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Performance Obligation
What is a Performance Obligation?
A Performance Obligation in the construction industry refers to a commitment or liability that a contracting party has to perform and fulfill, according to the terms stipulated in a contract. It includes the delivery of services or completed work components. For example, if a construction company has a contract to build a commercial complex, their performance obligation could involve the construction of the entire complex or individual stages of the contract, such as erecting the structure, installing heating systems, laying down the flooring, among others. Each of these components may have their own deadlines and quality standards. Thus, not fulfilling these obligations could result in penalties or legal consequences. Therefore, recognizing and managing performance obligations is crucial in construction project management.
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Other construction terms
What is a Lender?
A lender, in the context of the construction industry, is a bank, financial institution, or a private individual that provides funds for construction projects. They lend money with the understanding that the amount will be returned, often with interest, as per the terms of a loan agreement. The borrower can be a contractor, real estate developer, or a homeowner needing funding for a building or renovation project. Lenders assess the viability of the projects and the borrower's solvency before loan approval. They play a vital role in construction financing, facilitating economic growth by enabling infrastructure development. They also manage risks by using construction loans that follow a draw schedule that matches the construction stages, ensuring the project's timely completion. Ultimately, lenders power the various construction operations, providing necessary liquidity and fostering business growth and expansion.
What is Accounts Receivable (A/R)?
Accounts Receivable (A/R) in the construction industry refers to the amount of money owed to a construction company for goods and services it has provided but has not yet been paid for. This is typically recorded as an asset on the company's balance sheet as it represents a legal obligation for the customer to remit payment to the company. The A/R system helps track these outstanding payments within a set time period, allowing construction companies to manage their cash flow effectively. It's essential for construction firms to monitor their A/R closely, as late or uncollected payments can significantly impact their financial health and ability to fund future projects.
What is a Partial Lien Waiver?
A Partial Lien Waiver, in the construction industry, refers to a legal document drafted to provide assurance to a payer that a contractor, subcontractor or materials supplier has received specified payments and waives its right to place a lien on the construction project to the extent of received payments. This document, typically used to maintain a clear title, only relates to the amount that has been paid up to a certain point. Subsequent payments would need additional waivers. It is advised to closely monitor Partial Lien Waivers as they help in avoiding disputes about the amount due, ensuring smoother construction operation.
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