Payment Terms in Construction and Trades
The short answer: Construction runs on milestones, not Net X. 40–50% deposit on residential remodel, monthly progress billing with retention on commercial, due-on-completion on service calls. Lien waivers exchanged with payment are the rule, not the exception.
Why construction payment cycles are different
Construction is the only industry with a statutory collection mechanism — the mechanic's lien — built into nearly every state's law. The lien gives the contractor priority over the property for unpaid work, which dramatically shifts the negotiating dynamics versus a freelancer or consultant chasing a Net 30 receivable. As a result, construction payment terms developed differently: rather than relying on Net X cycles, the industry runs on progress payments tied to physical milestones, with retention held back as a finisher's incentive.
The other distinctive feature: construction work has high upfront material costs. A residential remodel contractor ordering $20,000 in materials before starting work needs the customer's deposit to fund those orders. A 40–50% deposit isn't aggressive — it's arithmetic. The deposit covers materials at-risk; the contractor's margin is in the labor that follows.
The standard construction payment cycle
Residential remodel (typical $20K–$150K project)
- Deposit on contract signing: 40–50%
- At rough-in inspection: 25–30%
- At substantial completion: 20–25%
- Retention (released after punch list): 5–10%
Commercial construction (monthly progress billing)
- Monthly billing using AIA G702/G703 forms
- 10% retention typical, held until substantial completion
- Net 30 from invoice approval (note: approval, not submission — getting the architect's signature can add 1–2 weeks)
- Final retention release after punch-list completion and any required documentation (warranty, O&M manuals, lien releases)
Service and repair (HVAC, plumbing, electrical, handyman)
- Due on completion, paid before the truck leaves
- Diagnostic fee billed up front, credited toward repair if accepted
- Net 15 or Net 30 only for established commercial accounts on master service agreements
Retention — what it is and why it exists
Retention (or retainage) is the portion of each progress payment that the owner withholds until the project is substantially complete and the punch list is resolved. Typical: 5–10%. Some state laws cap retention rates on public-works projects (California limits public-works retention to 5%; other states have similar caps). The retention protects the owner against the contractor walking off the job at 90% complete and gives the punch-list process real leverage — the contractor wants the retention released, so the punch-list items get done.
Retention applies to subcontractors too, sometimes layered: the GC withholds retention from the subs at the same percentage the owner withholds from the GC. The retention timing flows downstream — subs get their retention when the GC gets retention released, which can mean a sub waits 6–12 months from completion of their work for their retention.
Lien waivers — the document that goes with every payment
Mechanic's lien rights are valuable, which is why payments in construction come paired with lien-waiver releases. The standard pattern:
- Conditional waiver on progress payment — signed by the contractor before payment, effective only when the payment clears.
- Unconditional waiver on progress payment — signed after the progress payment clears, releasing lien rights for that period's work.
- Conditional waiver on final payment — signed when invoice for final payment is submitted.
- Unconditional waiver on final payment — signed when final payment clears, releasing all remaining lien rights for the project.
California, Texas, Florida, Arizona, and several other states have specific statutory forms for each waiver type — using a non-statutory form may not be legally effective in those states. Consult a construction attorney for state-specific forms before using your own draft.
Comparison: how construction differs from adjacent industries
| Industry | Default term | Upfront | Collection tool |
|---|---|---|---|
| Construction (residential) | Milestones | 40–50% | Mechanic's lien |
| Construction (commercial) | Net 30 + retention | Per AIA forms | Mechanic's lien |
| Service / repair | Due on completion | Diagnostic fee | Limited lien rights |
| Manufacturing | Net 30 / 60 | Sometimes | Standard |
| Consulting | Net 30 | 25% retainer | Standard |
Frequently asked questions
What's the standard payment schedule for construction work?
Highly milestone-driven, varying by project type. Residential remodel: 40–50% deposit at contract signing, progress payments at major milestones (rough-in, drywall, finish), 5–10% retention released at punch-list completion. Commercial construction: monthly progress billing using AIA G702/G703 forms with retention typically 10%. Service-and-repair (HVAC, plumbing, electrical service calls): due on completion, paid before the truck leaves. Government and federal construction: governed by the Prompt Payment Act with 14-day or 30-day terms depending on contract type.
What's retention (or retainage)?
Retention is a portion of each progress payment — typically 5–10% — that the owner withholds until the project is substantially complete and any punch-list items are resolved. The retention protects the owner against incomplete or defective work and gives them leverage to ensure the contractor finishes properly. Retention rates vary by state law (some states cap retention at 5%; California limits it to 5% on most public works), by project type (commercial typically 10%, residential 5–10%), and by contract terms. The contract should state the retention percentage explicitly.
How do AIA G702 and G703 forms work?
AIA G702 (Application and Certificate for Payment) and G703 (Continuation Sheet) are the standard payment-application forms used in commercial construction. The contractor fills out G703 with line items showing each contract category, the percentage complete, the dollar amount earned this period, retention withheld, and the amount due. G702 is the cover sheet summarizing the total and capturing the architect/owner approval signature. Together they form a payment application that gets reviewed and approved (or revised) before payment. Subcontractors may use the same form structure billed up through the GC.
What are lien waivers and when do they get exchanged?
Lien waivers are written releases of mechanic's lien rights in exchange for payment. There are typically four types: conditional waiver on progress payment (signed in advance, effective only when payment clears), unconditional waiver on progress payment (signed after payment clears), conditional waiver on final payment, and unconditional waiver on final payment. The pattern: contractor signs a conditional progress waiver to get the next progress payment; once the payment clears, signs the unconditional version. State requirements for lien-waiver language vary — California and Texas have specific statutory forms; consult state-specific lien-waiver requirements before drafting your own.
What's the difference between residential and commercial construction payment cycles?
Residential remodel work runs on shorter cycles with bigger upfront deposits. A typical residential bath or kitchen remodel: 40% deposit, 30% at rough-in, 25% at substantial completion, 5% retention released after punch list. The whole cycle might be 8–12 weeks. Commercial construction runs on monthly billing cycles tied to AIA forms with 10% retention; the cycle from bid to final retention release can be 6–18 months on a large project. Service-and-repair (a plumber fixing a leak) runs on the simplest cycle: due on completion, paid before the truck leaves.
What if a customer doesn't pay a construction invoice?
Construction has the strongest collection tools of any industry. After a properly served preliminary lien notice (deadlines vary by state — typically 20 days from first work performed) and a notice of intent to lien, the contractor can file a mechanic's lien against the property. The lien gives the contractor priority over the property for the unpaid amount and can force a sale to satisfy the debt. Filing requirements are state-specific and have strict deadlines (typically 60–90 days from last work performed). Don't miss the deadline — once it passes, the lien rights expire. For larger amounts, consult a construction attorney early in the dispute.
How does a contractor's deposit handling differ from a freelancer's?
Construction deposits are larger (40–50% vs. freelance's 25–50% on smaller projects) because the contractor's cost of materials is significant — a 40% deposit on a $50,000 remodel is $20,000, often roughly equal to the materials cost the contractor has to pre-order. Most states allow contractors to keep deposits as legitimate progress against materials and labor; some require the deposit to sit in a separate account if the project is canceled. Contracts typically state the deposit is non-refundable once materials are ordered.