Construction Payment Application: How Pay Apps Work (AIA G702/G703)

A construction payment application — commonly called a "pay app" — is the formal monthly request a general contractor submits to the owner to receive payment for work completed during the period. The pay app documents how much of the contract work has been completed, how much has been billed previously, how much retainage is being held, and what net payment is due. On commercial projects, the industry-standard form is the AIA G702 (Application and Certificate for Payment) paired with AIA G703 (Continuation Sheet), which the architect reviews and certifies before the owner releases payment. Understanding how to prepare an accurate, defensible pay app — and what causes them to be disputed or reduced — is fundamental to managing project cash flow.

The Schedule of Values: The Foundation of Every Pay App

Before the first pay app is submitted, the contractor must establish a Schedule of Values (SOV) — a breakdown of the contract sum into line items representing each major element of work. The SOV is the framework against which every progress billing is measured for the duration of the project.

Each pay app reports percentage complete against each SOV line item. A well-structured SOV:

• • Mirrors the work breakdown structure — line items organized by CSI division or trade, at a level of detail that allows meaningful progress measurement without being so granular that it creates administrative burden.
• • Front-loads appropriately — line items for early work (mobilization, demolition, foundations, structural steel) receive their full value in early billings, improving GC cash flow in the critical startup period. Owners and architects scrutinize front-loading; it must reflect actual cost distribution, not aggressive manipulation.
• • Separates labor from materials on large items — some contracts require labor and materials to be shown separately, particularly for stored materials billing.
• • Is approved by the architect before the first billing — submit the SOV as early as possible (ideally before mobilization) so the architect has time to review and request revisions. An unapproved SOV will delay your first payment.

The AIA G702/G703 Forms

The AIA G702 is a single-page summary certificate; the G703 is the multi-page continuation sheet showing the line-by-line SOV breakdown. Together they form the complete payment application package.

The Pencil Requisition Process

On most projects, the monthly billing process follows a "pencil requisition" workflow before the formal G702/G703 is submitted:

Billing for Stored Materials

Contractors can bill for materials stored on-site or in a bonded warehouse before they are incorporated into the work — a significant cash flow tool for projects with high material costs. Requirements:

• • Materials must be suitably stored — protected from damage, clearly identified as belonging to the project, and segregated from other materials.
• • Title must pass to the owner — the owner is paying for materials they don't yet have installed; the contract should confirm title transfers upon payment. This protects the owner if the contractor defaults.
• • Insurance must cover stored materials — the builder's risk policy should extend to materials stored off-site in approved locations. Confirm this before billing for off-site stored materials.
• • Documentation required — vendor invoices, delivery receipts, inventory records, and photos. The architect will not certify stored materials without documentation of what's stored, where, and its value.
• • Off-site storage requires owner approval and typically a bill of sale — billing for materials in a supplier's warehouse requires more documentation than on-site storage.

Lien Waivers with Payment Applications

Most owners require lien waivers as a condition of each progress payment. The two types used in the pay app cycle:

Sub lien waivers are also typically required. The GC collects conditional waivers from each subcontractor covering the current period's payment, submits them with the pay app, and then collects unconditional waivers from subs for prior periods once those payments have been made and confirmed. This creates a documented chain showing that sub payments flowed through from owner to GC to sub.

Common Reasons Pay Apps Are Disputed or Reduced

• Overbilling percent complete. Billing 80% complete on a line item when field observation shows 60%. Architects catch this through site visits and photo documentation. Overbilling erodes trust and often results in under-certification on subsequent pay apps as the architect corrects the running balance.
• Billing for unapproved change order work. Including costs from change order requests that haven't been formally approved. Most architects will not certify unapproved CO costs. Submit time-and-material tickets or pending COs as a separate line — clearly identified as unapproved — to document the cost without certifying it prematurely.
• Missing lien waivers. Submitting the G702/G703 without the required lien waiver package. Many owners won't process payment without complete waiver documentation. Build the waiver collection process into your monthly billing workflow — chase sub waivers before the pay app deadline, not after.
• SOV line items completed ahead of the corresponding work. Billing 100% for "structural steel" when the steel is delivered but not yet erected. Stored materials should be billed under the stored materials line — not as work-in-place percent complete.
• Arithmetic errors on the G703. Simple math errors that don't balance to the G702 summary. Always have a second person verify the G703 arithmetic before submission. Errors cause delays as the architect returns the application for correction.
• Outstanding punch list items from prior periods. Owners and architects sometimes withhold payment or reduce certification when punch list items from previous billings remain uncorrected. Prompt punch list execution keeps payment flow clean.

Pay App Timing and Cash Flow Management

The timing of monthly pay apps is one of the most significant levers in project cash flow management:

• • Most contracts specify a billing cutoff date — the last day of each month or a fixed date (e.g., the 25th). Work completed after cutoff is billed next month. Align major material deliveries and milestone completions before the cutoff where possible.
• • The gap between work performed and payment received is typically 45–60 days on commercial projects: billing cutoff → GC submission (3–5 days) → pencil review (5–7 days) → formal submission → architect certification (7 days) → owner payment (7–14 days). Retainage adds to the float.
• • On GMP and cost-plus projects, subcontractor pay apps are due to the GC typically 5–7 days before the GC's prime submission — build the sub billing cycle into your schedule so sub invoices arrive in time to be incorporated.
• • Track the "over/under billing" position on each project — the difference between percent complete (what you've earned) and percent billed (what you've requested). Projects that are consistently under-billed are leaving cash on the table; projects that are over-billed are carrying a risk of future reductions.