A clear payment schedule is a great way to help contractors and subcontractors get payment for projects promptly. Using a draw schedule, contractors keep track of their payments. Throughout the project, they can use this to plan their income. However, contractors must also pay their subcontractors, purchase materials from suppliers, and rent equipment in addition to receiving payment from clients. Payment schedules can also track when payments are due to their vendors. Cash flow forecasts are created by combining income and expense payment schedules. Contractors can identify when they may need financing during different project stages using a forecast.
Construction projects are often long and complicated. They’re also expensive. Payment is determined in the contract process, which includes the contractor payment schedule. What’s included in the contractor payment schedule and the different types are a critical part of the professional relationship between the project owner and the general contractor. Let’s look at the construction payment schedule to fully understand its benefits.
An explanation of contractor payment schedules
Construction projects pay contractors according to the contractor payment schedule. In general, contractors rarely receive one lump sum payment for their work. Hence, a construction payment schedule shows how their work is compensated over time. The construction contract defines the contractor’s payment schedule and sets payments at regular intervals. The contractor will receive clear payment terms and will be less likely to receive late payments.
Contractor payment schedules are negotiated between the owner and general contractor to achieve a mutually beneficial arrangement that aligns with project requirements and protects all parties. The construction payment schedule should be included whenever a project plan is developed. To avoid costly delays that decrease profit margins, general contractors can include the contractor payment schedule in their project timeline. To keep the project on track, they can also filter for critical path tasks, which can be used to identify essentials and set baselines to compare planned versus actual effort.
Construction payment schedule types
An important aspect of a construction contract is establishing a solid payment schedule. You can keep your project on track by planning payments and maintaining a schedule. It can greatly reduce delays, prevent disputes, and keep the project on budget. Processing payroll can become time-consuming and frustrating when you begin hiring many employees.
In today’s modern world, a small business owner can choose from various payroll software that automate and streamline the process of ensuring their employees are paid correctly and on time. You’ll need to consider the type of contract you’re using when scheduling payments. Compared with contracts based on progress or set deadlines, time and materials contracts often allow for more payment flexibility.
A few common payment schedule formats are listed below.
Final payment and deposit
The deposit followed by the final payment can keep everyone happy on a smaller project. A deposit is used to cover the cost of goods, permits, and possibly labor, and the final payment is used to close out the profit and cover other costs.
Take, for instance, the case of a small deck-building company that charges $4,000 for the project. To purchase some materials and secure permits, the contractor may request $2,000 upfront. After the contractor pays the remaining materials, profit, and labor costs, the final payment will total $2,000. Using this method, the homeowner withholds payment for the contractor to ensure he finishes the project (within reason).
Payments based on progress
A different approach is required for medium-to-large-sized construction projects. Progress payments and billing schedules are these projects’ most common payment schedule methods. There will be specific points at which payments will flow throughout the project under this scheme. There are several common ways to make a payment.
Payments based on time
In time-based payments, the contract amount is divided equally between equal payments. There are usually set dates for monthly payments under these contracts. It simplifies calculating payment amounts and intervals, but it can require some adjustments if change orders or delays arise.
Payments based on milestones
Payments are made according to milestones during a project when specific stages are completed. For example, a payment may be due when the contractor finishes clearing the property or constructing the driveway. Construction projects are often divided into smaller, separate jobs, so this payment schedule is ideal.
Payments based on completion
Contracts that use completion-based payments must be made periodically according to the project’s progress. The project’s completion could be marked with 20% milestone payments. Several factors need to be taken into consideration when determining the completion percentage. Some projects work better with this format, such as those with crystal clear, itemized budgets or schedules of values.
Retainage
Until a project reaches substantial completion, the owner or general contractor withholds a portion of payment. During each payment, a specified amount of cash is deducted. It can be very motivating for contractors to receive a retainage payment greater than their entire profit margin.