Continuing our discussion on contracts, our previous article talked about the importance of getting a down payment. Now, progress payments.
Progress Payments in Remodeling
Remodeling. Way back when the earth was cooling, we used to get three payments on jobs. One-third down, one-third when the job was 66% complete, and one-third on completion. Then we realized we were financing a significant portion of every job.
So we started asking for progress payments tied to completion points throughout the project. That created a new set of problems because it’s not easy to say when something is complete. If we stated the next progress payment was due when the kitchen cabinets were complete, if there was a drawer front missing on one cabinet, clients would argue that it wasn’t complete. And we’d end up continuing with the job without getting a progress payment, or holding up the job for a small part.
So we switched to getting paid at the start of the next phase on the job. This works well for many contractors.
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Depending on the type of work you do and the way your projects progress, I recommend either getting paid at the start of the next phase on the job, or getting a progress payment every two weeks after job start. Asking for a progress payment every two weeks removes any subjective argument about the status of the job, often put forward by clients who know just enough about construction to be dangerous.
Unless your total job length is less than two weeks, you should break your progress payments into three or more payments. Your payment schedule might look like this for a $45,000 remodel:
| Down payment @ 38% = | $17,100 |
| Progress payment, end of week 2 @ 15% = | $ 6,750 |
| Progress payment, end of week 4 @ 15% = | $ 6,750 |
| Progress payment, end of week 6 @ 15% = | $ 6,750 |
| Progress payment, end of week 8 @ 15% = | $ 6,750 |
| Final payment due on day of job completion @ 2% = | $ 900 |
Notice that your second to fifth payments are all the same and an easy number to remember.
Progress Payments for New Home Construction
I suggest at least six to eight payments or more. If you need to, build in a few extra dollars that you’re willing to pay for the lender to make more payments than their standard of four or five payments for a typical new home. Whatever you do, schedule the progress payments to cover your expenses, preferably before they are incurred. You’re a contractor, not a bank. You aren’t in business to finance your client’s home.
Progress Payments for Subcontractors / Specialty Contractors
Specialty Contractors. Even if you have smaller job sizes, you should get at least two or three payments. Look at your expenses on the job and make sure your client (whether it’s the building owner or a general contractor) is financing the project, not you.
Set your payment schedules so you’re working with the client’s money, not your own.
The Bottom Line:
At the start of the next phase, or every two weeks — never at “completion” of a phase, where one missing cabinet piece hands the client an argument to withhold payment. Michael Stone shows a sample payment schedule for a $45,000 remodel and explains why new home builders need at least six to eight payments.
Related Articles:
Money Changing Hands
Use the Right Payment Schedule
Payment Schedules for Cash Flow
Contract Commitment Language
Cash Flow Needs
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses. He is the author of Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations. More here.