Michigan Residential Builders License Practice Test

In a construction contract, what do progress payments signify?

1. Payments for completed work segments

2. Payments for materials only

3. Full payment upon project completion

4. Retainer fees for contractors

The correct answer is: Payments for completed work segments

Progress payments in a construction contract are crucial financial arrangements that reflect payments for completed work segments. This means that as various parts of the project are finished, the contractor receives payments that correspond to that completed work. This practice is beneficial for both contractors and clients, as it ensures that the contractor has the necessary funds to maintain cash flow throughout the project while also providing the client with security that payments are linked to actual work performed. Progress payments help to reduce financial risk for both parties; for the contractor, it provides continuous financial support, while for the client, it offers a form of performance guarantee as payments are made only when specific milestones are reached. This structure encourages the timely completion of phases of the project and aligns with the project timeline. In summary, progress payments are essential for managing the financial aspects of construction projects effectively by linking payments to the completion of defined segments of work.