In most sectors, getting paid is a relatively straightforward process of sending an invoice. The construction industry is different. Due to the scale, complexity, and long duration of most projects, a simple invoice often isn't enough. B2B payments in construction rely on payments applications for contractors and subcontractors to manage cash flow and ensure they get paid for work as it progresses.

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What is a payment application in construction and how is it different from an invoice?

A payment application, or 'pay app', is a written request from a subcontractor to a main contractor (or a main contractor to a project owner) for partial payment for work that has been completed. It's essentially a collection of documents that prove what has been done, what materials have been used, and why you are entitled to payment.

While it serves a similar purpose to an invoice, i.e. requesting payment, an application for payment is different in a few key ways:

• Detail and substantiation: Unlike an invoice, a pay app requires a detailed breakdown of the work performed. It’s often linked to a 'Schedule of Values' (SoV), which is a document agreed at the start of the project that itemises every part of the job and its associated cost. The application shows the percentage of each item on the SoV that has been completed.
• Supporting documents: A pay app is backed by extensive evidence. This can include supplier invoices, purchase receipts, daily work reports, payroll records, and sometimes even photographic evidence of completed work or materials stored on-site.
• An interactive process: Submitting an invoice is typically a one-way request for payment. Submitting a payment application initiates a process. The payer (e.g., the main contractor) has a set period to review the application, value the work, and respond with a formal notice stating how much they agree to pay.
• VAT treatment: For a standard VAT invoice, the liability to pay VAT to HMRC arises when the invoice is issued. With an application for payment, which is not a VAT document, the VAT liability is triggered only when the payment is actually made, and it's based on the amount paid, not the amount requested. This means an invoice is still often required for tax purposes after the payment amount is certified.

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Why payment applications matter for cash flow in construction 

Cash flow is a particular issue for construction. Projects can last for months or even years, requiring major upfront investment in labour and materials. If a subcontractor had to wait until the entire project was finished to get paid, they would have to take on a huge amount of financial risk.

That’s why the payment application process is so important, enabling B2B instalment payments that keep funds flowing through the supply chain at regular intervals.

How do payment applications improve cash flow in construction projects?

Payment applications improve cash flow by enabling contractors and subcontractors to receive regular, interim payments for work as it is completed on long-term projects. This creates a more stable and predictable flow of working capital, preventing businesses from having to finance the entire cost of a project themselves and improving trade receivables.

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Understanding payment schedules, deadlines and legal rules in the UK

The application for payment process in the UK is governed by a strict set of rules and deadlines, outlined either in the project's contract or, by default, in the Scheme for Construction Contracts. 

Here is a typical timeline of the key events:

1. Application for payment submitted: The subcontractor (payee) submits their application to the main contractor (payer).
2. Due date: This is the date the payment officially becomes due. It is not the date the money is paid. The Due Date is usually set in the contract and allows the payer time to assess the work. It acts as the starting point for the rest of the payment timeline.
3. Payment notice: No more than five days after the Due Date, the payer must issue a Payment Notice. This notice must state the sum the payer considers to be due (the 'Notified Sum') and show how that figure was calculated.
4. Pay less notice (Optional): If the payer intends to pay less than the amount stated in their own Payment Notice, they must issue a Pay Less Notice. This notice must be served within a 'Prescribed Period', typically no later than seven days before the Final Date for Payment. It must also explain how the new, lower sum was calculated.
5. Final date for payment: This is the absolute deadline for the payment to be made. This date is set by the contract or, if not specified, is 17 days after the Due Date according to the Scheme.

The payment terms laid out in the contract are critical, but if they don't comply with the Construction Act, the rules of the Scheme for Construction Contracts apply as a fallback.

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How to protect your business from disputes over payment applications

While the process is designed to be clear, disputes are still possible in construction. A disagreement over a payment application can delay payment, put pressure on relationships, and slow down your cash flow. 

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What happens if a payment application is disputed or a pay less notice is issued?

If a payer disputes an application and intends to pay less than the amount previously certified, they must issue a formal 'Pay Less Notice' before the payment deadline. This notice must detail the new amount they intend to pay and provide a clear calculation for the reduction. If the subcontractor disagrees with this notice, the UK Construction Act provides a right to refer the dispute to an adjudicator for a rapid resolution.

If a payer fails to issue the correct notices on time, they may be legally required to pay the full amount requested in the original application. Even with these protections, the process involves financial risk. For many businesses, the ideal scenario is to remove the risk of customer non-payment altogether by having a third party guarantee the funds. 

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How retention payments affect cash flow and credit decisions in construction

A common feature of construction contracts is 'retention'. This is an agreed-upon portion of the contract value that is withheld from interim payments and only paid out once the project is substantially complete. It acts as a form of security for the client to ensure the contractor completes the work and rectifies any defects.

While standard practice, retention has a direct and often significant impact on a subcontractor's cash flow. It means that for every application, a percentage of the earned money (often 5-10%) is held back, tying up vital working capital. 

This withheld cash affects your ability to manage your own trade payables and can stretch your finances. When making credit decisions, such as taking on new work, it's essential to factor in the cash flow impact of retention across all your active projects.

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Are digital payment applications worth the investment for construction firms?

In recent years, many firms have turned to digital solutions, including mobile payment applications and cloud-based platforms.

Are digital payment application platforms worth it for smaller construction businesses?

Digital payment platforms are often a useful investment for smaller construction businesses because they significantly reduce administrative workload and minimise the risk of payment delays caused by manual errors. 

Digital platforms offer several key advantages:

• Standardisation and efficiency: They provide a consistent template and workflow for all applications, both internally and for subcontractors, removing the need for manual processes.
• Compliance and automation: These systems can automate reminders and notifications, ensuring deadlines for Payment Notices and Pay Less Notices are met. This creates a full audit trail, which is vital for compliance and dispute resolution. Many also offer features like automated invoicing to simplify the last few steps of the payment process.
• Reduced risk: By cutting down on manual work and ensuring all required documentation is included, digital solutions increase the likelihood of an application being approved quickly and in full. The more advanced platforms go a step further, not only streamlining the application but also offering the option to get paid upfront while the customer pays over time.
• Improved visibility: Centralised dashboards allow you to see the real-time status of all your applications, making it easier to forecast cash flow and manage your finances.

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Using payment applications data to reduce trade credit risks

Every payment application you submit and every notice you receive is a valuable piece of information.

When collected and analysed, this can provide useful insights into the payment behaviours and financial health of your clients, helping you to proactively manage your trade credit risk. 

However, relying on historical data is a reactive approach. You're still extending trade credit and waiting to see if a client's payment pattern, whether it’s good or bad, repeats. A proactive solution is to change the payment model entirely, eliminating the credit risk from the outset.

Rather than offering traditional payment terms and hoping for the best, you can use a modern B2B payment processing that pays you instantly, regardless of the terms your customer chooses. For example, with a solution like iwocaPay, you can offer clients the choice to:

• Pay Now: Your customer can pay the full amount immediately via an instant bank transfer – free for both you and your customer.
• Pay Later: Your customer can choose to spread the cost of an invoice over 3 or 12 monthly instalments, while you still receive the full funds instantly .

Instead of you having to vet clients based on past payment behaviour, iwocaPay handles the credit assessment and takes on the full risk of non-payment . 

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Practical tips for improving your payment application processes

For businesses navigating the traditional application for payment system, the most effective tip is often to upgrade the system itself. Making standard pay apps work better requires:

1. Reviewing contracts: Before work begins, thoroughly review the contract to understand the specific requirements for pay apps, including deadlines, required documents, and the format.
2. Documenting everything: Collecting supporting evidence like daily reports, photos, and receipts.
3. Using a clear template: Ensure your application form is clear and contains all the necessary information, such as the project name, application number, valuation period, and a breakdown of the amounts.
4. Double-check everything: Before submitting, double-check all your figures and calculations.
5. Submitting on time: Missing a submission deadline can mean you have to wait until the next payment cycle to apply again, causing a serious delay to your payment.
6. Communicating proactively: Don't assume the project manager knows what work you've done. Good relationships and open communication can help smooth the approval process and prevent misunderstandings.

But these only manage the symptoms of a slow and risky payment system. The ultimate solution is to adopt a payment method that eliminates the root causes of cash flow strain and credit risk.

By integrating a solution like iwocaPay, you get paid upfront for your work, while giving your trade customers the flexible payment terms they need . You get your cash instantly, remove the credit risk, and can focus on building.

Discover how iwocaPay can work for your business.

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