Construction contracts are filled with payment terms that can significantly impact when and how you receive payment. Understanding these terms isn't just helpful; it's essential for protecting your financial interests and planning your cash flow.
Net Payment Terms
The most common payment terms specify how many days the client has to pay after receiving your invoice. Net-30 means payment is due within 30 calendar days of the invoice date. Net-15 and Net-45 are also common. Some contracts specify "Net-30 from receipt" versus "Net-30 from approval," which can add days to your timeline if the approval process is slow.
Always clarify when the clock starts ticking. Net-30 from invoice date is better for you than Net-30 from invoice approval. The difference can be two weeks or more.
Retainage
Retainage is a percentage of each progress payment that the GC holds back until the project is substantially complete. Typical retainage is 5-10% of each invoice amount. On a $100,000 project with 10% retainage, you'd receive only $90,000 during the project and the remaining $10,000 upon completion.
Retainage can severely impact your cash flow, especially on long projects. Negotiate to reduce retainage to 5% or lower, and include specific release milestones. Some states have laws limiting retainage percentages and requiring timely release.
Pay-When-Paid vs. Pay-If-Paid
These two clauses sound similar but have very different implications. A pay-when-paid clause means the GC will pay you within a reasonable time after they receive payment from the owner. It sets a timing mechanism but doesn't eliminate the GC's obligation to pay you.
A pay-if-paid clause is more dangerous. It means the GC is only obligated to pay you if they receive payment from the owner. If the owner doesn't pay the GC, you may have no recourse against the GC. Many states have limited the enforceability of pay-if-paid clauses, but they still appear in contracts.
Progress Payments
Progress payments are partial payments made as work progresses, typically tied to milestones or monthly billing cycles. Instead of waiting until the entire project is complete, you submit invoices for work completed during each billing period.
Negotiate for progress payments on any project lasting more than two weeks. Monthly billing cycles are standard on commercial projects. On residential work, tie payments to completion milestones like rough-in, trim, and final.
Change Order Terms
Change orders modify the original contract scope and price. Your contract should specify the process for approving change orders and how quickly additional charges will be paid. Without clear change order terms, extra work often becomes a dispute.
Insist on written change orders before performing any work outside the original scope. Include pricing, timeline impacts, and payment terms in every change order.
Early Payment Discounts
Some contracts include early payment discounts, typically expressed as "2/10 Net 30," meaning the client receives a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days. Offering these discounts can incentivize faster payment, but calculate whether the math works for your margins.
Dispute Resolution
Payment disputes are common in construction. Your contract should include clear procedures for resolving disputes, including mediation or arbitration clauses. Avoid contracts that require litigation in a distant jurisdiction or waive your right to file a mechanics lien.
Protecting Yourself
Read every contract thoroughly before signing. If you don't understand a payment term, ask for clarification or consult a construction attorney. Never assume a term is "standard" or "doesn't apply." The payment terms in your contract directly determine your cash flow, and your cash flow determines your ability to stay in business.