How to Write a Remodel Contract With Multiple Payments

Contractors' bank accounts spend most of a project playing catch-up, simply replacing money that the contractor already put out on the job. Slow or partial payments can crush cash flow. It's not until the final payment that the contractor can hope to make any profit. A few schedule delays along the way and a contractor can be upside down on a project before they have the chance to change tack. Construction is a tough business, but projects don't have to suck the life out of the participants. A solid payment schedule can help.

What is a payment schedule?

In construction, a payment schedule is a timeline of the payments to be made throughout the lifetime of a project. On most jobs, contractors don't receive a single, lump-sum payment for the work or materials they provide. Instead, construction agreements typically break the full contract value into progress payments, made at regular intervals during the project schedule.

When tracking their own payments, contractors use a draw schedule. This document helps them plan out their income throughout the project.

But payments aren't just coming in — contractors have to pay their subcontractors, buy materials from suppliers, rent equipment, etc. A payment schedule can also be used to track when payments are due to their vendors as well.

Payment schedules for income and expenses are both used to create a cash flow forecast. A forecast can help contractors identify different stages of a project during which they may need to seek financing.

What a construction payment schedule includes

A payment schedule should contain all of the information you need to plan out anticipated and actual payments:

• The name of the contractor or vendor
• Description of the work or materials
• Amount of the payment due
• Due date for the payment
• Actual amount paid
• Actual payment date
• Payment method
• Notes

In addition, you may also want to include a field to track whether a lien waiver has been sent or received for the payment. This is especially important if you are using the payment schedule to track payments to subcontractors or suppliers on a project.

Construction Payment Schedule Template

Download a free construction payment schedule template to easily track project income or expenses.

Types of construction payment schedules

It seems that every aspect of a construction project is the "most important part" of the job in some way or another. The fact is that without payments and cash changing hands, there is no project. In that regard, payment schedules might actually be the most crucial element of a project going off without a hitch.

Regardless of whether you're the contractor or the homeowner, nailing down a concrete payment schedule is a critical part of the contract. Planning payments and following through with the schedule can serve as the rails to keep your project from going off-track. It can go a long way toward completing the project on time, avoiding disputes, and even staying within budget.

The type of contract you're using can influence your payment scheduling. Payments under a time and materials contract can often be a bit more flexible than those based on the project's progress or set time frames. Let's take a look at some common payment schedule formats.

Deposit + final payment

When it comes to a smaller project, a deposit followed by a final payment can be all it takes to keep everyone happy. The deposit can cover materials, permits, and possibly labor, while the final payment wraps up the profits and other expenses.

For example, let's take a small deck with a contract price of $3,000. The contractor may request $1,500 upfront to secure permits and purchase some of the materials. The final payment amount of $1,500 will cover the rest of the materials, the profit, and any labor costs the contractor paid. In this scheme, the contractor doesn't have to front all of the cash on their own, and the homeowner can hold back some payment to ensure the contractor finishes the project (within reason).

Read more: Why GCs Don't Give Deposits – and What Subcontractors Can Do About It

Progress payments

Medium to large size construction projects require a different approach. The most common payment schedule method for these projects is some form of progress payment and billing schedule.

Under this payment scheme, payments will flow at specific points throughout the project. Here are some of the most common payment waypoints.

Time-based payments

Under time-based payments, the payment schedule breaks up the contract amount into equal distributions. Usually, these contracts establish monthly payments with set dates. They make payment amounts and intervals crystal-clear, but can require some adjusting if change orders and delays emerge.

Milestone-based payments

Contracts that use milestone-based payments outline payments when specific stages of the project wrap up. For instance, a payment could be due to the contractor when they finish clearing the property or when the driveway work wraps up. This payment schedule is ideal when a large construction project is really just a series of smaller, separate projects.

Completion-based payments

If a contract uses completion-based payments, payments are due at regular intervals based on the project's progress. For example, payments could be due at every 10% of the project's completion. However, determining the completion percentage can be very challenging. This format really only works well on projects with crystal clear, itemized budgets or schedules of values.

Retainage

It's an unfortunate fact that some contractors need a bit of a carrot-on-a-stick to keep things on track. Retainage is that carrot, and it helps owners and GCs retain a bit of control over the project.

Retainage is a portion of a payment amount that the owner or GC withholds until the project reaches substantial completion. This set percentage of cash comes out of each payment. A retainage amount can often outweigh a contractor's entire profit margin, so it can be a very compelling motivator.

Using a schedule to track payment rights & deadlines

Contractors have a right to get paid for their work. When a property owner or general contractor fails to make good on a payment to a contractor, sub, or supplier, the unpaid party can file a mechanics lien against the property.

A mechanics lien is a construction company's most powerful tool to ensure they get paid on time. But it is not automatic — protecting your lien rights requires compliance with specific documents and deadlines.

If the owner or GC misses a payment in the schedule, you need to know the deadline to file a lien claim. If you miss the deadline, you generally lose the right to use a mechanics lien as a payment tool.

Protect & speed up every payment

Learn how Levelset can help you easily manage your lien rights on every project to ensure your payments are always protected.

The more you can automate the tracking of these deadlines, the easier it will be for you to ensure you never lose your right to file a lien if you need to. (Hopefully you never do!)

Contractors don't actually need to wait until the end of a project to file a lien — they can file a claim at any point after payment is due. In fact, it's not uncommon for a contractor to file multiple liens throughout the lifetime of the project. This is often a sign that the owner or GC is experiencing chronic financial problems that cause payments to be delayed.

Payment schedules help contractors to view project cash flow at a glance, and plan ahead to prevent any impact to their company's bottom line.

How to Write a Remodel Contract With Multiple Payments

Source: https://www.levelset.com/blog/contractor-payment-schedule/

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