Construction projects of any size require extensive planning. Project managers, owners and general contractors know that excellent planning and thorough preparation are the best ways to mitigate risks and possible budget blowouts.
The culmination of late and non-payments can cripple a construction company; research has found billions of dollars are lost to contractors each year due to late payments. Sometimes mistakes and accidents occur, but these kinds of costs can be wholly prevented with the right management and project planning.
That’s why it’s important to understand the contractor payment schedule so you can be prepared for each project and reduce the risk of late or non-payments. Negotiating a solid contractor payment schedule will start the project off on the right foot, and understanding what makes a proper agreement will mitigate future risks. And if the worst does happen, it provides a clear framework to seek compensation and recoup losses.
So, let’s explore contractor payment schedules, what you need for an effective agreement and various definitions to widen your understanding.
Plus, a free template download to boot!
What is a contractor payment schedule in construction?
A payment schedule in construction is a timeline for when contractors will receive payments throughout a project's lifecycle. Lump sum payments are uncommon, so an agreed-upon schedule between all parties is necessary to ensure proper compensation. As a result, the majority of construction projects have payment schedules that provide payments based on job progress.
Preparing a contractor payment schedule and negotiating terms between the project manager and contractors is an essential facet of the project planning process, as well-defined and reasonable schedules keep all parties on the same page, protect projects from unexpected costs and provide another contract for legal protection.
Contractor payment schedules are important tools for tracking cash flow throughout a project as you buy materials and supplies and pay independent contractors and subcontractors. They help you stay within budget and on track, keeping your schedule in line with the key project goals and milestones.
A contractor payment schedule can take time to nail down and will change depending on the project, but all share essential key points. We’ll explore how you can prepare to negotiate contractor payment schedules and what your field service business needs for an effective payment contract.
Download our Free Payment Schedule Template
First things first: download our free payment schedule template and take a look! It should give you a solid idea of how a contractor payment schedule should be laid out and what you should expect to negotiate.
There are many factors that can create a unique contractor payment schedule and each project will require its own negotiations to keep everything fair and to ensure proper cashflow for contractors to cover materials, labor and income during a project.
How should a construction payment schedule be laid out?
No two contractor payment schedules will look the same regarding the details, but each one requires particular details and information to be effective. Remember, this isn’t just a reference sheet about payments; it’s an agreement that provides clarity and legal protections.
Effective contractor payment schedules can make or break a budget, so ensure you have the following:
- Project Information: the project's name, description outlining the project, location and all the key dates. For example, start date, expected completion date, project completion of milestones etc.
- Names of all parties involved in the project, including the owner, project manager, contractors and subcontractors.
- Scope of the work, including tasks, materials and services relevant to the contractor
- Payment due date, be it a project milestone or specific dates/times such as biweekly or monthly payments.
- If relevant/used in the contract, what are the milestones and projected dates
- Payment Amount due to all parties
- Preferred payment method, for example, check or electronic transfer, including payment penalties and invoicing requirements
- Retainage withheld from each payment (we’ll cover more about retainage later)
- Dispute resolution method for payment interruptions, issues or disagreements. It’s essential to outline the expected steps in each case. (We’ll outline these steps later in the article.)
- Actual amount paid
- Actual payment date
- Signatures and dates for all parties in agreement
- Space for Notes
The most important thing is that you and your client are on the same page when it comes to getting paid to avoid delays in the project and to avoid cash flow problems.
The typical contractor payment schedule types
As you can see from the above list, there are different relevant factors that will affect your contractor payment schedule. These include the specific milestones, dispute methods and payment methods, but each will require negotiation and agreement in the planning stage.
Different-sized projects will benefit from different types of payment schedules. It may also depend on the client. We mentioned lump sum payments: these are usually used for small, simple jobs by individual contractors or field service businesses. Lump sum payments are more typically used for short jobs without too much risk and consist of an initial deposit to cover materials and labor and a final payment to round off the jobs.
Construction projects are a different realm altogether, and lump sum payments are uncommon, especially for contractors who will be engaged with the project for some time.
There are three common types of construction progress payment schedules: Completion, milestone, and time-based.
Completion payment
Completion-based payment schedules allow for payments at regular intervals, determined by the project's progress. For example, payment could be made at every 15% of the project completion level.
While this is a good option for projects that have clearly defined budgets, if the percentage measurements and planning aren’t clear, this will be a tricky contractor payment schedule to determine and effectively manage.
Milestone payment
With milestone agreements, payments are made based on when a particular aspect of the project is completed. For example, when the site cleanup has been done, a payment - or percentage of monies - will be dispersed.
This differs from completion payment as milestones are very specific goals in a construction project, and contractors may wait for a shorter or longer time than completion payments. The upside is that milestones are much simpler to define and can break down large, complex construction projects.
Time-based
These types of agreements separate the project into equal amounts of time, often separated into monthly or biweekly payments.
The benefit of this payment schedule is that payments are specifically identified by dates and amounts however, they can be changed in the event of project delays or change orders.
What are the most common payment terms for contractors?
Just as invoicing terms should be clear, payment terms in your contractor payment schedule must be crystal clear and unambiguous. Without clearly defined payment terms and a solid construction billing method, you risk slow or non-payment for your construction project; which can lead to further delays and run over.
Your payment terms should be very concise and accurate, and make it easy for your client to submit their payments. At a minimum, your payment schedule should include these terms:
1. Contract sum
The contract sum is the agreed-upon amount for the project. These are not set in stone as it would be unrealistic for contractors to factor in things like weather delays or equipment failure. That’s why there’s usually a clause allowing for some wiggle room in case unexpected variations occur, and is part of the projected risk to be accounted for in the project planning stage.
2. Schedule of values (SOV)
The SOV is a detailed list of each work item and its value within the project's scope. It provides a clear picture of when progress payments will be expected throughout the project based on milestones.
3. Application for payment
An application for payment should be as detailed as possible. It should include how you want to be paid and accompanied by a list of services, materials, labor, and other costs associated with the project.
4. Change orders
Construction change orders are changes to the scope of work in the original contract. They are an agreement between all parties involved in:
- Any changes to the project
- The schedule to make the change
- The cost difference
- Other pertinent terms of the contract
5. Retainage
Retainage is a percentage of each payment that’s withheld throughout the project and released when the project is completed/substantially completed. It’s a form of risk mitigation for the project manager and needs to be outlined clearly in your contractor payment schedule: what the percentage is, when it will be repaid and the terms of project completion.
Occasionally, retainage is reduced as the project progresses and sometimes less scrupulous clients will withhold retainage for no good reason. As these can compromise the line between loss and profit, it’s essential to lay out the retainage terms early.
What if a client doesn’t pay?
Construction is tough but rewarding work most of the time. Unfortunately, there are a handful of clients that don’t submit payment when expected, some due to simple mistakes and others who purposely withhold payments.
Whatever the reason, late payments create a cash flow problem and inhibit your ability to pay your workers and your subs and run your business. Disruptions to your contractor payment schedule also mean you may have to halt work and run the risk of delays as contractors and subs await compensation.
The contractor payment schedule should outline the process of payment disruption and how issues should be addressed. A clear documentation path and accountability is essential to protecting your business and the project. Fortunately, there are some things your business can do to minimize the risks of mistakes!
Send timely invoices
First and foremost, an essential component of getting paid on time is ensuring that your invoices are submitted in a timely and consistent fashion.
Waiting too long to submit an invoice removes any sense of urgency or expectation as it sends a message that you’re not in any rush. If you’re not invoicing on time, why would they pay on time? Invoices can take time, but late invoicing is a common mistake that can cost your business.
Best practice is to establish a regular billing cycle to follow, so invoices are sent out on time with clear payment instructions and a due date. This can be decided upon in the contractor payment schedule and provide an easy timeline to follow.
Reach out with a reminder
Mistakes happen, and if an invoice still hasn’t been covered, it could easily be explained on the other end. If, after 30 days, you have still not received payment, it could be due to circumstances beyond your control, such as an illness or a family emergency that happened on the other end, or someone simply forgot to approve the invoice. It happens, especially in large projects.
That’s why it’s good to be thoughtful but firm when following up with a reminder. This could be done with a phone call or visit, but a written letter or email with an attached bill is a good way to maintain records of your correspondence in the event that litigation becomes necessary. You’re not attacking anyone, but you are rightfully following up on your owed compensation.
Send a demand letter
If you’ve tried to receive payment with no success, you may need to submit a demand letter (also known as a letter of demand) to the client to let them know you’re serious. This is after previous attempts have failed, and it’s time to get your legal on.
A demand letter is a business document that’s legally binding and informs the client of your intention to go to small claims or circuit court if they don’t remit payment. It should include evidence of the work completed and show how their non-payment is a breach of your contract.
A demand letter should include:
- Introduction
- Factual background statement
- Liability statement
- Description of damages
- Formal demand
- Evidence attachments
When sending a demand letter, ensure you have proof of sending it in case you do go to court. This will prove in court that you tried in every way possible to collect the debt before resorting to litigation. When it comes to legal matters, a clear paper trail is your greatest ally.
The Mechanic’s Lien
If your client has still not submitted payment after all these steps, you can file what’s known as a mechanic’s lien. Every state has construction lien laws to protect contractors from shady practices and to obtain fair compensation for their work and costs.
So, what does a lien do?
A lien states that you have a claim on the property because of the unpaid work you put into it. This is extremely effective as non-payers having a lien put on their property makes it difficult for them to sell it or get any loans against it, plus it makes a big dent in their credit scores.
Each state and county has rules, including limits on how long after a project’s completion, you can file it, the information required, and which forms you need. Be diligent about filling out the forms to avoid the lien being rejected, as small mistakes and quirks for the county can invalidate an application.
Think of the above steps as part of that process; by having a clear paper trail and multiple attempts to resolve the situation, your business is far more likely to be approved for a lien.
When the lien is successfully filed, the client often (finally) pays the bill. If not, you can enforce the lien by lawsuit or wait for them to sell the property. When the property is sold, you will be paid from the proceeds based on where you stand in the priority list of those who have a claim on the property. Can this take a long time? Yes. However, a mechanic’s lien will ensure that no matter what happens to the project, your business will eventually get fair compensation.
Arbitration
If you hire an arbiter, they will work as an objective third party to help remedy the situation. Arbitration costs about as much as small claims court, and the cost is usually split between you and your client.
This is the option when you’ve exhausted all others, or your business can’t wait for the eventual result of a mechanic’s lien.
Small claims court
Most small claims courts have a cap of $10,000 for lawsuits. In small claims court, you can present your case yourself without an attorney but you should make sure you have meticulous records of the project and correspondence before going this route.
With an airtight contractor payment schedule and paper trail from the previous attempts to resolve the situation, your business will be set.
District court
Each state has different laws, rules, and regulations, but if the amount you’re owed is over the limit of small claims court, it might be beneficial to hire an attorney to represent your company in the district or supreme court. You might be able to recover attorney fees and other damages with this option.
This is an expensive option and definitely a last resort.
How ClockShark Help Your Contractor Payment Schedule Process?
As you can see, agreeing on a contractor payment schedule is essential for project success. Following through with timely invoices, on-schedule work and accurate charges is vital to keeping the process smooth and cashflow steady with whichever payment terms you’ve decided upon.
Contractor software such as ClockShark is invaluable to ensure your crew is where they need to be, on time and staying productive. Construction projects have plenty of moving parts, but there are tools to help your business keep everything on track!
Preparing Timely Invoices
Invoicing is the key to getting paid fairly and on time. Keeping your cashflow consistent is necessary to keep up with jobs, pay subs and cover expenses while projects are completed. Streamlining the invoice process is key to getting invoices in on time with the contractor payment schedule so your field service business can get paid faster.
Accurate Billing
The last thing you need is for an invoice to be incorrect. Charging too much or too little not only interrupts your cash flow, but it also means chasing up and rectifying mistakes, mistakes that unfortunately can easily happen with traditional paperwork methods.
For example, a common mistake is incorrect time clock conversions when taking crew times from a timesheet and converting it into hours worked. Software like ClockShark uses accounting integrations to make timesheets to payroll effortless. Or perhaps your current timesheet system isn’t working, and it’s time to try different timesheet templates? We’ve got you covered!
Crew Scheduling and Job Management
Efficiency happens when effective planning meets a productive team! Get the most out of crew time and keep up-to-date with construction projects with employee scheduling tools offered by ClockShark. Even if there are delays or you need to shuffle your crew, have all the options and data at your fingertips with job management software.
Get Your Contractor Payment Schedule to Help Your Team and Clients!
All jobs are easier and more organized when everyone understands what is expected of them. With a clear contractor payment schedule, you’ll know when to expect payments and how much they will be, and your clients will know when they’re expected to pay whatever the amounts are. Effective payment schedules are a win-win for all involved and are one of the first steps to sustainable project success.
If you are ready to take your business to the next level, sign up for a free trial of ClockShark and see first-hand how automating your time-tracking and billing processes will help you streamline your processes and keep your cash flow healthy!
