A schedule of values turns one contract price into a list: demolition $4,000, framing $12,000, electrical $9,000, and so on, adding up to the contract. Each month you state how much of each line is complete, and the invoice is the sum of those percentages times the line values, minus what was billed before, minus retainage. It is the basis of every AIA G703 form and of most lender draw requests.
A worked number
On a $90,000 job, framing is $12,000 on the schedule. At month two, framing is 75% complete: $9,000 earned on that line. If month one billed $3,000 of framing, this month's framing line is $6,000. Repeat for every line and you have the pay application.
The mistake it hides
Front-loading. A contractor can put more value on early lines (mobilization, demolition) to get cash sooner, and owners know it. A schedule that doesn't match your real cost breakdown also makes the job's margin unreadable: you bill against one set of lines and cost against another. The fix is to build the schedule from the same cost codes you'll cost the job with.
In Obra
Obra doesn't produce the AIA form, but a project's budget lines can mirror the schedule of values one for one, so the budget vs. actual view answers the question behind every pay application: is this line earning what it's costing?