The Ultimate Guide to Construction Payments

Each day of delayed payments compounds their related problems in the construction industry, creating cash flow stress, work stoppages, legal costs, lien filings, and more. Fortunately, construction companies can regain control of their finances—and support project success—by understanding and implementing effective payment practices. This requires mastering several key elements: drafting effective contracts, maintaining thorough project documentation, establishing efficient payment processes, following relevant regulations, and adopting appropriate technology solutions. With these fundamentals in place, construction firms can reduce payment delays, strengthen their cash flow, and dedicate more resources to what matters most—delivering quality projects on time and within budget.

What Are Construction Payments?

“Construction payments” is a blanket phrase that covers all financial transactions related to a construction project, including payments for supplies and labor, as well as incidental expenses, such as storage fees. Payments may be made by or to contractors, subcontractors, suppliers, owners, or any other stakeholder in a construction project.

The nature and timing of these payments determine their classification. Advance or mobilization payments are made before construction begins to cover initial costs. Progress payments, made as work progresses, support a contractor’s cash flow; a small portion of each progress payment is usually retained until the project is substantially complete. Change order payments cover work that wasn’t part of the original contract but was added during construction. Final payments, made after the project is fully completed, inspected, and approved, usually include the release of any retainage.

Key Takeaways

• The unique nature of each construction project necessitates diverse contract types and payment mechanisms.
• Late payments, a common issue, often result from complex processes that rely on large, constantly changing datasets used to validate billed work and satisfy contract terms.
• Construction payments are further complicated by outside forces, including numerous regulations governing the industry.
• Embracing technology to automate processes and make data easily accessible can reduce payment delays, improve cash flow, and boost profits.

Construction Payments Explained

Given the variety of stakeholders and factors involved, managing construction payments can feel like juggling. Legal considerations, documentation, supply chain challenges, and even the weather can change what’s being juggled at any time.

Construction payment processing is notoriously inefficient, adding to the challenge. Instead of simple invoices, many contractors submit payment applications—complex packages of documents substantiating charges in detail. (More on payment applications later.) These documents typically come from several sources, are frequently updated, and must be gathered, reviewed, and formatted to comply with contract terms. This can be a tedious process, where even small discrepancies may lead to rejections. Afterward, the appropriate stakeholders must review and sign off on the payment application before it’s submitted.

Submitting the payment application is one hurdle; getting paid is another. No wonder this juggling act can be stressful. Dropping any ball can delay payments, constrict cash flow, and hinder payments to suppliers or crews, leading to further delays and reputational damage.

Unsurprisingly, construction companies with strong payment processes see fewer late payments and stronger cash flow. Effective processes tend to automate several steps, but construction firms can’t rely on automation alone. They also are encouraged to:

• Use consistent contracts for all clients.
• Maintain accurate and thorough documentation.
• Foster open communication.
• Double-check invoices or payment applications before submitting.
• Improve payment collection strategies, such as by allowing electronic payments.

It may seem daunting to tackle so many elements of the construction payment process, but if doing so can—as Rabbet estimates—slash almost 14% off total construction costs, the investment is decidedly worthwhile.

Beyond financial gains, an effective construction payment process also:

• Serves as proof of completed work.
• Acts as a project progress report.
• Establishes a single source of truth for the project.
• Improves risk management.
• Helps maintain the quality and schedule of construction projects.

Types of Construction Contracts

A common reason for delayed construction payments is that clients don’t know or understand the payment terms. That’s why it’s strongly recommended that contractors never begin a project without a contract that clearly outlines the scope of work and payment terms. These contracts eliminate any “I didn’t know” excuses and serve as invaluable evidence should legal action become necessary to secure payment.

There is no one-size-fits-all construction contract. There are several options, however, each with different payment terms. Among them:

• Fixed-price contracts:

  Fixed-price contracts, also known as lump sum contracts, lock in the total project price before work begins. If the client and contractor agree that the total price is $30,000, the only way to alter that price is through a change order initiated by the client. Fixed-price contracts are often billed as a lump sum at the end of the project, hence the alternate name, but they can also be written to establish installment payments. Fixed-price contracts are a good option when the project scope, design, and specifications are well defined and unlikely to change, such as when building a standard commercial office tower.

• Cost-plus contracts:

  Building a cost-plus contract starts with the commitment that the client will cover all the contractor’s direct expenses, including materials, labor, and equipment, “plus” an additional fee—typically a percentage of the total cost—to ensure that the contractor earns a profit. Compared to fixed-price contracts, cost-plus contracts are well suited to projects in which the scope is uncertain, likely to evolve, or involves complex, unpredictable elements. Renovating a historic structure is one example.

• Time and materials (T&M) contracts:

  As with cost-plus contracts, time and materials (T&M) contracts do not specify a total project cost. Instead, the contract starts with the client and contractor defining the details of the project’s outcome. With that as the framework, the contractor determines hourly labor rates, cost of materials, and markup percentages, and clients are typically billed as costs are incurred. The key difference between T&M and cost-plus contracts is how profit is handled. In T&M contracts, profit is included in markups, rather than as a separate fee.

  Unlike fixed-price contracts, T&M contracts are often ideal when the scope of work is unclear or likely to change, and the client wants the flexibility to adjust the project as it progresses. Renovating a kitchen is a good example.

• Unit price contracts:

  Unit pricing is determined by breaking down a total project into discrete pieces and then determining the costs and markup for each piece, or unit. For example, one “unit” might be laying all the pipes for plumbing and another could be applying stone veneer to the exterior. Under these contracts, clients are typically billed as each unit is completed. A unit price contract is ideal when the scope of work is somewhat defined but the total quantity of work or materials needed is uncertain, such as in highway construction.

• Design-build contracts:

  Design-build contracts combine design and construction responsibilities under one contract, rather than separating them into two. These contracts usually identify project milestones that trigger billing and payments. This type of contract is ideal when the client values speed, simplicity, and a single point of accountability.

• Guaranteed maximum price (GMP) contracts:

  While fixed-price contracts define an entire project price from the outset, guaranteed maximum price contracts cap the total project cost but leave the final amount flexible. Therefore, it’s possible for a client to pay less than the stated maximum, but never more. Construction projects for which there is ample precedence and few unknowns—such as building a new location for a fast-food chain—are well suited to these contracts.

Key Stakeholders in Construction Payment

An average construction project has at least eight stakeholders, often more. For example, a large commercial project could have one architect and numerous subcontractors, each with distinct responsibilities, levels of authority, and payment schedules. Effectively managing construction payments demands a thorough understanding of these roles.

• Project owner or client: The individual, company, developer, or government entity that initiates the construction project and owns it upon completion. Owners define the project’s scope, set the budget, and secure funding. Their primary financial priority is to keep the project within budget while meeting the specified requirements. They are also concerned with protecting against financial risks, such as cost overruns, delays, or defects that could lead to long-term maintenance expenses or legal liabilities.
• General contractor: The general contractor (GC) oversees all project activities on behalf of the client. This includes hiring and managing subcontractors, procuring materials, and ensuring that the project meets its specifications and stays on schedule. The GC’s financial priority is to earn a profit, which hinges on effective cost management. The GC also seeks to secure full and timely payments from the owner, including additional compensation for approved change orders.
• Subcontractors: The GC hires subcontractors to perform specialized labor, such as electrical, plumbing, or HVAC work. Their primary concern is timely payment for completed work, which often flows through the GC. Their profit margins depend on finishing their part of the project on time and within budget while managing labor, equipment, and material costs. Subcontractors also aim to avoid penalties or claims related to defects in their work.
• Suppliers and vendors: Suppliers and vendors provide the materials, equipment, and products needed for construction, such as concrete, steel, plumbing fixtures, or electrical components. Their primary financial priorities are receiving full and timely payment for the goods they’ve provided, earning a profit, and maintaining healthy cash flow.
• Architects and design engineers: Architects and design engineers shape the project’s creative and technical vision, and they develop detailed plans and specifications. They typically oversee the design’s implementation during construction. Their financial priorities include being paid for their design work and for any additional services, such as revisions or site visits. They also want to protect themselves from liability for design defects. This includes verifying that their design integrity is maintained; if it isn’t, it can hurt their reputation and future business.
• Legal and financial advisers: These professionals help construction stakeholders navigate contracts, financial agreements, regulatory compliance, and risk management. Attorneys handle contracts, dispute resolution, and claims, while financial advisers oversee project financing and budgeting. The core financial interest of both teams is to help clients minimize legal and financial risks, such as contract disputes, cost overruns, or nonpayment. They also make sure the project meets regulatory and contract requirements.
• Banks and financial institutions: These entities assess a construction project’s financial viability. If the project is deemed viable, they finance it, typically through loans to the owner, developer, or contractor. Banks may also issue performance bonds or surety bonds, which guarantee fulfillment of the contractors’ obligations or compensate the owner if they fail to do so. These stakeholders’ primary goal is to make sure the loan is repaid, which involves minimizing risks, such as cost overruns, project delays, contractor insolvency, or other factors that could hinder the project’s ability to generate revenue. To protect their investment, they often set strict guidelines for fund disbursement and require regular progress updates.
• Government and regulatory authorities: Responsible for verifying that construction projects comply with building codes, environmental regulations, and other laws, these parties issue permits and conduct inspections. Depending on the project’s scope, local, state, and federal authorities may be involved. For example, building an airport runway could require input from all three levels. Regulatory authorities collect fees for permits and inspections and may impose fines or penalties for noncompliance. For public projects, they also monitor efficient use of public funds.

Payment Mechanisms in Construction

One reality of construction payments is that contractors and clients often have conflicting financial goals. Contractors need healthy cash flow to pay crews and purchase supplies, while clients want to avoid overpaying or paying for unfinished or subpar work. To address these concerns, the construction industry has developed payment mechanisms designed to be fair and transparent to all parties. (These mechanisms are just one of the reasons why construction accounting constitutes its own specialized field.)

Progress Payments

For lengthy or high-budget construction projects, progress payments—a pay-as-you-go structure in which the client and GC make payments throughout the project—are common. These payments may be set up according to a planned timeline (e.g., every 30 days), upon completion of a predetermined portion of the work (e.g., 30%), or by reaching project milestones (e.g., once framing is complete). Any of these options will work, provided that the payment mechanism is clearly stipulated in the contract.

Progress payments benefit all parties. They provide contractors or subcontractors with a predictable cash flow, making it easier to budget, buy supplies, and pay crews. For clients, progress payments can alleviate anxiety by allowing them to review completed work and resolve conflicts before the project is finished.

Retainage

Many contracts include retainage, also known as retention or holdback, to promote high quality work. This practice involves the hiring party withholding a portion of each progress payment. The amount withheld varies by the project or location, but 5%–10% is typical. The withheld amount is paid at the end of the project, as long as the hiring party is fully satisfied with the work. In that sense, retainage is a variation on billing in arrears.

Retainage reassures clients worried about delays or quality issues, as it provides leverage for addressing such concerns. But retainage can be stressful for contractors and subcontractors. The retained funds often represent most or all of a project’s profit, meaning contractors might spend months covering only costs. Subcontractors that complete work early in the project may wait for months or even years to receive full payment. And if retainage is linked to quality, subjective disputes about finished work can culminate in delayed or denied payments. Contractors can minimize such conflicts by thoroughly documenting progress and maintaining open communication about quality concerns to help resolve issues as they arise.

Final Payments

Final payment marks the end of a contractor’s legal obligations to the hiring party. To protect their financial interests, contractors must carefully progress through each step leading up to this stage. These steps often include addressing punch list items, which typically arise after “substantial completion,” meaning that the project is close enough to completion that the owner can use the property as intended. At this point, the client or architect may compile a punch list of minor corrections that need to be made.

Contractors must also make sure that all subcontractors and suppliers have been paid in full and that they have all provided lien waivers. Any outstanding liens could prevent the contractor from receiving final payment. Additionally, many contracts require documentation submissions, such as warranties, as-built drawings, and operation and maintenance manuals, before payment is released.

Final inspections are another key step, often involving safety checks, code compliance reviews, and approvals from third-party engineers. Contractors should confirm that all work is up to code and meets all contractual obligations before requesting final inspections.

Finally, it’s important to resolve any disputes and compensate for change orders or additional work before accepting final payment. Once final payment is accepted, it becomes difficult to claim further compensation or to address unresolved issues.

Construction Payment Applications Documents

In most industries, getting paid is straightforward: Send an invoice, wait a short period, and confirm the funds have arrived. Construction accountants, however, would gladly trade one of a genie’s three wishes for that level of ease. With so many stakeholders and moving parts involved, construction payments are far more complex. These challenges are compounded by human subjectivity—no contractor wants to battle a client about whether electrical work is really 50% complete or if the flooring really required that much hardwood.

To avoid such conflicts, and others, contractors generally request payment by submitting payment applications instead of invoices. A payment application is a package of documents that collectively substantiates the payment being requested. The specific components of a payment application vary, depending on the nature and size of the project, but they commonly include:

• Application for payment form: The centerpiece of any payment application package, this form summarizes key financial details, including work completed, amount requested, retainage withheld, and previous payments. Supporting documents, all mentioned below, uphold transparency and substantiate the claims in the form. Contractors may use customized forms or widely accepted industry templates, such as the AIA G702 Application and Certificate for Payment, or the ConsensusDocs 710 form, which is part of a subscription-based library developed for the architecture, engineering, and construction industries.
• Continuation sheet: A detailed breakdown of the work completed during the billing period, specifying itemized costs, tasks, and materials. It builds on the original schedule of values, which breaks down the total contract price into specific work categories with corresponding prices. It includes the percentage of work completed, and materials and supplies purchased.
• Lien waivers: These protect owners and GCs from the risk of subcontractors or other stakeholders filing liens after payment is made. Requirements vary—some owners ask for a single waiver from the GC, while others require waivers from every payee. Common types of waivers include conditional lien waivers, which become effective only when payment is received and cleared; and unconditional lien waivers, which take effect immediately upon signing, regardless of payment status.
• Materials receipts and invoices: When billing for materials, contractors should include proof of expenses in their payment application. Supplier receipts are the most straightforward way to provide this evidence. Some contractors also include delivery confirmations, bonding or insurance documents for storage facilities, or photos of the materials in storage to further substantiate their claims.
• Payroll and prevailing wage reports: These documents prove labor expenses and demonstrate compliance with wage requirements. Though the concept is simple, contractors must be careful to meet contractual obligations. For example, some contracts call only for annual wage reports, but others require them for every pay application. For government contracts, certified payroll reports are typically required to demonstrate compliance with prevailing wage laws.

Laws Governing Construction Payments

Construction is a highly regulated industry. Construction itself can be affected by everything from zoning restrictions and fire safety regulations to seismic building codes and historic preservation laws. There are also numerous laws that specifically govern construction payments. These laws generally fall into seven categories, outlined below. Because laws vary widely across jurisdictions, compliance can be complex. Given the legal and financial stakes, consulting an attorney is strongly recommended to ensure proper adherence to all relevant laws.

• Prompt payment laws: These ensure prompt payments to all stakeholders in a construction project. These laws require GCs to pay subcontractors within a specified period after receiving payments themselves. Most states have prompt payment laws, often with separate provisions for public and private projects. The federal Prompt Payment Act requires all federal construction contracts to include a prompt payment clause.
• Mechanics’ lien laws: Also known as construction liens or materialman’s liens, these laws permit any stakeholders that provide labor, materials, or services to claim a security interest in a property if they are not paid. Most states have some form of lien law, with the most stringent being California, where liens are recognized as a constitutional right.
• Retainage laws: These govern the withholding and payment terms for funds reserved during construction. These laws tend to specify maximum retainage charges, interest charges for delayed payments, and timelines for releasing retained funds. The Federal Acquisition Regulation law stipulates retainage of 10% on federal projects, while 49 states (West Virginia is the exception) regulate retainage for public projects. Over 30 states also regulate retainage on private projects.
• Payment bond laws: These laws are designed to protect construction stakeholders by ensuring that they get paid. Payment bonds, a type of surety bond, guarantee that a GC will pay subcontractors, suppliers, and laborers as specified in the contract. If the GC fails to do so, the surety (the bond provider) steps in to cover the payments. The federal Miller Act requires payment bonds for federal projects exceeding $150,000, while many states have similar “Little Miller Acts” for public projects. Some states also mandate or encourage payment bonds for large-scale or lender-financed private projects.
• Contract law: This one regulates the formation, content, and enforcement of the contracts that form the legal foundation of every construction project. It covers a range of aspects, such as offer and acceptance, consideration, performance obligations, breach of contract, and remedies. Understanding contract law is essential to limit risks, avoid disputes, and ensure smooth project execution.
• Dispute resolution laws: These laws govern methods for resolving conflicts over payments, delays, defects, contract interpretation, and other aspects of construction. Depending on the jurisdiction and the nature of the construction project, resolution may involve negotiation, mediation, arbitration, or litigation.
• State-specific and international laws: These laws regulate various aspects of construction, including payments. State laws that cover lien rights, retainage, bonds, and employment issues, such as worker classification and wages, are especially relevant to construction. For international projects, it’s crucial to determine which country’s laws govern the contract. Other areas of international construction law include labor regulations for locals and expatriates, anticorruption measures, and taxation.

Common Payment Issues and Disputes

Given the number of stakeholders involved in a construction project—not to mention the plethora of moving parts, countless decisions needing to be made, and high financial stakes—conflict is all but inevitable. Payment issues, in particular, often lead to disputes. Here are six common sources of contention:

• Delayed payments:

  Delays can significantly impact a project’s cash flow. Many delays are avoidable because they stem from small, procedural errors in the billing process. For example, if a contract requires that lien waivers be notarized, forgetting to do so can stall payment approvals. Such delays can cascade, affecting contractors’ abilities to pay subcontractors, purchase materials, and stay on schedule—ultimately increasing project costs and risks.

• Nonpayment:

  A project owner may refuse to pay a construction bill if they believe the work isn’t completed or doesn’t meet expected quality standards. In such cases, contractors often resort to work stoppages to pressure the owner, file a lien to secure a legal claim against the property, or rely on a payment bond to make sure funds will be available for payment. Nonpayment can also occur when owners simply don’t have enough money to pay. This can happen if a bank delays loan disbursements, financing falls through, or the project balloons beyond the original budget.

• Underpayment/overpayment:

  Underpayment happens when the owner or contractor pays less than the amount billed. That’s different from retainage, which is typically built into contracts and therefore expected. There are several possible reasons for underpayments.

  • Receipts or payroll records are missing that will verify expenses.
  • Subjective disagreements arise about the quality or progress of the work completed (e.g., one person’s 30% of framing is another person’s 25%).
  • Insufficient funds are available, despite the intention of paying the remainder as soon as possible.

  Overpayment occurs when the owner or client pays more than the value of the work completed, materials provided, or services rendered. This can happen if incomplete work is paid for, duplicate payments are made, unapproved changes are paid for, or retainage is released too soon. Such overpayments may occur because of:

  • Inaccurate progress reporting
  • Failure to review invoices or change order documentation
  • Errors in unit pricing
  • Duplicate or overlapping invoices
  • Poor communication
  • Rushed processes to meet deadlines
  • Fraud

  Both underpayments and overpayments can create significant struggles. Underpayments may delay work, strain relationships, and lead to disputes or liens. Overpayments, on the other hand, can be difficult to redeem, disrupt cash flow, and harm stakeholder trust.

• Retainage issues:

  Retainage is the practice of withholding a small percentage of each payment (typically 10%) until the final payment to ensure that work will be completed satisfactorily. Retainage is defined in the contract and typically doesn’t cause conflict. However, disputes can arise if the contract terms aren’t followed carefully. Points of contention include:

  • Not retaining enough and then trying to make up for it later.
  • Retaining too much and then disagreeing about how to resolve that.
  • Disagreeing that the work merits the release of the retainage.
  • Misspending the retainage so that it isn’t available when needed.

• Discrepancies in contract terms:

  Ideally, all parties should be satisfied with contract terms before construction begins. Yet, small details can be overlooked, leading to contradictions and, in some cases, disputes. For example:

  • Plans don’t match specifications, as when the drawings specify a concrete wall, but the written specifications call for wood framing in the same location.
  • The general contract states that the contractor will be paid monthly, but an attachment specifies milestone-based payments.
  • The contract states that payment will be made upon “substantial completion,” but fails to define what constitutes “substantial completion.”
  • The contractor is required to “provide all necessary equipment” without clarifying whether this includes heavy machinery, hand tools, or both.

These kinds of disputes can lead to construction delays, cash flow problems, and other difficulties, but diligent review of all contract documents before and during the project can prevent such disruptions.

• Change order disputes:

  Making changes during construction is common. Supply chain issues can make a design choice unavailable. The contractor encounters mold when breaking into a bathroom wall during a remodel. Necessary permits are denied. And so it goes. These changes can lead to conflict if:

  • The change order isn’t documented.
  • The contractor proceeds with the change before obtaining client approval.
  • All parties agree to the change but not to its cost.

  Careful documentation and review of change orders, with sign-offs from all parties before work begins, can help prevent similar disputes.

Best Practices For Managing Construction Payments

If there were a foolproof way to guarantee that every construction payment was made and processed flawlessly, someone would get very rich marketing it. The reality is that nothing is perfect. But there are best practices that can promise as effective a process as possible.

1. Write detailed contracts: A well-crafted contract stiffens the spine of every construction project. While creating thorough agreements can be time-consuming, it pays off by preventing problems later. Contracts should clearly define the project scope, responsibilities, schedules, payment terms (including penalties for noncompliance), and any conditions that could otherwise lead to disputes.
2. Use escrow accounts: These independent holding accounts guarantee that funds will be available to pay for the work. They are typically established by a financial institution before construction begins. The same institution then disburses the funds when work is completed.
3. Use milestone-based payments: Linking payment disbursement to project progress and performance, rather than to a specific date or interval, can incentivize contractors to stay on schedule and meet quality standards.
4. Conduct regular audits: Periodically reviewing the project’s status and finances verifies that all parties have the same understanding of progress to date. Audits are also invaluable in making sure that progress payments are accurate and that any problems are addressed immediately.
5. Leverage technology: Automating invoices and payments, for instance, can save time, minimize human error, and reduce administrative burden. This is particularly useful given the notoriously complicated and tedious nature of construction invoicing.
6. Mitigate risk: Protect against future claims by securing lien waivers and appropriate insurance coverage.
7. Follow all applicable laws and regulations: Stay up to date with all laws relevant to the type of construction project (e.g., public or private) to avoid compliance issues.
8. Keep scrupulous records: Keep organized records of receipts, payroll documents, delivery confirmations, photos, drawings, and other material that can be used to substantiate expenses and counter any doubts.

Technology and Construction Payments

While construction has historically been slower than some other industries to embrace technology, that’s changing, as developers and contractors realize they can’t achieve the growth they’d like without it.

A significant focus of this technological shift is on improving the efficiency of billing and payment processes. Traditionally, construction billing has been resource-intensive, requiring substantial time and effort to collect updated paperwork, organize it, secure approvals, and so on. Many companies become so consumed with generating bills that they lack the resources to follow up on payments, exacerbating the industry’s chronic delayed-payment issues. Automating tasks, such as invoicing and sending payment reminders immediately, reduces the resources required.

Technology is also changing the basics of when and how people are paid. For example, some firms have replaced the typical two-week pay period with on-demand payroll systems that give construction crews access to wages through virtual debit cards. This is made possible by integrating new technology with existing payroll systems. Others have automated specific components of the payment process, such as generating and managing lien waivers, to cut down on errors and free up time for other tasks.

Many firms are managing to shorten payment cycles by severing their dependence on paper checks in favor of facilitating ACH transfers or credit card payments. These methods reduce the risk of lost checks and fraud, while speeding up access to funds. Offering digital payment options is frequently perceived as a customer service improvement, as many clients prefer electronic payment options.

Even technology not directly tied to payments can enhance the payment process. For example, project management software with secure communication and document storage features can simplify workflows and communication. Finance teams, for instance, can save time by easily locating the latest documents and getting approvals, which streamlines the overall billing process.

Keep Construction Projects Progressing With NetSuite

NetSuite Enterprise Resource Planning (ERP) is a powerful tool in almost any industry, but it can be particularly valuable for unraveling construction project complexity. By centralizing core construction business processes, NetSuite's Construction ERP empowers various stakeholders to share data and improve communications to support efficient project management.

For example, the ERP system can automate labor-intensive tasks, such as invoice generation and payment tracking, to reduce administrative burdens. Its real-time data capabilities simplify critical functions, such as implementing change orders, managing inventory, generating accurate financial statements, and other elements of construction and construction payments. This also enhances billing accuracy and supports efficient materials storage management. Construction firms, in turn, find that they can reduce delays, improve project efficiency, and make more informed decisions to support smooth project progress from start to finish. All of this, and more, can help construction businesses exceed client expectations and achieve greater profitability.

Construction projects have traditionally relied on manual systems and outdated practices, which can contribute to inefficiencies, payment delays, and decreased profitability. By implementing a few industry best practices—starting with well-structured contracts and thorough documentation and continuing to adopting modern technology solutions—construction firms can lay the foundation for client satisfaction and sustainable growth.

Construction Payment FAQs

What are typical payment terms for contractors?

Construction payment terms vary by contract type, project size, and the agreement between the project owner and contractor. While there are no “typical” payment terms, common industry practices include progress payments, retainage, advance payments, milestone payments, time-based payments and final payments.

How does billing work in construction?

Because construction involves so many stakeholders and so many moving parts, simple invoices are insufficient for most payments. Instead, contractors use construction payment applications, which spell out all the billing details and include extensive materials (such as receipts and wage reports) to confirm the validity of the charges.

How do most contractors bill?

The most common methods include progress billing, time and materials billing, milestone billing, and lump sum billing, each of which is suited to specific project needs. All of these methods aim to ensure consistent cash flow throughout the project.

How are payments made to contractors?

Many construction payments are still made by paper checks, but other methods—such as bank or wire transfers, electronic funds transfer, and credit or debit card payments—are growing in popularity, as contractors turn to technology to help them effectively manage the payment process.