Advance Payment
The advance payment gives the contractor liquidity before they can start billing for progress: it lets them buy materials, mobilize equipment, and hire staff without draining their own capital. It is not profit or a non-refundable payment; it is money that is recovered —amortized— over the course of the project.
On public works, procurement regulations typically cap the advance at up to 30% of the contract value (for example, one portion for purchasing materials and another for starting the work), and it must be backed by an advance-payment bond that guarantees it is properly applied or returned. On private projects, the percentage is freely negotiated in the contract.
The advance is recovered by deducting the same percentage it was granted at from every progress payment, so that by the time the work reaches 100% completion it is fully repaid. That deduction is the advance amortization, a fixed line item on the cover sheet of each progress payment alongside the retainage.
Formula
Example
A $10,000,000 contract with a 30% advance: the contractor receives $3,000,000 at the start. On a progress payment of $1,000,000 in completed work, 30% ($300,000) is amortized and deducted from the payment. Once 100% of the work has been billed, the full $3,000,000 will have been deducted and the advance is settled.
Frequently asked questions
How much is the advance payment on a construction project?
It depends on the contract. On public works it is often capped at up to 30% of the contract amount; on private projects it is freely negotiated, commonly between 20% and 30%.
How is the advance payment amortized?
It is deducted from each progress payment at the same percentage it was granted at. If the advance was 30%, 30% of each progress payment amount is subtracted, so that at 100% completion the advance is fully repaid.
What is the difference between an advance payment and a progress payment?
The advance payment is an up-front sum paid before the work is executed and later recovered; the progress payment is the periodic billing for work actually completed, from which the advance amortization is deducted.