Late and non-payments can cripple a construction company. In fact, research found billions of dollars are lost to contractors each year, due to late payments. That’s why it’s important to understand the contractor payment schedule, so you can be prepared with each project and reduce the risk of late or non-payments. You will also need to understand what to do when a client doesn’t pay.
What is a payment schedule in construction?
A payment schedule in construction is a timeline of when payments will be received when a lump sum payment is not received. The majority of construction projects have payment schedules that provide payments based on the progress of a job.
Payment schedules are important to track cash flow throughout a project, as you buy materials and supplies and pay independent contractors and subcontractors. Payment schedules help you stay within budget and on track, and serve to protect both you and your client.
How should a construction payment schedule be laid out?
The way you lay out your contractor payment schedule will depend on the type of project you’re doing and the scope. Your payment schedule should include:
- The project name and number
- The owner
- Each milestone when payment is expected
- The amount of each payment
- Due date for each payment
- Preferred payment method
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
Different-sized projects will benefit from different types of payment schedules. It may also depend on the client. There are three types of construction progress payment schedules: Completion, milestone, and time-based.
Completion-based payment schedules allow for payments at regular intervals, determined by the progress of the project. This is a good option for projects that have clearly defined budgets.
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.
These types of agreements separate the project into equal amounts of time. Payments are specifically identified by dates and amounts however, they can be changed in the event of project delays.
What are the most common payment terms for contractors?
Without clearly defined payment terms and a solid construction billing method, you risk slow or non-payment for your construction project. 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.
2. Schedule of values (SOV)
The SOV is a detailed list of each work item and the value of it within the scope of the project. An SOV 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
- Another other pertinent terms of the contract
Retainage is a percentage of each payment that’s withheld throughout the project and released when the project is completed. Sometimes retainage is reduced as the project progresses and sometimes less scrupulous clients will withhold retainage for no good reason.
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. Obviously, this creates a cash flow problem and inhibits your ability to pay your workers, and your subs, and run your business.
Send timely invoices
One way to avoid late or non-payments is to ensure you’re invoicing the right way. 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.
You should establish a regular billing cycle to follow, so invoices are sent out on a timely basis with clear payment instructions and a due date.
Reach out with a reminder
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. That’s why it’s good to be thoughtful but firm when following up with a reminder.
You can choose to do this 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.
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.
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. It should include:
- 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.
The mechanic’s lien
If your client has still not submitted payment after all these steps, you can file a mechanic’s lien.
A lien states that you have a claim on the property because of the unpaid work you put into it. Having a lien put on their property makes it difficult for them to sell it or get any loans against it plus 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.
When the lien is successfully filed, the client often 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.
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.
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.
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 district or supreme court. You might be able to recover attorney fees and other damages with this option.
Understanding construction payment schedules helps you and your clients
All jobs are easier and more organized when everyone understands what is expected of them. With a clear 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.
If you are ready to take your business to the next level, sign up for a free trial and see first-hand how automating your billing process will help you streamline your processes and achieve a healthy cash flow.