Payment Schedules and Best Practices

How and when you pay subcontractors is one of your most powerful management tools as an owner-builder. Payment done right protects you legally, maintains quality leverage, and ensures project completion. Payment done wrong leaves you exposed to liens, abandoned work, and poor quality.

This guide will teach you industry-standard payment practices, how to protect yourself at every payment stage, when to hold payment, and how to handle payment disputes professionally.

Why Payment Strategy Matters

The leverage principle: Whoever holds the money has the power.

Pay too much upfront: Contractor has your money, you have no leverage Pay too little: Contractor can't afford materials, may abandon job Pay correctly: Contractor is motivated to complete quality work, you're protected

Real examples:

Bad payment: Paid 60% upfront ($18,000 of $30,000 contract)

Good payment: Paid 15% deposit, then progress-based payments

The difference: Payment structure

Standard Payment Structures

Industry Standard (Recommended)

Four-payment structure:

  1. Deposit: 10-20% at contract signing
  2. Progress 1: 30-35% at defined milestone
  3. Progress 2: 30-35% at next milestone
  4. Final: 15-20% at completion + lien release

Example for $20,000 contract:

Why this works:

Three-Payment Structure (Simpler)

For smaller projects (under $10,000):

  1. Deposit: 10-20%
  2. Mid-point: 40-50%
  3. Final: 30-40%

Example for $8,000 contract:

Trade-Specific Payment Schedules

Different trades have different natural payment breakpoints:

Foundation/Concrete

Deposit: 15% - At contract signing
Payment 1: 35% - After footings poured and inspected
Payment 2: 35% - After walls poured and inspected
Final: 15% - After backfill complete and final inspection

Framing

Deposit: 15% - At contract signing
Payment 1: 30% - First floor framed and sheathed
Payment 2: 30% - Second floor and roof framed
Payment 3: 10% - Sheathing and house wrap complete
Final: 15% - After inspection passed and punch list complete

Roofing

Deposit: 15% - At contract signing (if materials included)
Payment 1: 50% - Underlayment and shingles installed
Final: 35% - Ridge cap, flashing complete, cleanup done

Plumbing/Electrical/HVAC

Deposit: 10% - At contract signing
Rough-in: 45% - After rough-in complete and inspected
Finish: 30% - After fixtures/devices installed
Final: 15% - After final inspection and punch list

Drywall

Deposit: 10% - At contract signing
Hanging: 25% - After all drywall hung
Taping/First coat: 25% - After first coat of mud
Finish: 25% - After sanding and priming
Final: 15% - After touch-ups and cleanup

Payment Milestones

Key principle: Payments tied to measurable completion, not time elapsed.

Good Milestones (Measurable)

Bad Milestones (Vague)

How to Define Milestones

Be specific:

PAYMENT MILESTONE 1: $7,000 due when:
☑ All first-floor walls framed per plan
☑ All second-floor walls framed per plan
☑ All exterior walls sheathed with 7/16" OSB
☑ House wrap installed on all exterior walls
☑ Work photographed and verified by owner
☑ Site cleaned of debris

Owner shall inspect within 3 business days and payment due within
5 business days of verification.

Not this:

"$7,000 when framing is halfway done"

Deposit Guidelines

Deposits serve one purpose: Secure contractor's commitment and cover initial material costs

Standard deposit amounts:

Red flags:

When contractor asks for large deposit:

Wrong response: Pay it because you want to secure them

Right response:

"I understand you need to cover materials. Standard industry practice is 10-20% deposit. I'm comfortable with 15%. If you need more for materials, let's set up supplier accounts where I pay directly, or I'll provide materials myself. I won't be paying more than 20% before work begins."

If they refuse: Find a different contractor. Financial stability is questionable.

Progress Payment Best Practices

Before Making Any Progress Payment

Required steps:

  1. Inspect the work yourself

    • Compare to contract scope
    • Verify milestone actually achieved
    • Check quality
    • Take photos
    • Note any issues

  2. Verify inspections passed (if applicable)

    • Get copy of inspection card
    • Confirm no corrections needed
    • Photos of passed inspection

  3. Get conditional lien release

    • Contractor signs lien release covering work to date
    • Release becomes effective when payment clears
    • Protects you from liens for that payment period

  4. Verify previous payments used properly

    • No liens filed
    • Materials on-site that were supposed to be purchased
    • Subcontractors paid (if applicable)

  5. Document everything

    • Photos of completed milestone
    • Inspection results
    • Lien release
    • Invoice from contractor
    • Your verification notes

Only after all steps: Issue payment

The Verification Process

Step-by-step:

1. Contractor notifies you milestone reached

2. You schedule inspection (if required)

3. Inspection occurs and passes

4. You inspect personally

5. Request lien release

6. Process payment

Timeline: 3-5 business days from verification to payment

This protects you and is fair to contractor

Final Payment Procedures

Final payment is different: Most critical for your protection

Before Final Payment

Must have:

  1. 100% completion verified

    • All contract scope complete
    • All punch-list items done
    • No outstanding work
    • Quality acceptable

  2. All inspections passed

    • Final inspection if required
    • Certificate of occupancy if applicable
    • Copies of all inspection records

  3. Unconditional lien release

    • Contractor provides unconditional release
    • Covers all work performed
    • Signed and notarized if required

  4. Subcontractor lien releases (if contractor used subs)

    • Release from every subcontractor
    • Proves they've been paid
    • Protects you from their liens

  5. Warranty documentation

    • Written warranty per contract
    • Manufacturer warranties assigned to you
    • Contact information for warranty service

  6. Final cleanup complete

    • Site broom-clean
    • All debris removed
    • All tools/equipment removed
    • Protected work areas restored

  7. As-built documentation (if applicable)

    • Any changes from original plans
    • Photos of installed work
    • Product specifications
    • Maintenance instructions

Never pay final payment without ALL of these

The 30-Day Hold

Additional protection: Hold final 10% for 30 days after completion

Why 30 days:

How it works:

Contract total: $20,000
Regular payments: $18,000
Final 10%: $2,000

Completion date: June 15
Hold until: July 15 (30 days)
Payment if no issues: July 15

If lien filed or defect found: Hold until resolved

Include in contract:

"Final 10% of contract price held for 30 days after substantial completion to ensure no liens are filed and no latent defects appear. Payment released after 30 days if no liens filed and no defects discovered."

Contractors who refuse this: May be planning to not pay their subs (red flag)

Lien Releases

Critical protection: Prevents mechanics liens on your property

What is a Mechanic's Lien?

Definition: Legal claim against your property for unpaid construction work

How it happens:

  1. You pay contractor
  2. Contractor doesn't pay their suppliers/subs
  3. Supplier/sub files lien against YOUR property
  4. You must pay them or they can force sale of property

The problem: You pay twice (contractor and lien claimant)

The solution: Lien releases with every payment

Types of Lien Releases

Conditional Lien Release

Used for: Progress payments Means: "I release lien rights when payment clears"

When to get: With every progress payment Becomes effective: When check clears or transfer completes

Example form:

CONDITIONAL LIEN RELEASE

In exchange for payment of $7,000 from [Owner Name], which payment
has been received/upon receipt, [Contractor Name] releases and waives
all lien rights for labor and materials furnished to [Property Address]
through [Date] to the extent of $7,000.

This release is conditional on payment clearing.

Signature: _________________ Date: _______

Unconditional Lien Release

Used for: Final payment only Means: "I release all lien rights, period"

When to get: Before final payment Becomes effective: Immediately upon signing

Example form:

UNCONDITIONAL LIEN RELEASE

[Contractor Name] has received final payment of $3,000 from [Owner Name]
for all labor and materials furnished to [Property Address].

[Contractor Name] releases and waives all lien rights for all work
performed and materials furnished through the completion of this project.

This release is unconditional and effective immediately.

Signature: _________________ Date: _______

Subcontractor Lien Releases

Required: Lien releases from contractor's subs and suppliers

When contractor uses subs, you need:

  1. Contractor's lien release
  2. Every subcontractor's lien release
  3. Every major supplier's lien release

How to request:

"As a condition of final payment, please provide unconditional lien releases from yourself and all subcontractors and material suppliers who worked on this project. I need releases from [list specific subs you know about] at minimum."

If contractor won't provide:

Lien Release Forms

Where to get:

State-specific: Forms must comply with your state's lien law

Have ready: Blank forms for contractors to sign at each payment

When to Hold Payment

Sometimes you must withhold payment to protect yourself:

Valid Reasons to Withhold

  1. Work incomplete

    • Milestone not actually reached
    • Scope items missing
    • Punch list not done

  2. Work defective

    • Doesn't meet code
    • Failed inspection
    • Poor quality not per contract

  3. No lien release

    • Contractor won't provide
    • Concern about unpaid subs

  4. Missing documentation

    • No inspection approval
    • No warranty documents
    • No as-built information

  5. Damage to property

    • Contractor damaged other work
    • Damage not yet repaired

  6. Breach of contract

    • Violated contract terms
    • Missed deadlines with liquidated damages
    • Used wrong materials

How to Withhold Payment Properly

Do it right or you're in breach:

Step 1: Document the issue

Step 2: Notify contractor in writing

[Date]

[Contractor Name],

I am withholding payment of $[Amount] due [Date] for the following
reasons:

1. [Specific issue with contract reference]
2. [Specific issue with contract reference]

To release payment, please:
- [Specific action required]
- [Specific action required]

I'm happy to discuss these issues and work toward resolution.

[Your Name]

Step 3: Give reasonable time to cure

Step 4: Re-inspect and pay when resolved

What NOT to do:

The line: You can withhold for legitimate contract breaches, not to be difficult

Payment Timing

How quickly should you pay after verification?

Standard: 5-7 business days from verification

Reasonable: 10 business days

Slow: 14+ business days (will frustrate contractors)

Unreasonable: 30+ days (breach of contract typically)

Best practice: Pay within 5 business days

Exceptions: Legitimate issues that require withholding (see above)

Payment Methods

Recommended: Check

Pros:

Best practice:

Also Good: ACH/Bank Transfer

Pros:

Cons:

Acceptable: Credit Card (Rarely Used)

Pros:

Cons:

Never: Cash

Why not:

If contractor insists on cash: Major red flag, find different contractor

Late Payment Penalties (If You're Late)

Some contractors include late payment terms:

Are these enforceable? Usually yes, if in contract

How to avoid:

Legitimate delays:

Not legitimate:

Payment Disputes

What to do when you disagree about payment:

Common Disputes

  1. Work not complete to contractor's claim
  2. Quality not acceptable
  3. Amount owed differs between you and contractor
  4. Extras not approved but contractor wants paid
  5. Inspection failed, who pays to fix

Resolution Process

Step 1: Review contract

Step 2: Document your position

Step 3: Meet and discuss

Step 4: Written resolution

Step 5: Formal dispute resolution (if can't resolve)

Most disputes resolve at Step 3

Example Dispute Resolution

Issue: Framing contractor claims final payment ($3,000) is due. You see several punch-list items incomplete.

Wrong approach: Ignore their calls, refuse to pay, no explanation

Right approach:

  1. Create punch list with photos
  2. Email contractor: "I have the following items remaining per our contract before final payment: [list]. Once these are complete, I'll process payment within 5 days."
  3. Meet on site to review list
  4. Contractor completes items or you negotiate
  5. Verify completion
  6. Pay promptly

Resolution: Professional, documented, fair

Payment Records to Keep

For taxes, insurance, resale, legal protection:

Required Documentation

How Long to Keep

Organization System

/Project Name/
  /Contracts/
    Framing Contract - Signed.pdf
    Plumbing Contract - Signed.pdf
  /Payments/
    Framing Payment 1 - $5000 - Check 1001.pdf
    Framing Payment 2 - $5000 - Check 1015.pdf
  /Lien Releases/
    Framing - Conditional Release 1.pdf
    Framing - Final Unconditional Release.pdf
  /Inspections/
    Framing Inspection - Passed 6-15-24.pdf
  /Invoices/
    [All invoices]

Payment Schedule Checklist

Before first payment:

Before each progress payment:

Before final payment:

Next Steps

Understanding payment practices also requires:

  1. Contract Essentials → - What should be in your payment terms

  2. Managing Subs → - Coordination with payment schedule

  3. Dealing with Problems → - What to do when payment disputes arise

**Remember