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The video tutorial explains how to create a payment application for contractors and distinguishes between payment applications and payment certificates. As a contractor, you will not receive the full payment upfront but in installments based on the percentage of work completed each month. The application submitted for the work completed in a particular month is known as a payment application. Payment applications are used to claim the amount for the work executed during that specific period. This process helps to ensure that contractors are paid based on the progress of the project.