Of all the problems you can encounter on a construction site—weather delays, scheduling issues, or unexpected conditions like termite damage—it’s actually construction costs that cause the most significant issues. A lack of cash flow can grind a construction project to a halt.
Regardless of if you are working on a remodel, new home, or landscaping, having a payment schedule will help your construction project stay on track.
Let’s talk about how to create and implement a payment schedule for any construction project.
What Is a Payment Schedule in Construction?
Construction costs can pose a problem for both contractors and homeowners. Homeowners may have a hard time making a large final payment, as construction payments are often one of the highest costs they’ve ever dealt with. Contractors need a consistent cash flow so they can pay subcontractors and for any materials needed—otherwise, they can be in debt for a period of time.
Payment schedules in construction (also known as draw schedules) help both homeowners and contractors stay on track in any project, as they break up large payments into smaller chunks. Payment schedules are simply multiple payments made by banks, a lender, or homeowners to the contractor through the construction process.
Payments can be made on a monthly schedule or when certain agreed-upon milestones are completed. This could mean that payments are broken up by certain percentages (like when the project is 50% completed) or milestones (like when a chunk of work is completed)
What Are the Benefits of a Construction Payment Schedule?
It’s easy to understand the benefits for homeowners. They can make smaller payments over a period of time, which can help them afford the total cost and reduce stress. But, these schedules offer benefits for contractors too.
1. Consistent Cash Flow
Regular payments make life easier for everyone since contractors don’t have to wait until a project is completed to get paid. Regular cash flow allows you to make a profit throughout a project and pay for supplies and subcontractors. Broken up payments also help homeowners, as it gives them more time to come up with funding as needed.
2. Dispute Resolution
If you bill as you complete the project, you can settle financial disputes quickly. If the client discovers that their project is exceeding their financial limits—like when they encounter unexpected financial issues including extra repairs—you can pause work temporarily or discuss how to solve the problem.
Billing at the end of the project could create problems as you discover that perhaps the client didn’t have enough money set aside. You could end up haggling over the price tag or pursuing a lawsuit or mechanic’s liens, which help you get the compensation you’re owed.
Since owners and contractors are forced to discuss billings, payment schedules can force both parties to honestly discuss the contractor’s progress and bring up any issues upfront.
3. Work Flexibility
If you bill as you go, you can halt work as needed. Perhaps the client discovers a payment issue or wants to take the project in a different direction.
Clients often don’t want a project’s progress stalled. Halting a project puts them in a position to either pay you to resume work or to temporarily pause the project until they can afford to complete it.
What Are the Drawbacks of a Construction Payment Schedule?
Like anything else, a construction payment schedule does have its downfalls. Here are a few potential drawbacks.
1. Time Investment
Since progress billings stretch out over a period of time, your construction projects may take longer. The invoicing process can take more time as you have to submit several multiple times over the course of a project. If your payment schedule has gone through a bank, you may have to wait for an inspector to come to the construction site to determine your progress before payments are made for your invoice’s line items.
2. Creating Different Disputes
While progress payments can resolve some disputes, these construction contracts can start different kinds of disputes. There could be disagreements over how much work has been completed. For example, you could feel that you’re halfway through your project and bill for 50 percent when the owner feels you’ve only completed a third of the work.
Construction Payment Schedule Templates and Examples
Contractors can use standardized contract documents, like the AIA G702 from the American Institute of Architects or the ConsensusDocs 710. You can also create your own payment contract. Since many homeowners take out loans to pay for construction, you may have to work with a bank to create a schedule.
Draw schedules may need noticeable milestones to be completed, like new foundation, rough framing, or new electrical wiring completed.
Let’s look at a super simple example. A draw schedule may specify the following for a kitchen remodel:
- Draw 1: Down Payment, $1,000
- Draw 2: Foundation, $2,000
- Draw 3: Drywall, $3,000
- Draw 4: Flooring, fixtures, cabinets $5,000
- Draw 5: Clean up, painting, and completion $5,000
Or a time-based schedule for a home remodel at $32,000 may look like this:
- Down Payment: $1,000
- Week 2 Progress Payment at 23%: $7,360
- Week 4 Progress Payment at 23%: $7,360
- Week 6 Progress Payment at 23%: $7,360
- Week 8 Progress Payment at 23%: $7,360
- Final Payment for Job Completion: $1,560
How to Create a Payment Schedule in Construction
A payment schedule (or draw schedule) will specify each specific construction milestone with the expected completed work and the exact amount for each draw. It should also include your payment terms, so you and your customer are on the same page about when payments need to be made.
Your payment schedule will depend on the scope of the project. Draw schedules for new home construction may have as many as five to seven payments.
There’s a few contract pricing structures that you can work with in construction.
A time-based “completion” payment schedule, like our second example above, will pay according to a time period. Some draw schedules may disperse funds every two weeks or monthly.
However, it’s more common for payment schedules to follow a “milestone” model, like our first example above. This is when contractors are paid according to milestones completed, like disbursements made after significant parts of the project are completed.
Regardless of the type of payment schedule you use, you will want to include a down payment and a final payment.
Your contract may include retainage, which is a portion of the payment that the general contractor or owner sets aside to make sure that the project is completed quickly and to a high standard. Retainage is typically included so that contractors are motivated to complete the project correctly and to give owners peace of mind. The retainage amount is typically a small percentage of each progress payment. The retainage also gives owners some leverage to make sure that any "punch list" items or odds and ends are completed by the construction company to industry standards at the end of the job.
A draw schedule is sometimes created by and managed by a bank. Banks have different methods for managing payment schedules, but in general, banks pay for work once it’s completed as agreed upon in a contract.
To disburse funds through a bank, the bank will send an inspector to approve each disbursement. If the draw schedule doesn’t include a bank, then either the property owner or a construction manager will take a look to make sure progress is made.
Ideally, a draw schedule will address a subcontractor’s needs to get paid in a timely manner and the owner’s (or bank’s) needs to only pay for work completed. It can be a bit of a delicate dance.
Is a Construction Project Payment Schedule Right for You?
Some general contractors and homeowners love working with payment schedules, but it doesn’t work for every project. Small projects like installing countertops or replacing flooring may not require a payment schedule, but it can be helpful for bigger projects and undertakings.
Though working with draw schedules can be time-consuming, regular progress payments can make the construction process easier on both homeowners and contractors. They help create a constant cash flow, and keep both parties accountable.