The cash flow pressures faced by construction can affect every aspect of a project, from material purchases and payroll obligations to equipment rentals. To ease these pressures, construction businesses need explicit payment terms and verification requirements. These measures can minimize the risks of payment disputes, work stoppages, and damaged professional relationships, and safeguard a construction company’s reputation and future revenue opportunities.
A useful solution is to establish clear payment schedules. Effective schedules specify when and how funds are disbursed, and clarify requirements for verifying completed work. This approach strikes the right balance between protecting all parties’ interests and ensuring steady cash flow.
What Is a Construction Payment Schedule?
A construction payment schedule is a contract component that creates a framework for a project’s payment terms, clearly defining payment amounts, timing, and conditions so that all parties can manage cash flow effectively. Depending on the project’s size and scope, these schedules may govern agreements between project owners or managers and their contractors and subcontractors or be set up directly between customers and contractors. After terms are set for when and how funds will be distributed, the schedule helps keep everyone on the same page, and it protects stakeholders from financial strain, reduces payment-related disputes, and provides clear expectations.
Construction businesses also rely on payment schedules to better align their cash flow with project milestones and resource requirements. For example, a payment schedule might specify a 10% deposit up front to secure initial materials and labor, followed by monthly payments tied to progress, and then a final payment upon project completion. This kind of structured approach helps contractors maintain sufficient and consistent cash flow so they can meet payroll and pay for supplies, and it reassures customers because payments directly correspond with completed work.
Key Takeaways
- Construction payment schedules divide large project costs into manageable installments, which improves cash flow and protects all parties through clear documentation and verification requirements.
- Payment schedules can follow various formats, including milestone-based, time-based, or progress-based approaches.
- Each of several possible formats offers unique advantages suitable for different project types and business needs.
- Digital tools and automation help construction businesses create, track, manage payment schedules, and maintain accurate records while reducing payment delays.
Construction Payment Schedules Explained
Payment schedules guide every monetary transaction in each stage of the construction process. They break down large project costs into smaller, manageable payments, often by linking them to specific milestones, time periods, or completion percentages. This structured approach ensures that contractors will be fairly compensated as work progresses, while giving project owners confidence that tasks are being completed at an acceptable pace. According to a construction payments report from Rabbet, a construction finance software company, slow payments cost the industry $208 billion in 2022, with 37% of contractors reporting that “work has been delayed or stopped due to a delay in payments to crew members in the last 12 months.” Payment schedules also help owners maintain control over their investments, often by retaining a predetermined percentage of payments until project completion.
Effective payment schedules strengthen relationships among customers, project managers, and construction teams by establishing clear expectations and assuaging financial uncertainty. For contractors, knowing exactly when payments will arrive helps them manage resources, timelines, and subcontractor commitments. Likewise, customers and project owners benefit from improved cash flow planning, especially for large projects with multiple financing sources. This transparency helps all parties focus on project execution, rather than on payment concerns.
Why Are Construction Payment Schedules Important?
Construction payment schedules establish clear financial expectations, helping to sidestep common issues that can derail projects, such as payment delays, cash flow shortages, or disputes over work completion. According to Levelset’s 2022 Construction Cash Flow & Payment Report, only 12% of construction companies say they always get paid on time. Payment schedules serve as risk management tools by creating documentation trails and establishing dispute resolution procedures, such as setting explicit verification requirements at key stages to keep projects on track throughout the contract’s duration.
Besides issue resolution, payment schedules help all involved parties maintain control over the project. For project owners and customers, structured payment terms provide accountability and help ensure that project milestones are met before payments are disbursed and constructing accounting records are updated. For contractors, consistent and predictable payments improve project planning by enabling them to order materials, schedule labor, and cover costs for each phase.
What to Include in a Construction Payment Schedule
Although every schedule should be tailored to a specific project’s needs, a comprehensive construction payment schedule typically includes several key components. Each element contributes to a clear, enforceable agreement that supports successful project completion.
- Project info: Include basic project details, such as the project name, location, start date, expected completion date, and contract number. This helps stakeholders clearly identify projects and avoid confusion, especially when multiple contracts are involved.
- Names of stakeholders: Provide complete contact information for all parties involved, including project owners, general contractors, subcontractors, and any relevant third parties. Clearly specify each party’s role and payment responsibilities.
- Scope of work: Outline descriptions of all expected work, organized into phases or components. This breakdown should clearly connect specific work completion data, milestones, or benchmarks with their corresponding payments.
- Payment: Include the total project cost and a breakdown of individual payments. Some schedules also outline costs for materials, labor, and other expenses. Explain any additional terms, such as retainage percentages, if applicable.
- Terms: Define the conditions that must be met before releasing payments, such as required documentation, inspections, or approvals. Include any additional rules or exceptions, such as late payment penalties or early payment incentives.
- Frequency: Specify a clear timeline for when payments will be made. This may be based on completion milestones, regular intervals, or a combination of factors. Include detailed dates or triggering events for each payment, as well as any lump sum payments to be made upon project completion.
- Method of payment: List accepted payment methods, such as electronic transfers or checks, and specify any expected processing times or requirements for payment submission and approval.
- Method of resolving disputes: Include clear steps for addressing payment disagreements, such as predetermined procedures or designated mediators and arbitrators, if needed.
- Actual payment: Record amounts, dates, and receipt verification as payments are made. Share copies with all participants to create an audit trail, and track payment history and cash flow throughout the project.
- Signatures: Once all parties agree, they should sign and date the schedule, indicating their agreement with and commitment to the outlined terms and conditions.
Types of Construction Payment Schedules
Construction payment schedules vary according to project requirements, accounting styles, risk mitigation strategies, industry standards, and more. Each type offers distinct advantages and considerations, allowing project stakeholders to choose the appropriate payment structure for their needs. Here are six different types to consider when developing a construction payment schedule.
Deposit and Final Payment
Deposit and final payment is the simplest form of construction payment scheduling. Under this arrangement, project owners set an overall price and provide contractors with an initial deposit to cover startup costs and material purchases. Then, when the work is completed, they make a final payment to satisfy the remaining balance.
Because this method requires minimal paperwork and administration, it typically works best for small, short-duration projects where contractors can manage cash flow between the two payment points. However, contractors must make sure they have sufficient funds for ongoing project expenses, and owners must carefully check completion criteria before releasing final payment.
Progress Payments
Progress payment schedules require payers to distribute funds based on the percentage of work completed during specified periods. This method requires regular evaluations, often conducted monthly, to verify a chunk or unit of work has been performed before payment is released. For instance, if a contractor completes 30% of the contracted work in a given month, they can send an invoice for the corresponding percentage of the total contract value after the project owner verifies the work, minus any retained amounts (covered in more detail below).
The progress billing approach helps contractors maintain steady cash flow for labor and material costs, while ensuring that project owners and customers pay only for completed work. Progress payments work particularly well for medium to large projects where contractors need consistent funding to sustain operations, especially if the overall project timeline is unclear when the work begins.
Time-Based Payments
Time-based payment schedules establish regular payment intervals, typically monthly or biweekly, regardless of specific completion benchmarks. Construction companies often use these schedules for projects with predictable work rates and resource requirements, since they allow contractors to plan their expenses around fixed payment dates.
While simpler to administer than progress-based systems, time-based payments require careful oversight to ensure that work completion keeps pace with the payment schedule; otherwise, businesses risk exceeding budgets or missing project deadlines.
Milestone-Based Payments
Milestone-based payments link financial disbursements to the completion of specific project objectives or deliverables, such as foundation or structural framing completion. Under this arrangement, contractors bill for predetermined payment amounts once these defined benchmarks are reached and the work quality is assessed and approved. This approach incentivizes contractors to meet project goals on time, and it gives project owners and customers concrete verification points, plus timely progress updates when payments are made.
Milestone-based schedules work particularly well for complex projects with distinct phases or when certain work benchmarks trigger the start of subsequent work by other contractors.
Completion-Based Payments
Completion-based payments tie disbursements directly to verified completion percentages of the total project scope. Unlike progress payments that adhere to regular evaluation periods, this method releases funds whenever contractors reach predetermined completion thresholds—such as 25%, 50%, and 75% of total work—regardless of how long it takes to reach each milestone. This approach requires thorough documentation and completion verification, often through third-party inspections or project manager assessments. These completion thresholds should be defined before work begins to minimize the risk of disagreements, such as disputes over what constitutes 25% of work.
Completion-based schedules work best for projects with clearly defined scopes and measurable progress indicators, especially when project owners or customers want tight control over the relationship between payments and actual work completion.
Retainage
Retainage involves withholding a predetermined percentage from each payment until project completion, typically 1% to 10% of the agreed-upon price. Often used alongside other payment schedule types, retainage provides project owners and customers with a financial safety net for addressing defects, incomplete work, or contractor nonperformance, if they arise. Contractors typically receive the retained funds upon satisfactory completion of all work.
Though retainage can help incentivize quality work, contractors must carefully account for these delayed payments when planning their cash flow and project financing.
Construction Payment Schedule Example
Although all payment schedules break down large payments into phases, the way a business lays out its payments can significantly impact cash flow. Below is an example of a milestone-based payment schedule for a $100,000 office kitchen and bath renovation project. In this case, the client set an agreed-upon 2% retainage policy for the project.
- Initial deposit: $10,000 (10%), with $200 (2%) retained and due upon contract signing. This deposit will cover the initial orders for custom cabinets, quartz countertops, and tile, as well as project setup and demolition planning.
- Demolition and structural: $25,000 (25%), with $500 (2%) retained and due upon completion of demolition, subfloor installation, and any load-bearing modifications. Before payment is released, building inspectors must approve structural changes, including rough carpentry and window installations.
- Mechanical systems: $20,000 (20%), with $400 (2%) retained and due after installation of updated electrical panel, copper plumbing lines, and HVAC ductwork. These installations require inspections of electrical, plumbing, and ventilation systems, as well as provision of a rough layout for new appliances.
- Interior finishing: $25,000 (25%), with $500 (2%) retained and due after completing drywall, tile flooring, and cabinet installation. This milestone also includes installation of recessed lighting, under-cabinet fixtures, and final plumbing inspections.
- Final payment: $20,000 (20%), with $400 (2%) retained and due upon project completion and final walkthrough. Final tasks include appliance installation, fixture mounting, hardware placement, and securing of occupancy certificates. Once all parties give final approval, the payer will release all retained amounts ($2,000 total).
Construction Payment Schedule Template
Creating an effective payment schedule requires careful attention to detail, including clear descriptions of payment terms, conditions, and verification requirements. Templates provide a customizable framework that construction businesses can adapt to their specific project needs, including project duration, payment amount, and payment frequency. Download and modify this template to create a comprehensive construction payment schedule that establishes clarity and accountability for all involved parties. The provided template currently uses the figures from the above milestone-based kitchen and bath renovation example as a placeholder.
Technology in Construction Payment Scheduling
Modern construction businesses increasingly rely on digital tools to streamline and manage their payment scheduling processes. These technologies can automate construction accounting calculations, track project progress, maintain documentation, and verify contract compliance. Whether contained in all-inclusive business software or specialized construction platforms, these tools can help limit delays, resolve disputes, and improve overall project management.
Let’s explore some of the top tools construction companies are implementing in their financial processes.
ERP:
Enterprise resource planning (ERP) systems are comprehensive solutions that help businesses manage their payment schedules and other key operations. These platforms integrate payment tracking with project management, accounting, and document control, enabling businesses to generate payment schedules based on contract type—such as guaranteed maximum price contract, lump sum contract, cost-plus contract, or time and materials contract—as well as predetermined timelines. After contracts are signed, businesses can set up their ERP system to monitor progress and send automatic payment reminders at each milestone until the project is completed.
Construction-focused ERP systems often include industry-specific features, such as retainage management and real-time visibility into a project’s financial status. This makes it easier for businesses to review their cash flow status against milestones and in light of overall progress.
Construction management software:
Construction management software gives construction teams the tools they need to manage project finances and payment schedules. These platforms can be customized to offer features for creating and tracking payment schedules, managing change orders, and documenting work completion through photos and daily reports.
Many solutions also integrate with other business systems, such as accounting software, and include remote capabilities that allow project managers to verify work completion and approve payments directly from the jobsite. This accessibility helps businesses maintain detailed and up-to-date records for all transactions.
Payment automation platforms:
Payment automation platforms modernize the payment process through features such as digital receipts, automated approval workflows, and payment processing tools. With these systems, construction companies can increase accountability, reduce manual data entry errors, and create clear audit trails for payments and approvals.
Many payment automation platforms provide automatic reminders, compliance checks, and integration with major banking and credit card systems, capabilities that support timely and convenient payments without sacrificing payment security and traceability.
Accounting software:
Construction-specific accounting software helps businesses with payment schedules and other financial obligations, such as contractor and subcontractor payments and supply orders. Many of these systems also manage retainage, progress or milestone billing, and tracking of actual payments vs. scheduled amounts.
Accounting systems have built-in and customizable reporting tools to monitor cash flow, forecast future payment needs, and certify compliance in accordance with contract terms and tax obligations, regardless of construction accounting methods used.
Digital invoicing tools:
Digital invoicing tools automatically create, send, and track invoices, which minimizes delays in payment processing and recording. These platforms often provide customizable templates for aligning project billing schedules with the contract terms and can track progress in real time as project owners and customers make payments.
Additionally, many of these tools integrate with accounting software and payment processing platforms to help businesses centralize their financial data and enable them to offer customers convenient online payment options.
Cloud-based document management:
Real-time collaboration and accessible information are essential for office staff, field teams, and external stakeholders, especially when inspecting work. With cloud-based document management systems, construction companies can access all payment-related documentation—including contracts, change orders, invoices, and proof of completion—from any location.
These tools allow stakeholders to review and approve payment documents through features such as version control, electronic signatures, and automated workflow routing. The cloud-based nature of these systems also furnishes secure backups of financial records to protect company, contractor, and customer data.
Mobile applications:
Mobile applications extend payment scheduling capabilities to smartphones and tablets, allowing construction teams to manage financial processes directly from a jobsite. These apps let users review and approve payment requests, track project completion status, and access payment documentation, all of which can help minimize delays and misunderstandings.
It’s common for mobile solutions to include photo and video documentation features so that teams can verify work completion and maintain detailed digital records of project progress to share with stakeholders. According to the Associated General Contractors of America’s 2023 construction outlook national survey, 85% of respondents expect to use mobile software technology in the coming year. More than half expect to use it for daily field reports (68%); for sharing drawings, photos, and documents (58%); and for accessing customer and job information from the field (56%).
Blockchain:
Blockchain is an emerging technology. It can simplify elements of construction payment schedules through smart contracts and digital transactions, such as automatically releasing payments when predefined conditions are met and verified, helping to shorten payment delays and diminish disputes.
Blockchain is also known for its contribution to security. It creates permanent, tamper-proof records of all transactions, increasing transparency for all parties. As its adoption grows, potential applications of blockchain in construction will likely grow as well.
Prevent Payment Schedule Issues With NetSuite
Managing payment schedules across multiple projects can overwhelm even the most organized business. NetSuite ERP simplifies this process by providing automated workflows that streamline payment scheduling and offering real-time financial visibility that gives businesses greater control over incoming and outgoing funds. The platform’s built-in features allow companies to create, track, and manage payment schedules, while also enabling businesses to apply custom rules tailored to each project’s contract.
With NetSuite ERP’s customizable dashboards and reporting tools, construction teams can easily monitor payment status, track project progress, and forecast cash flow needs from a single, cloud-based platform. The system can also automatically send payment reminders, flag potential delays, and record detailed audit trails of all financial transactions, thus minimizing errors and maintaining compliance standards.
Construction payment schedules are essential for managing project finances and maintaining positive relationships between stakeholders. Whether based on straightforward time-based payments, more detailed milestone-based approaches, or more complex payment schedule methods, payment schedules ensure clear payment terms, consistent documentation, steps for preventing disputes, and steady cash flow throughout the project life cycle. By implementing appropriate and comprehensive payment schedules, which are increasingly enhanced by digital technology, construction businesses can control their finances, support their contractors, and deliver quality work.
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Construction Payment Schedule FAQs
What is the payment schedule of a project?
A project's payment schedule specifies the timing and amounts contractors receive during the project's duration. It details payment amounts, due dates, necessary documentation, verification methods, and conditions for fund release. Typically, large project costs are divided into installments linked to specific milestones or completion percentages. This structure ensures contractors have the necessary funds for supplies and labor, while protecting project owners from subpar or incomplete work.
What are typical payment terms for contractors?
Payment terms in construction contracts vary based on project specifics but typically include initial deposit, progress payments, and retainage. This structure balances financial security for both contractors and project owners, promoting timely payments and safeguarding against incomplete or substandard work.
What is the payment schedule process?
The payment schedule process begins with establishing clear terms in the contract, including payment amounts, timing, and verification requirements. This process typically includes regular inspections, progress documentation, and formal approvals, with final payment and retainage release occurring after the construction team satisfactorily completes the project.
What is the California law for contractor payments?
Regulations for contractor payments can vary geographically. For example, California law requires prompt payment for construction work. For private projects, property owners must pay contractors within 30 days of receiving a proper invoice, and prime contractors must pay subcontractors within seven days of receiving payment. The law also requires retainage to be paid within 45 days of project completion and given to subcontractors within 10 days of receiving the payment. There are some exceptions, such as for public projects or when disputes occur.