While it might seem that physically erecting a structurally sound, weather-proof building should be the most challenging part of a construction project, the reality is that payments cause the most significant issues. Having a definite schedule can reduce the risk of issues, but it’s only part of the equation. Let’s take a look at the issues and different options for effective contractor payment schedules.
Payment challenges in construction
Contractors’ bank accounts spend most of a project playing catch-up, simply replacing money that the contractor already put out on the job. Slow or partial payments can crush cash flow. It’s not until the final payment that the contractor can hope to make any profit. A few schedule delays along the way and a contractor can be upside down on a project before they have the chance to change tack.
Homeowners often feel like their project is bleeding them dry. In many cases, construction payments could be the largest checks they’ve ever written. When they stack up every month, payments can feel overwhelming. Factor in the threat of a mechanics lien and payment issues forcing them to pay twice, and the entire scenario can feel like an expensive nightmare.
Construction is a tough business, but projects don’t have to suck the life out of the participants. A solid payment schedule can help.
Contractor payment schedule options
It seems that every aspect of a construction project is the “most important part” of the job in some way or another. The fact is that without payments and cash changing hands, there is no project. In that regard, payment schedules might actually be the most crucial element of a project going off without a hitch.
Regardless of whether you’re the contractor or the homeowner, nailing down a concrete payment schedule is a critical part of the contract. Planning payments and following through with the schedule can serve as the rails to keep your project from going off-track. It can go a long way toward completing the project on time, avoiding disputes, and even staying within budget.
The type of contract you’re using can influence your payment scheduling. Payments under a time and materials contract can often be a bit more flexible than those based on the project’s progress or set time frames. Let’s take a look at some common payment schedule formats.
Deposit and final payment
When it comes to a smaller project, a deposit followed by a final payment can be all it takes to keep everyone happy. The deposit can cover materials, permits, and possibly labor, while the final payment wraps up the profits and other expenses.
For example, let’s take a small deck with a contract price of $3,000. The contractor may request $1,500 upfront to secure permits and purchase some of the materials. The final payment amount of $1,500 will cover the rest of the materials, the profit, and any labor costs the contractor paid. In this scheme, the contractor doesn’t have to front all of the cash on their own, and the homeowner can hold back some payment to ensure the contractor finishes the project (within reason).
Medium to large size construction projects require a different approach. The most common payment schedule method for these projects is some form of progress payment and billing schedule.
Under this payment scheme, payments will flow at specific points throughout the project. Here are some of the most common payment waypoints.
Under time-based payments, the payment schedule breaks up the contract amount into equal distributions. Usually, these contracts establish monthly payments with set dates. They make payment amounts and intervals crystal-clear, but can require some adjusting if change orders and delays emerge.
Contracts that use milestone-based payments outline payments when specific stages of the project wrap up. For instance, a payment could be due to the contractor when they finish clearing the property or when the driveway work wraps up. This payment schedule is ideal when a large construction project is really just a series of smaller, separate projects.
If a contract uses completion-based payments, payments are due at regular intervals based on the project’s progress. For example, payments could be due at every 10% of the project’s completion. However, determining the completion percentage can be very challenging. This format really only works well on projects with crystal clear, itemized budgets or schedules of values.
It’s an unfortunate fact that some contractors need a bit of a carrot-on-a-stick to keep things on track. Retainage is that carrot, and it helps owners and GCs retain a bit of control over the project.
Retainage is a portion of a payment amount that the owner or GC withholds until the project reaches substantial completion. This set percentage of cash comes out of each payment. A retainage amount can often outweigh a contractor’s entire profit margin, so it can be a very compelling motivator.
Construction laws that affect a contractor payment schedule
There are some rules and laws that can have a significant impact on payment schedules. These rules are in place to ensure everyone’s on the same page and receives fair treatment.
Mechanics lien laws
Contractors have a right to payment for their work. When a property owner or general contractor fails to make good on a payment to a contractor, sub, or supplier, there are repercussions. That contractor can file a mechanics lien against the project property.
As a contractor, you need to understand and protect your lien rights. In some states, you have to take action to retain those rights. This often includes sending preliminary notices and working within specific time frames. Levelset’s Mechanics Lien Guide is a great first step in understanding your rights and what you need to do to protect them.
As a homeowner, you might think that issuing payment to your GC will absolve you of lien risk, but that’s simply not true. If the GC fails to pay a sub, the lien still lands on the property. You could potentially have to pay for the same work twice if you want to avoid the lien.
Avoiding such a scenario could require some research before you hire a general contractor. Looking into their job history, payment history, and speaking to some of their subs could tell a significant part of the story. Levelset’s Contractor Payment Profiles can help.
Prompt payment laws
Some states have their own prompt payment laws. These laws determine the amount of time that can pass before the owner pays the general contractor, and then how long the general contractor has to pay the sub. They intend to speed up the time it takes to get payments through all the project participants.
The US Prompt Payment Act requires that federal construction contracts include a prompt payment clause. While these laws do exist, there’s a lot of gray areas.
In regard to the US Prompt Payment Act, the requirement states that prime contractors must pay subcontractors for “satisfactory” performance within seven days of receipt of payment. Satisfactory is a relative term and can be the cause of disputes.
Create a great construction schedule
Schedules are important when managing any type of project, but especially in construction. Project schedules, payment schedules, draw schedules — keeping all the aspects of your projects on an organized timetable is good for everyone.
Check out Levelset’s guide to construction schedules with Free Construction Schedule Templates for Contractors, and browse and download construction schedule templates (including payment schedules) for all your projects.