Industry Insights

Crafting a Winning Construction Payment Schedule: The Key to Ensuring Project Success

Kristen Frisa
March 27, 2024
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A construction payment schedule is a plan that details the expected times and amounts a contractor will invoice for completed work.

Because construction projects are often complex and span an extended time frame, contractors don’t usually receive a single payment for all the construction costs. Instead, contractors and project owners agree on when and how the contractor will invoice in progress payments. The progress payment schedule is laid out in advance as part of the construction contract agreement so that all parties can plan their financial obligations accordingly.

This article will discuss what contractors should consider when building or agreeing to a payment schedule, tips on managing cash flow throughout the project, and best practices for maintaining a successful pay schedule.

What’s involved in a construction payment schedule?

The construction payment schedule is built in a separate document that is to be included with the contract. As with any contract document, it should start with information about the project, including:

  • project name and location
  • the start and expected completion date
  • the names of the owner and contractors.

Then, it should list out:

  • services performed
  • amount due
  • payment due date
  • payment intervals (whether monthly, by milestone, etc.)
  • actual payment received
  • actual payment date
  • payment method
  • room for any notes, including references to change orders or delays
  • information about any amount held back as retainage

If in doubt, follow a construction payment schedule template to ensure all the required information is included.

Retainage refers to a payment amount that is held back from the contractor until the project work is complete. Retainage amounts are outlined and agreed to in the contract and may range from 5-10% of the total contract price. Contractors already face cash flow challenges throughout the construction process, so they should be aware of and plan for any retainage in the contract.

A contractor payment schedule should also provide a breakdown of payment milestones that makes it clear exactly when conditions have been met for payment, what documentation is required to backup the invoices, and what invoice formats are considered acceptable.

Benefits of a construction pay schedule

Pay schedules help foster trust and predictability between construction stakeholders by laying out expectations at the outset of a project.

Manage cash flow

Properly managed finances are critical to project success. Contractors need cash for labor, materials, permits, and insurance to continue building. Pay schedules are a vital part of financial planning and cash management. A predictable pay schedule can help builders maintain consistent cash flow to avoid payment delays and save on the cost of financing.

Timely payments to subcontractors and suppliers

A payment schedule maps out expected incoming and outgoing payments, ensuring contractors have cash on hand to pay the bills. Prompt payment to subcontractors and suppliers strengthens relationships and bolsters goodwill, all of which can pay off on future projects.

Further, contractors, laborers, and materials suppliers have the right to be paid according to their contracts. If those payments fall through even though they have followed all of the required payment documentation and invoicing procedures, construction stakeholders may file mechanics liens. Following construction payment schedules as outlined can help avoid the costly and time-consuming fallout of delayed work and legal action or lien disputes.

Types of pay schedules

The type of contract used for a construction project may impact the type of pay schedule used. A lump sum contract may be paid out by percentages at set times, while a large construction project contracted out by an undetermined number of work units may have to be paid out when certain sections are complete. Here are some of the more common payment schedule types for construction projects.

Percentage complete

Some contracts may dictate that payments come as the project progresses toward completion. The contractor may submit an invoice for the work so far when 10% or 20% of the project is finished. To make percent complete work, the financials have to be set in stone and all parties need to have a clear understanding of what constitutes completion for each section of work.

Payment milestones

Projects that are easily divided into phases may lend themselves well to milestone payments. The contractor sends an invoice for each specific section of work when that section is finished. Milestone payments aren’t as clearly tied to timelines, so both the contractor and the owner must have a clear idea of how long each phase will take to anticipate payment timelines correctly.

Equal monthly payments

Projects with a clear scope of work can be added up to a total cost, which can then be paid out in monthly increments. On each billing date, the construction company invoices for a portion of the work, plus any approved and completed change orders.

Best practices for creating a construction payment schedule

Expectations for payment should be laid out clearly and precisely before a project begins. Even so, there will often be questions that arise, changes to the plan, and challenges to payment as the project progresses. Following a few basic protocols will help avoid some of the snags in the flow of money through construction projects.

Communication and collaboration

A construction project payment schedule should set clear expectations for payments from the beginning of the contract to its closeout. Work together to define payment terms including milestones, percent complete triggers, and documentation requirements that are universally understood.

A successful payment schedule should be fair and workable for all parties. The project will fail if any one of the involved parties fails, and financial disputes cost time and even more money, so success for everyone should be the goal for all.

Make progress payments simple

Applying for progress payments can involve a lot of hoops for contractors to jump through. There may be specific forms, photos or documents to back up an invoice, and cutoff dates involved in payment applications that complicate the process. One thing contractors can do to make their lives, and their clients’ lives, easier is to facilitate a fast and painless payment process.

With Truss, contractors can receive ACH and card payments for free and access and use the funds as soon as the client sends payment. Customer checkout is fast and easy, with flexible payment amounts. Customers can pay invoices in increments as outlined in the payment schedule and with multiple payment methods, giving them a transparent overview of paid and outstanding amounts.

Monitor and adjust the payment schedule as needed

Even with extensive planning, construction projects often change and evolve as they progress. Projects may be delayed for many reasons, and project elements may need to be added or removed through change orders, affecting the payment schedule in the process. Project teams must continue to pay attention to and discuss the construction budget, project schedule, and payment timeline to keep everything in line.

Truss provides an overview of each vendor/client relationship, showing previous and outstanding payments so that both the construction business and the client can track changes and the status of each progress payment in real time.

Successful projects need a payment plan

Contractor payment schedulespaymen set clear expectations for financial transactions from a project’s inception to closeout and helps all project parties to develop cash flow strategies. Discussions about contractor payment schedules should include decisive tipping points for payment, as well as required paperwork to back up invoices and acceptable payment methods.

Discussing project financials is as important as strategizing design or materials use – the project won’t survive without the money to keep everything moving. Contractors should prioritize the development of a payment schedule that works for all project stakeholders and make it easy for clients to complete construction payments throughout a project.

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