Payment Terms | Construction Project Contracts

Contractors are not in the business of working for free.  (Or at least I do not think so.)

It is important to define in the construction contract when payment is expected.  How you draft this section depends on whether you are contracting with the property owner or another contractor.

Payment Terms for Contractor to Unsophisticated Property Owner

Contractors who are performing residential remodels and smaller residential projects may have unsophisticated property owners.  In these situations its best to request payments in understandable phases instead of progress payments at a percentage completed or weekly. 

An example would of this is

  • Payment at foundation inspection
  • Payment at rough framing inspection
  • Payment at rough plumbing inspection
  • Etc.

Payment Terms for Subcontractor to General Contractor

Payment terms should be drafted differently when the contract is subcontractor to contractor. 

The payment schedule should be weekly, monthly or on percentage.

Subcontractors should be mindful of “pay when paid” or “pay if paid” provisions in the contract. If your payment is tied to the property owner’s payments to the general contractor and there is any delay in paying the general contractor, the subcontractor’s payment will be delayed no matter what the payment terms say. Read about Key Contract Clauses & Other Quick Tips for Avoiding Liability.

Non-Payment Sentence for Payment Clause

In this author’s opinion, one of the most left out sentences in the payment clause is a sentence defining the general contractor/subcontractor’s rights when payment is overdue.  When this sentence is absence, which it is most of the time, the contractor is left in a precarious position.  The contract has some “not so good” choices.  The contractor can stop working, which puts the property owner in position to claim the contractor breached the contract and seek damages OR the contractor can continue to work until the project is finished and then start legal action to collect the monies owed.  Both actions can be costly.

The best approach is to draft a sentence in the payment clause contract that allows the contractor to stop working without being in breach of the contract until payment is made.  There is no standard language for this sentence.  

Find out more about Scope of Work and Change Orders so you are prepared entering in to your next project.

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