Construction Payments: Tips, Methods & Best Practices [2025]

What are Construction Payments?

Construction payments refer to the transfer of value (cash, assets, etc.) between clients (the payer) and contractors (the payee) in exchange for meeting specific milestones or completing the project. 

After completing the transaction, contractors issue a receipt to acknowledge the payment. Then, both parties sign a lien waiver, essentially saying that the contractor has received their payment and given up the right to place a lien on the property.

Construction payment terms are typically agreed upon during the contract bidding process, during which different general contractors (GCs) submit proposals stating the amount for which they can execute the project.

However, payment amounts quoted in contracts are not fixed due to the unpredictability of construction projects. Prices may change (mainly due to rising material costs), weather-related delays may elongate the deadline, and design alterations may increase cost estimates. 

That’s why construction contracts typically include wiggle room, which allows contractors to increase prices once conditions are met.

Construction payments are broadly divided into three types of billing processes:

1. Progress payments: This payment schedule is based on certain milestones or work completed to date. Here, contractors are paid monthly or as they complete a certain percentage of the project. Progress payments are perfect for small or midsize projects with defined scopes and a low probability of change.

2. Final payment: The client pays a deposit at the start of the project, enough to cover overheads and a few expenses. The final payment, which covers the contractor’s profit margin and the remaining project expenses, is released at the end of the project.

3. Retainage: When making progress payments, the client withholds a certain percentage (usually five to ten percent). The withheld amount is only released if the project reaches a certain level of completion and meets quality standards. This motivates GCs and their subs to complete the project to satisfy clients and correct defects. 

Any construction payment method, though, can only help maintain a steady cash flow when the client pays on time.

What’s the Importance of Timely Construction Payments?

Projects are very capital intensive, and any delay in payment can throw them off course. Worse, contractors may be forced to cut corners to compensate for cash shortfalls or halt the project when payments are delayed.

Here are some other reasons why timely construction payments are important:

1. They prevent cost increases: Contractors cannot pay suppliers and financial institutions when payments are late. This can lead to costly late payment penalty fees and interest charges. It also strains the relationship with vendors, who may impose stricter terms in subsequent contracts.

2. They strengthen relationships with subcontractors: Subcontractors who commit to delivering quality work are invaluable. So, it’s vital to hold onto them by paying them promptly, which only happens when the general contractor gets paid on time.

3. They mitigate legal disputes: Timely payments prevent lawsuits and stop mechanics liens from being filed. This protects the reputation of all parties and ensures the project is completed on time.

How Can You Effectively Manage Cash Flow in Construction Projects?

Most projects that fail follow a similar cycle. First, there is a lot of hype at the beginning. Stakeholders can’t wait to see the project completed.

However, that enthusiasm fades when cash flow issues arise due to financial mismanagement and late payments. The project is then abandoned midway, causing messy legal disputes.

Don’t take our word for it. Look at what an experienced professional in the construction industry has to say about cash flow issues causing projects to fail.

Source: Quora

This experience isn’t unique, as 97 percent of construction professionals who participated in a Levelset survey say they suffer anxiety due to cash flow issues and late payments.

Furthermore, 47 percent said an interrupted cash flow reduces profits, 33 percent said it delays projects, and 30 percent said it forces them to take out loans—a costly measure considering the current high interest rates.

Here are some strategies you can implement to manage cash flow in your projects effectively: 

Accurate budgeting and forecasting

Projects involve massive amounts. Some contractor business owners wrongly assume it won't be finished and spend the money frivolously.

They pay directly from their checkbook while overestimating the amount left in the project account and only come back to reality when the first check bounces. The money has been exhausted. 

Don’t be like them.

At the start of every project, forecast the amount needed using insights from past projects and market surveys. Then, use your findings to create a budget detailing how the money will be spent down to the last cent.

While the project is in motion, use ServiceTitan’s Job Costing software to track profitability.

The software compares budgeted and actual costs using data from your inventory and payroll system and worker-on-site reports. It also shows the completion percentage and compares project expenses against revenue to ascertain profitability.

You can customize these reports to showcase only data between specific time ranges—days, months, weeks, and so on—and include specific columns your team requires.

This way, you'll stay on top of your spending and avoid budget overruns.

Streamlined invoicing and collections

Contractors typically handle multiple projects simultaneously, so it's easy to forget when to send an invoice to a client.

Another cause of late invoicing is the delay in getting subcontractors' cost information (labor, equipment, and materials).

The best way to eliminate late invoicing is to streamline your billing process using invoicing applications.

For example, ServiceTitan’s Field Service Management software lets construction business owners create progress and retainage billing schedules.

Once it's time to request payment, you can create and send invoices to clients from the platform. Customers can then pay via credit card, check, or ACH.

This streamlined invoicing and payment collection workflow shortens the payment cycle, allowing construction companies to maintain stable cash flow.

Consider using ServiceTitan’s invoice generator to generate invoices for free.

Expense management

You need a strong accounting system to accurately record expenses, track what's left in the project fund, and prevent financial mismanagement.

Additionally, write the purpose of every expense on its receipt, which should be kept in a safe place for tax purposes.

Finally, leverage technology to track your expenses, as manual processes like saving receipts in shoeboxes and recording transactions on spreadsheets are inefficient and error-prone. Plus, you’ll be forced to hire more bookkeepers, project managers, and accountants as your company expands.

You can use ServiceTitan’s Accounting platform to record all transactions and pull all financial data from QuickBooks, Intacct, and Viewpoint Vista into one hub.

This makes it easy to track expenses and ensure the project stays within the budget.

Check out this guide that breaks down how to manage accounting processes during construction projects.

How Can You Optimize the Payment Application Process?

For large construction projects, contractors must send payment applications alongside invoices before they can be paid.

Payment applications are documents contractors use to request payments based on progress. Unlike invoices, they contain multiple documents and extra details, such as the work done. They are sent monthly or after certain milestones are completed.

There are two standard payment application documents: AIA G702 and AIA G703. Both commonly contain the project’s name, total value, money due, change order details, and owners. They are delivered together with a continuation sheet and other supporting documents, such as daily reports, change orders, and lien waivers.

To avoid payment delays and maintain a stable cash flow, follow these tips when submitting your payment application:

• Submit it according to the schedule agreed in the contract. 

• Don’t wait until the last minute to prepare the documents. This will ensure that you deliver them before the deadline and avoid mistakes.

• Follow up on your payment applications to confirm receipt and encourage the client to act promptly.

• Include all evidence of the project’s progress, including visual documentation.

Generally, contractors invoice for projects only after customers sign the payment application to agree to the reported project progress. This can never happen if the document contains errors or lacks essential details.

To avoid this, use ServiceTitan’s Project Tracking software to complete your payment application and continuation sheet using data obtained from estimates and other business units connected to the project.

After completing the appropriate fields, you can print the document or email it to customers directly from the platform.

Using ServiceTitan’s Project Tracking platform, you can minimize common mistakes and send your payment application on time.

How to Manage Change Orders Effectively

Project scopes sometimes change midway through a project. You may discover that executing the project at the agreed price is impossible, or the project owner may decide to add or remove some work items.

For example, a customer may initially settle for a basic electrical system but then decide to add smart-home electrical fixtures, such as security cameras and a smart thermostat. This will change the budget, timeline, and project scope. 

Modifications to details agreed upon in a construction project contract must be documented using change orders. Otherwise, the contractor risks not being paid for the extra work or being held liable for damages if the client denies requesting such changes.

Change orders are documents used to alter or suggest changes to the scope of work stipulated in a construction contract. They record all changes to the project’s scope of work, cost, and delivery timeline.

Like payment applications, change orders can cause payment delays when they contain mistakes, inaccurate information, or a poor description of the customer's required changes. 

To ensure your payment isn’t delayed, take the following precautions when submitting change orders:

• Include all the necessary information.

• Never start implementing a change, assuming the client will sign the document. Change the scope only after you receive a signed change order.

• Keep all change order documents, even after the project is completed, to defend against lawsuits.

• When explaining changes to the project scope, use clear and specific language. Instead of writing, “We’re adding more electrical outlets,” say, “We’re adding two more electrical outlets at x location.”

• Include the correct prices. ServiceTitan’s Pricebook Pro integrates with the catalogs of top manufacturers and suppliers, fetching accurate prices in real time.

ServiceTitan’s Project Tracking software helps contractors create error-free change orders easily. It’s as simple as clicking a few buttons and inputting the relevant details in the provided form fields. Additionally, once the change order is completed, you can include it in your payment application with a simple click.

How Should You Handle Retainage?

Retainage is a percentage of the agreed price (usually five to ten percent) that project owners withhold until the project is totally or substantially completed. This is done to pressure the contractor to finish the project according to the client’s specifications, address defects, and complete it on time.

For example, let's say both parties agree to five progress payments of $30,000 each, with a 10 percent retainage. The contractor will receive $27,000 each time, and the remaining $15,000 (five retainage amounts of $3,000 each) will be paid after completing the project.

Project owners can sometimes refuse to release retainage payments by claiming the work is deficient, incomplete, or not in line with the set guidelines. Contractors can prevent such disputes by:

• Clearly defining the project’s specifications and retainage amount release conditions.

• Quoting retainage amounts on all payment applications.

• Documenting all changes to the project scope.

• Always recording the work completed so the customer releases the retainage amount on time.

• Sending customers progress reports regularly. Inviting them to perform regular inspections to spot any deviations between the work scope and their expectations.

How to Ensure Final Payment

Customers typically wait until specific criteria are fulfilled before releasing final payments. These criteria are included in the closeout process, which involves completing punch list tasks and delivering the project to the client, who will then hand over the final payment.

Here’s a breakdown of the steps involved in the closeout process:

• First inspection: The contractor and client jointly inspect the project to ensure that all quality and regulatory requirements have been met. All corrective actions to fix deviations and mistakes are consolidated into a punch list.

• Implementation of the punch list: The contractor will review and fix all punch list items.

• Document submission: The client receives all documentation related to the project, including drawings, operation manuals, final affidavits, etc.

• Final inspection: The contractor and client will review the project again to confirm that the punch list items were attended to.

• Employee training: In the case of commercial premises, the contractor must train the client’s employees in how to maintain and use the finished building.

• Final payment: The contractor receives and uses the final payment to settle with all subcontractors and suppliers.

• Project transfer: The project owner receives the keys and obtains a certificate of occupancy from the relevant authority to show that the building is safe to use.

Following the steps above will ensure that you receive your final payment. 

However, consider tracking the project using ServiceTitan’s Progress Tracking platform to ensure adherence to delivery schedules and agreed milestones.

The platform captures your project’s progress, profitability, and financials on intuitive reporting dashboards. This makes it easy to identify risks and allocate resources effectively.

Furthermore, ServiceTitan’s Project Tracking software can be used to:

• Bill customers

• Create estimates, invoices, payment applications, and digital job forms

• Manage crews from anywhere in the world

• Save and analyze accounting data

• Automate inventory management and replenishment

How Can You Secure Timely Progress Payments?

Progress payments help maintain a stable cash flow throughout a project’s duration. Contractors use them to settle with subcontractors and vendors and pay other overhead expenses. Unsurprisingly, projects are likely to falter when progress payments are delayed.

Follow these strategies used by contractors to ensure timely progress payments:

• Include a deadline for all progress payments and a penalty fee for late payments in all contracts. 

• Deliver invoices on time and include all supporting documentation to ensure prompt payment.

• Have a system for tracking the payment status of all projects and following up on all outstanding invoices.

• Provide customers with multiple payment channels. You should also use ServiceTitan’s Customer Financing software to allow customers to pay in installments for costly projects they can’t afford right now.

How Do You Manage Payments for Subcontractors?

Subcontractors are typically hired to handle specialized aspects of large and complex projects. For the project to succeed, their relationship with contractors must be positive. However, that can never happen when subcontractors are paid late.

To avoid such a problem, contractors must understand the key challenges with subcontractor payments and some strategies to prevent them.

Challenges in subcontractor payments

Most disputes involving general contractors refusing to pay subcontractors are traced to the following:

• Misalignment on the project scope: When general contractors and subcontractors are not aligned on the project scope, it can cause significant issues throughout the project lifecycle, including payment disputes.

• Communication breakdowns: Poor communication can lead to reworks, budget overruns, and strain the working relationship between the two parties. 

• Dispute over completed work: Payment issues arise between general contractors and subcontractors when there is a disagreement about the amount of work done.

Best practices for subcontractor payments

Now that the challenges of subcontractor payments are clear, here are some best practices for avoiding them:

• Clarify expectations in your contract before beginning work.

• Grow a relationship with subcontractors that stretches beyond just work to minimize disputes.

• Regularly communicate with subcontractors. Be transparent about expectations, deviations from the contract terms, and updates to the project scope.

• Always pay subcontractors on time. You can use ServiceTitan’s Contractor Payroll software to automate subcontractor payments for the work done and track timesheets.

Over to You!

Prompt payments are crucial to the successful completion of a project. 

Therefore, it is advisable to do everything possible to ensure project owners release the required funds on time. This includes providing them with multiple payment channels, timely delivery of invoices and payment applications, and regularly updating clients about progress.

Additionally, study the various project management principles and implement them using construction software like ServiceTitan. This will ensure that the project is delivered successfully to the client, who will have no option but to release your final payment.

ServiceTitan is a comprehensive software solution that helps service companies manage construction projects effectively. Our cloud-based platform is used by thousands of contractors nationwide who have reported an average 25 percent revenue increase in just their first year with us.