete. The contract specifies that BuilderCo will receive interim payments at different stages of the project, such as after the foundation is completed, when the structure is built, and once the building is ready for interior finishing.
- First Interim Payment: Upon completion of the foundation, BuilderCo submits an invoice for 20% of the total contract amount ($200,000). The client, after inspecting the work, agrees to release the payment.
- Second Interim Payment: After the structure is built, BuilderCo submits an invoice for 30% of the total contract value ($300,000), which the client pays after confirming that the construction meets the agreed specifications.
These interim payments ensure that BuilderCo has enough funds to continue purchasing materials and paying workers until the project is completed and the final payment is made.
Example of an interim payment clause
Here’s how an interim payment clause might appear in a construction contract or service agreement:
“The Contractor shall be entitled to receive interim payments based on the completion of specific milestones as outlined in the Project Schedule. The first interim payment shall be due upon completion of [Milestone A], and subsequent payments shall be made upon the completion of [Milestone B], [Milestone C], etc., with the final payment due upon satisfactory completion of the entire project. Each interim payment shall be calculated as a percentage of the total contract value and will be based on the value of the work completed as determined by the project manager. Payments will be made within [X] days of invoice submission.”
Conclusion
Interim payments play a vital role in ensuring that contractors and service providers are paid for the work completed during the course of a project. They help maintain cash flow and ensure that projects progress without delays caused by financial strain. For project owners, interim payments provide a way to manage costs progressively and ensure that the work is being completed according to the agreed terms. Properly defining interim payments in a contract is essential to ensuring that both parties are clear about the expectations and timelines for payments throughout the duration of the project.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.