Construction Contract Payment Terms: What to Look For Before You Sign
Every construction contract has payment terms. Most contractors read the price and the scope and then sign. The payment terms control your cash flow for the life of the job. Things like when you invoice, how long the owner has to pay, and what can be withheld all add up.
Before you price
How progress payments work
On most construction projects, you invoice monthly for the work completed during that period. This is called a schedule of values billing or an application for payment.
You submit the invoice or pay application by a cutoff date. The owner reviews it, approves or adjusts the amount, and pays within the number of days specified in the contract.
The interval from when you do the work to when you receive payment is typically 45 to 75 days: do the work in the first half of the month, invoice at month end, owner reviews and approves, pays 30 days after approval. In that time, you have paid your crew and bought your materials.
Net 30 vs net 60: what it means
Net 30 means the owner has 30 days to pay from the invoice date or approval date, depending on how the contract is written. Net 60 means 60 days.
The difference between net 30 and net 60 on a $100,000 monthly invoice is $100,000 sitting in the owner's account instead of yours for an extra month. On a large job, that financing gap is real money.
State prompt payment laws often set maximum payment periods for public work. Check your state's law. If the owner is a public agency, there may be a statutory maximum they cannot exceed, and interest applies if they miss it.
Invoice cutoff dates
Many contracts require invoices to be submitted by a specific date each month to be included in that month's payment cycle. Miss the cutoff and your invoice goes into the next cycle, which can mean waiting another 30 to 60 days.
Find the invoice cutoff date in your contract and put it on your calendar. On a big job, missing the cutoff once can mean a six-week delay in receiving payment you have already earned.
Payment term red flags
Pay-when-paid or pay-if-paid clauses conditioning your payment on the GC receiving payment from the owner.
No specified payment period. If the contract does not define when the owner must pay, it defaults to 'reasonable time,' which is vague and hard to enforce.
Right to withhold payment for any reason, including reasons unrelated to your work. Some contracts allow the owner to hold payments if there is any dispute on the project anywhere, even disputes that have nothing to do with your scope.
Stored materials restrictions. If your contract does not allow you to invoice for materials stored on or off site, you are financing all materials until they are installed.