Everyone wants to get paid on time. Unfortunately, our industry is infamous for slow payments. According to multiple studies, contractors typically wait up to 3 months between sending an invoice and collecting. And while payment delays like these may be common, they can be a big financial hurdle, especially for smaller contractors.
Having a clear understanding of each project’s contractor payment schedule can help cut down on some of these delays. This schedule sets clear payment terms, tracks cash flow, and helps maintain an honest, open relationship with project stakeholders. Essentially, it helps contractors get paid on time, per a contract’s specific terms.
Generally speaking, contractor payment schedules and construction draw requests will parallel a project’s Schedule of Values. Because of this, the payment schedule plays a vital role in your ability to properly manage cash flow and financial health throughout a job. The contractor payment schedule isn’t just a record of incoming payments, it’s also an important tool for tracking and managing outgoing payments to vendors and suppliers.
Key Takeaways
- A project’s contractor payment schedule helps set clear payment terms, lowering the risk of late or nonpayment.
- Properly structured contractor payment schedules make it easier for stakeholders to be on the same page when it comes to milestone progress, due dates, and billing amounts.
- The goal of negotiating payment terms is to draft a mutually beneficial payment schedule that aligns with project requirements and protects all parties.
The Components of a Contractor Payment Schedule
How a contractor payment schedule is formatted will depend on the type of contract in use and the payment structure chosen. Most payment structures you’ll come across feature either milestone-based payments or completion-based payments.
Milestone payments – Define amounts due based on the completion of specific work tasks outlined for the project.
Completion-based payments – These are due at predefined periods depending on an agreed-upon percentage of the project’s progress.
While the specifics vary from job to job, there are several essential components in every contractor payment schedule, including:
- The job name
- Project number
- Name of the project owner
- Detailed description of the work to be performed, along with materials and services agreed to
- Payment amounts
- Due dates
- Accounting for any applicable retainage
What a Real Contractor Payment Schedule Could Look Like
It’s always nice to see examples, right? To help you visualize what a contractor payment schedule might look like, we’ve put together this milestone-based payment schedule for some electrical work on a construction project.
As you can see below, the progress payments for each milestone are percentages of the total contract amount. In this case, the contractor bills 25% of the overall job for each work task completed. To protect themselves and maintain some leverage, the contractor insists on getting paid for each milestone before moving on to the next phase of the project.
It’s important that percentages roughly align with the cost and markup at that point in the project. In this example, the contractor collected 50% of the project total by the completion of the rough-in, which happens to be the most cash-intensive part of the project. This covers the contractor’s expenses and profit, keeping them in a cash-positive position.
Example Contractor Payment Schedule for an Electrical Project:
| Work Description | Percent | Amount |
| Deposit - Begin Work | 25% | $25,000 |
| Electrical Rough-In | 25% | $25,000 |
| Electrical Trim-Out | 25% | $25,000 |
| Substantial Completion | 25% | $25,000 |
| Total | 100% | $100,000 |
A well-crafted contractor payment schedule is a crucial component of every construction contract and plays a significant role in planning and scheduling for your construction company. By setting clear terms and expectations around the payment process and providing transparency for owners, contractor payment schedules can help mitigate cash flow issues and costly project delays – ensuring projects move forward and payments remain on schedule and on budget.
Establishing Fair Payment Terms
When drafting the contractor payment schedule, you’ll need to consider all of the project specifics, including contractual obligations, and any relevant industry standards.
Creating fair payment terms also means establishing clear expectations around:
- Billing intervals
- Milestone payments
- Preferred payment methods
- Late penalties
- Policies around dispute resolution
At the end of the day, how equitable your contractor payment terms are often comes down to how clear they are. By plainly laying out your terms, you can keep payments timely and avoid cash flow issues over a job’s life cycle.
Negotiating Payment Terms with Clients
When it comes time to negotiate payment terms with a client, your strategy should be aimed at creating mutually beneficial payment schedules that not only align with a project’s specifics but with all parties working on the job.
It’s pretty common for contractors to negotiate upfront deposits to cover certain start-up costs. These deposits typically range from around 10% on larger jobs to 33% or more on smaller projects. If you’re starting a quick residential job, you can even negotiate a 50% down payment, with the remainder paid upon completion.
Note: While much of a construction contract can be negotiated, it’s always important to put all of these accommodations in writing.
Managing and Tracking Payments
A good payment tracking process is key when we’re talking about contractor payment schedules. In our experience, one of the best ways to manage these payments is through a purpose-built construction accounting software. These platforms are specifically designed to help you put down the pen and paper and get back to doing what you do best – growing your business.
If you’re hunting for the right platform, make sure it offers tools like:
- Invoice creation
- Payment scheduling
- Online banking integration
- Change order management
- Retainage accounting
Addressing Payment Disputes and Delays
Even with all of these measures in place, payment delays and disputes can and will still happen sometimes – it’s simply the nature of the construction industry. That being said, make sure you understand all of the rights and dispute resolution strategies available to you before these issues come up.
One straightforward strategy you can rely on to ensure on-time payments is to double-check that all billing follows the agreed-upon schedule. If you wait too long to send an invoice, it can signal a lack of urgency. To make sure you’re paid on time, send your invoices according to the schedule with a clear due date and instructions.
If you’re still waiting on payment after that due date, you can (and should) send reminders to your client. Sometimes, things simply get overlooked in the shuffle, so don’t be afraid to send a letter or an email with a copy of the most recent invoice attached. This creates a good record of communication just in case any questions arise.
If your invoices continue to go unpaid, it might be time to send a demand letter letting the client know that your payment is past due and legal action may be required. This letter should include evidence of work completed and should reiterate that failure to pay is a breach of the contract. In case the matter does turn to litigation, make sure to maintain proof of every demand letter sent.
Retainage and Final Payments
Retainage is the practice of holding back a portion of your payment owed until the end of the project. This is a standard provision in construction agreements to ensure clients are satisfied with the finished job. While retainage amounts are up for negotiation, they usually range between 5-10% of the total cost. These retained amounts are generally included in the final payment upon project completion.
Retainage in construction is all about protection: For owners, it’s a kind of insurance policy. For general contractors and subcontractors, it’s a financial incentive to complete jobs as outlined in the contract, and it’s a bit of extra security for contractors who have agreements with subs and suppliers. If the work isn’t finished per the contract, the retained amount goes towards the purchase of any necessary materials, supplies, or labor to finish the job.
Legal and Regulatory Considerations
Where you work is going to influence which laws and regulations you’re subject to when it comes to project payments. Generally speaking, the most important legal protection is contract law. Since written contracts are the foundation of most construction agreements, any claims related to breach of contract and payment issues will most likely be brought under such laws.
If you aren’t paid for your work, you’ll typically have the right to file a lien. While the specifics vary by state, a mechanic’s lien is basically a claim against the client’s property or asset as compensation for the unpaid work. Arbitration is another option for resolving any payment-related conflicts. Generally, a third party acts as an objective moderator or arbiter to help both parties resolve payment disputes. For matters involving less than $10,000, payment issues can be presented in small claims court. Regardless of what legal action you take, make sure you’re up to date with all regulations.
Final Thoughts
Late payments don’t have to be the rule in construction. By better understanding contractor payment schedules, you can protect yourself and your construction business.
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