Introduction to Contractor Payment Schedules
It’s crucial for all parties involved in a construction project to have an understanding of when specific payments are due. The contractor payment schedule is essential for establishing clear payment terms, tracking cash flow, and maintaining a transparent relationship with all stakeholders on any construction project. The plan ensures that contractors get paid on time and in accordance with the terms of the construction contract.
Depending on the specifics of the agreement, the contractor payment plan and construction draw requests generally parallel the project’s Schedule of Values. As such, the payment schedule plays a vital role in a contractor’s ability to properly manage cash flow and financial health throughout the job. The contractor payment schedule is not only a record of incoming payments, it’s also an important tool for tracking and managing outgoing payments to vendors and suppliers.
Properly-structured contractor payment schedules play an integral role in maintaining positive relationships with all stakeholders on a job. By clearly defining terms and expectations, the payment schedule helps all parties remain on the same page concerning milestone progress, due dates, and billing amounts.
In This Article
Components of a Contractor Payment Schedule
Formatting of contractor payment schedules is dependent on the type of contract in use and the chosen payment structure. Most payment structures feature milestone-based payments or completion-based payments. Milestone payments define amounts due based on the completion of specific work tasks outlined for the project. On the other hand, completion-based payments 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 to every contractor payment schedule. The job name, project number, and name of the project owner are necessary identifiers shown on the payment schedule. The schedule should also include a detailed description of the work to be performed, materials, and services agreed to. Payment amounts and due dates are vital components of every contractor payment schedule, as is accounting for any applicable retainage.
Example of a Contractor Payment Schedule
In the example below, we see part of a milestone-based payment schedule for the electrical work on a construction project. As shown, 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. The contractor maintains leverage and protects themselves by insisting on payment 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. The 50% covers the contractor’s expenses and profit, keeping them in a cash-positive position.
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 |
By setting clear terms and expectations for payment and providing transparency for project owners, the contractor payment schedule mitigates cash flow issues and costly project delays. A well-crafted contractor payment schedule forms a crucial component of every construction contract and plays a significant role in the contractor’s planning and scheduling. Ultimately, it ensures a construction project’s progress and payments remain on schedule and within budget, ideally eliminating disputes or problems along the way.
Establishing Fair Payment Terms
Determining fair payment terms aligned with milestone progress and completion stages is critical to every project. Contractors must consider the project specifics, contractual obligations, and all relevant industry standards when formulating the payment schedule. It’s equally important to establish clear expectations with respect to billing intervals and milestone payments, preferred payment methods, late penalties, and dispute resolution. Clearly-defined and equitable payment terms help the contractor to ensure timely payments, avoiding cash flow difficulties over the life of the job.
Negotiating Payment Terms with Clients
Strategies for negotiating payment terms with clients should be aimed at ensuring mutually beneficial payment schedules aligned with the needs of all parties and the specifics of the project. It’s common for contractors to negotiate for upfront deposits to cover certain start-up costs. Such deposits generally range from around 10% on larger jobs to 33% or more on smaller projects. Quick residential jobs frequently require a 50% down payment and the remainder upon completion. While much of the construction contract can be negotiated, it’s always important to put all such accommodations in writing, ensuring transparency and clear communication among all stakeholders.
Managing and Tracking Payments
Successful contractors utilize a variety of tools for tracking payments throughout the life of every project. One of the best ways contractors can manage payments is by using accounting software or management systems designed specifically to streamline the payment process. Construction accounting applications like CrewCost help contractors manage core accounting functions, with benefits that include simple invoice creation, payment scheduling, and online banking integration. CrewCost connects the job site with the back office, allowing contractors to focus on their core construction business while worrying less about cash flow and profitability.
Addressing Payment Disputes and Delays
In the event of payment delays and disputes, contractors should understand their rights as well as the remedies available to them for resolving such conflicts. After all, timely payments are critical to the contractor’s cash flow and healthy financial position on every job.
A straightforward strategy contractors can rely on to help ensure on-time payments is to be sure all billing follows the agreed-upon schedule. Waiting too long to send invoices communicates a lack of urgency with regard to payments and often results in delays. Invoices issued according to schedule with a clear due date and instructions are more likely to be paid on time.
Should payment be delayed, contractors can send reminders to the client. Many times the client may have simply overlooked the invoice or experienced circumstances beyond their control, resulting in the missed payment. Such reminders are best sent as written letters or emails with a copy of the most recent bill attached in order to create a record of communication with the client.
If invoices continue to be unpaid, the contractor may be forced to send a demand letter informing the client that payment is past due and legal remedies are in order. The demand letter should include evidence of work completion and reiterate that failure to pay is a breach of the construction contract. Contractors must maintain proof of any demand letters sent in case the matter eventually turns to litigation.
Retainage and Final Payments
Retainage is the practice of holding back a portion of the payment owed to contractors until the completion of the project. This is a standard provision in construction agreements to ensure the client’s contentment with the finished job. Usually, retainage amounts fall between five and ten percent, but they are open to negotiation.
The role of retainage in construction is to ensure protection for all parties involved in a project’s contract, including owners, contractors, and subs. Retainage serves as a financial incentive for contractors to complete the job as outlined in the contract prior to receiving full payment. For project owners, retainage is an implicit insurance policy. Additionally, retainage offers similar security to contractors who have agreements with subs and suppliers. If the work isn’t finished per the contract, the retained amount goes towards purchases of necessary materials and supplies or employing others to finish the job. Any retained amounts are generally included in the final payment upon project completion.
Legal and Regulatory Considerations
Depending on the exact location of a construction job, laws and regulations govern much of a project’s payments. Generally speaking, the most fundamental legal protection related to a construction project is contract law. Since written contracts form the basis of most construction agreements, claims related to breach of contract and payment issues are frequently brought under such laws.
Contractors typically have the right to file a lien in the event of nonpayment. While the specifics depend on the state and county where the contract was signed, a lien is essentially a claim against the client’s property as compensation for the unpaid work. Successfully filed liens not resolved by payment can be further enforced by filing a lawsuit or through the proceeds of a future property sale.
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 the legal remedy pursued, contractors are encouraged to stay informed and comply with all regulations when dealing with nonpayment.
Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.
