A good payment schedule keeps you paid for the work you are doing. If you’re still using a 1/3, 1/3 and 1/3 payment schedule, you are financing most of the job out of your pocket. And you are at risk of not getting paid for all your work.

Some states have laws dictating payment terms on construction contracts. Like most laws written by politicians, the laws are written to deal with the effects of a problem and not the cause. The cause is dishonest contractors. A customer paying ahead of work being done is not a problem with good, honest contractors. Front loaded payment schedules are only a problem when the dishonest people that get into this business don’t uphold their end of the contract.

Put together a contract and a payment schedule that is a win-win scenario depending on the size of the job to be done. For small jobs, say up to $2,500, the payment schedule should be a down payment of 20% to 40% of the sales price, with at least one, preferably two progress payments of 20% to 30% and a final payment, due on job completion of about 2%. The final payment, depending on circumstances can drift up to maybe 5% but never more than that.

Depending on the state you live in, you can adjust your payment schedule to meet your state laws. In California, where they are limited to $1,000 or 10% of the sales price of a job, I would get a down payment at the signing of the contract, a material purchase deposit at some point before you get more than just a few days into the job and then continue on with the progress payments.

For larger jobs, get a down payment, a progress payment at least every two weeks and again, the final payment at no more than 2% of the sales price of the job. On larger jobs you should have no less than 4 payments, but again this depends on the length of the job. A good rule of thumb is to be paid every other Thursday or Friday until the job is complete. Be sure you have solid punch list language in your contract so there isn’t any misunderstanding when the job is complete and you are to receive your final payment.

The smart contractor gets smaller payments and more of them. That eliminates cash flow problems and helps your business stay on solid ground.

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Lindsay Cooper
Lindsay Cooper
June 1, 2017 1:10 pm

I am a commercial contractor and in my world down payments don’t exist and they shouldn’t You are a business owner, you should be expected to have OPERATING CAPITAL. If anyone comes to me demanding a down payment I am immediately thinking he doesn’t have any money, tools are old and is a fly by night contractor and I am usually right. You need money to buy materials??? don’t you have credit at your suppliers like everyone else??? if they don’t it makes me very leery about their credit situation Research your client first, expect to see documentation confirming they… Read more »

Linda Newman
Linda Newman
October 8, 2013 12:31 pm

By the time a contractor starts on a project, private or commercial, they have many out of pocket costs. These costs include permits, material to begin your project, admin and legal costs for setup of your project yet, lien laws only protect a contractor (for their out of pocket costs) once they’ve stepped onto your job and begun work. So it is absolutely acceptable to ask for a down payment or small deposit. It hasn’t always been this way. I remember just up to 5 or 6 years ago many accepted a handshake. It just isn’t like that anymore. The… Read more »

March 26, 2013 1:09 pm

Whenever you order anything online don’t you pay first and hope it gets shipped? There are so many examples of paying first and receiving later it should go without saying. You can always get references if you need to. But if you don’t trust your contractor with a deposit then why would you consider hiring them in the first place?

August 24, 2012 8:38 pm

I don’t buy your car or clothes, etc analogy. When I give them money, I have something tangible like a car in my possesion and no money was given upfront prior to the product being delivered. A restaurant provides a product/service and then gets paid just as a service company (HVAC, Electrical, Plumbing) performs a service and then gets paid. When a contractor gets money upfront, I have nothing tangible and it leaves me hoping that he will show up to perform his part. You suggest that the homeowner put up something before receiving a service, but you don’t ask… Read more »

August 24, 2012 4:18 pm

As a consumer, I would have a problem paying any money upfront.

If you are a a reputable contractor, you should have good credit with your material vendors and have 30 days before payment is due. This would give you plenty of time to get started on the job and collect a progress payment or two before paying your materials vendors.Also, if you are running a solid business then you should have operating capital to pay your employees and subcontractors.

Collecting upfront is a signal to me that this contractor doesn’t have good credit.

Would love your thoughts, please comment.x
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