Construction AP automation: what to check before you pay a subcontractor

Construction AP automation reads the bills a general contractor has to pay. Those are invoices from suppliers and pay applications from subcontractors. The pay applications come with lien waivers, and a new subcontractor also sends proof of insurance. The software checks each one against the subcontract or the PO before money goes out. Documents that pass move on to approval. The rest go to your accounts payable (AP) team, with the reason.

Why construction AP is harder than paying invoices#

Most AP teams pay for goods that were ordered and delivered. A general contractor's AP team also pays for work in progress. A subcontractor doesn't bill per delivery. It bills each month for the share of its work that's done, measured against a schedule of values. That schedule lists the work items in the subcontract, each with its dollar value.

The payment isn't the full amount billed, either. The general contractor holds back part of each payment as retainage, at the rate the subcontract sets, and pays it later. So each pay application has to carry what was billed before, what was held back and what's left to finish. A mistake in one month carries into the next.

Then there's the paperwork that has to be in place before money moves. A subcontractor that isn't paid can claim a lien on the project, or claim against a payment bond. So general contractors often ask for a lien waiver with each payment. They also want a current certificate of insurance and a W-9 on file. Payment deadlines can be short, too. On federal jobs, the Prompt Payment Act requires a clause in each subcontract. Under it, the prime contractor pays the subcontractor for satisfactory work within 7 days of being paid by the agency.

What comes in with a subcontractor's pay application#

A pay application rarely arrives alone. Most months the subcontractor sends a package. It holds the application, its continuation sheet, the lien waivers and any change orders. A new subcontractor also sends a certificate of insurance and a W-9.

AIA's subcontractor version of the pay application is the G702S. It goes with the G703S continuation sheet and covers work completed, materials stored, retainage, previous payments and change orders. The subcontractor signs it, has it notarized and sends it to the general contractor. AIA's instructions say to pay the subcontractor named on the form, and no other party unless the form says so.

Some general contractors use their own pay application forms instead. AIA doesn't publish a standard schedule of values form, so each subcontractor's continuation sheet can look different.

Supplier invoices go through ordinary construction invoice processing. Each one is matched to its PO and the delivery ticket. The invoice processing page shows how Docsumo handles them.

How to check the pay application itself#

Start with the summary page. AIA's G702 has nine numbered lines. The first two come from the subcontract and its change orders. You work out the rest from those lines, the continuation sheet and last month's certificate for payment. Here they are for a subcontractor's fourth application on a $480,000 subcontract, with retainage at 10%.

The third application showed $232,800 completed and stored. So this month adds $69,600 of work and materials. After 10% retainage, that leaves the $62,640 on line 8. If any line doesn't add up from the others, send the application back to the subcontractor or to the project manager.

• Contract sumLine 1 matches the signed subcontract. Line 2 matches the change orders you approved, and an unsigned change order doesn't count.
• Schedule of valuesEach scheduled value on the continuation sheet matches the approved schedule. Look for new lines and for value moved from one line to another.
• Work this periodThe percent complete on each line matches what the project manager saw on site. No line goes over 100%.
• Column mathOn each line, columns D, E and F add up to column G, and C minus G gives H. The column G total carries to line 4.
• RetainageIt's held at the subcontract's rates. The form has one rate for completed work and one for stored materials.
• Earlier paymentsLine 7 matches line 6 of the last application, as you certified it. If you changed an amount last month, the new application should carry your figure.
• Payment dueLine 8 is line 6 minus line 7. The conditional lien waiver shows the same amount.

Lien waivers come in four types, and the law can set the wording#

A lien waiver is a signed release. In it, the subcontractor gives up its lien and payment bond rights for work up to a given date, in return for a payment. There are four types. They differ by whether the payment has arrived and whether it's the final payment on the job.

• Conditional, progress

  Comes with each monthly pay application, before you pay. Match its amount to this month's current payment due. On a California form, match its through date to the end of the billing period. A Texas form has no through date. It covers the work in the pay request attached to it.

• Unconditional, progress

  Comes after a payment has cleared. Match its amount to what you actually paid last month.

• Conditional, final

  Comes with the final pay application. It covers the balance still owed, retainage included.

• Unconditional, final

  Comes after the final payment, retainage included. Keep it with the closeout records.

Some states set the exact wording. California's Civil Code has a form for each type, in sections 8132 to 8138. A waiver releases the owner, the construction lender or the payment bond surety only if two things are true. It must be in substantially the form in the law, which means close to its wording. And the claimant, the subcontractor giving up its rights, must sign it. A conditional waiver also needs evidence of payment, such as the subcontractor's endorsement on a check that has cleared. An endorsement is the payee's signature on the back of the check.

Texas also sets a form for each type, in Property Code sections 53.281 and 53.284. Its four forms have the same names as California's but different wording. A Texas waiver releases the owner, the owner's property, the contractor and the payment bond surety. In both states, a waiver that doesn't substantially follow the form in the law can't be enforced.

So check the form as well as the amounts. A waiver for a California job should be on the California form. If your subcontract also asks for waivers from the subcontractor's own suppliers and sub-subcontractors, check that each one is in the package.

The subcontractor's certificate of insurance and W-9#

Subcontracts usually set minimum insurance. They name the coverage types, the limits and who must be an additional insured. The subcontractor shows its coverage with a certificate of insurance, usually an ACORD 25. Here's one from an HVAC contractor.

Check each line against the subcontract. The limits should meet the minimums, and the policies should cover the months left on the job. On this certificate, workers' compensation ends on 03/15/2027, months before the other policies. If the job runs past that date, you'll need the renewed certificate. Check the certificate holder and the additional insured boxes against what the subcontract asks for.

The ACORD 25 says it's issued as a matter of information only and confers no rights on the certificate holder. It also says that if the holder is an additional insured, the policy must have additional insured provisions or be endorsed. An endorsement here is a written change to the policy. So ask for the additional insured endorsement and keep it with the certificate. ACORD 25 data extraction lists every field and check.

Docsumo reads ACORD forms, and it emails vendors for a missing or updated certificate. Checking a certificate against contract requirements is a cross-document check, on the Enterprise plan. Vertikal RMS, a risk management company, used Docsumo for COI verification by capturing ACORD forms. The certificate of insurance tracking page shows the checks.

The W-9 before the first payment

Ask each new subcontractor for a W-9 when you set it up as a vendor. The form gives you the subcontractor's correct taxpayer identification number (TIN). You need that number for the information returns you file with the IRS. Check that the name on the W-9 matches the subcontract and your vendor record. W-9 data extraction covers the fields and checks.

How automation fits the way you pay subcontractors#

Packages come in by email, by upload or through the API. Docsumo has an inbox for emails, so a shared AP mailbox can pass attachments straight to it. When a package arrives as one PDF, Docsumo's AI Split divides it into separate documents. AI Split takes a plain-English definition of each document type, which you give it. Splitting and auto-classification are on the Business plan.

Docsumo isn't limited to invoices. Large language models (LLMs) turn the text it reads into fields, so it can read any document an LLM can read. That includes a pay application, a lien waiver or your own form. A field the software isn't sure of goes to a person. You decide how sure is sure enough by setting a confidence threshold for each field. Clicking a field highlights the line in the document it came from.

Checks that need one document, such as the math on the G702, are steps you add to the workflow. A step can call an LLM or run your own Python code. Checks between documents are on the Enterprise plan. One compares a pay application with the approved schedule of values. Matching a supplier invoice to its PO and receipt is another, and the accounts payable automation page walks through that match. Docsumo also flags an invoice that duplicates one already received.

Invoices then go to approvers by the rules you set, on the Business plan. A rule can use any field, such as the job or the amount. Approvers get an email, an invoice not approved in the time you set is escalated, and the audit log records each decision. Docsumo doesn't pay subcontractors, and it doesn't create POs. Checked data goes to your accounting system through the API and webhooks, and Docsumo is cloud only.

Our take. Pay applications differ from one general contractor to the next. Some use AIA forms and some use their own. Retainage rates, insurance minimums and approval steps change with each subcontract. Set the software up around the forms you receive, the checks your subcontracts call for and the approval steps you already use. Don't change how you pay subcontractors to suit a tool.

Try it on last month's pay applications#

Bring the packages that three or four subcontractors sent last month to a demo, exactly as they arrived. Include one with a change order, and one from a job in another state, with its lien waiver on that state's form. Then check two things. Did the software flag a G702 line that didn't add up from the others? That check is a step you add to the workflow. Did it match each waiver to the right payment? That's a cross-document check, on the Enterprise plan. If it did both on your own files, your team can review what it flags instead of doing those checks by hand.

Book a demo with a month of your subcontractor pay applications, or start a free trial.

Frequently asked questions#