On most construction projects, contractors get paid through a structured process rather than a single payment at the end. Your contract determines how payments are calculated, when they are due, and what rights you have if payment is delayed. Clear payment terms help protect your cash flow and reduce disputes before they start, so you can keep the project moving.
The Construction Payment Process
Before Work Begins: Confirm the Owner’s Financing
Before work begins, you may want confirmation that the owner has the financial resources to pay for the project. Many standard contract agreements permit the contractor to request evidence of the owner’s financing. For example, A201® – General Conditions of the Contract for Construction gives you the right to ask for proof, before and during the work, that the owner can meet payment obligations. A201 also covers when you may delay or stop the work if the owner does not provide that proof.
The documents that are typically used to make that request include:
- G728™ – Request for Evidence of Owner’s Financial Arrangements
- G729™ – Owner’s Response to Request for Evidence of Owner’s Financial Arrangements
Construction Payment Applications: How They Work
Payments from an owner to a contractor are typically based on a percentage of completion of the work or on completion of project milestones.
When payment is based on a percentage of completion, contractors submit payment applications, typically at monthly intervals, detailing the work performed during that month. This approach, known as progress billing, is the most common payment method on commercial construction projects. The amount of each monthly application is part of the total contract sum.
Most contractors submit these applications using G702® – Application and Certificate for Payment and G703® – Continuation Sheet, or a variation based on the project’s delivery method.
If an architect is providing contract administration services, the architect reviews the contractor’s payment application and recommends whether the owner should pay it in whole or in part. If an architect is not providing these services, the owner will typically review the application instead.
Final payment at project completion is typically due when the substantial completion milestone has been reached, a final inspection is passed, and when the owner is satisfied that the punch list items have been completed.
Schedule of Values: The Foundation of Progress Payments
For stipulated sum or guaranteed maximum price contracts, the contractor typically prepares a detailed schedule of values before the start of the work, to be agreed upon with the owner. The schedule of values is a line-item list of each item (materials and labor) included within the scope of work, broken down by cost and schedule. Each payment application is then based on an updated schedule of values as work is completed. The schedule of values helps both parties track progress, plan cash flow, and support accurate payment applications.
Milestone Payments for Smaller Projects
Another payment method, often used on smaller projects, is based on the completion of construction milestones. In a residential renovation project, for example, milestones could include completion of demolition, framing, and drywall installation. The contract should include a list of the milestones and the amount due at completion of each.
Lien Waivers and Other Payment Documentation
Before releasing payment, the owner or construction lender may require lien waivers, releases, warranties, or other documentation specified in the owner/contractor agreement. A lien waiver is a document in which a contractor, subcontractor, or supplier confirms receipt of payment and gives up the right to file a lien against the property for that amount. Types of lien waivers include conditional, unconditional, progress, and final waivers.
Paying Subcontractors: Pay-When-Paid vs. Pay-If-Paid
The prime agreement should also specify when you will make payments to subcontractors, for example, within seven days of receipt of payment from the owner. The owner also has the right to ask for proof that you have paid subcontractors and suppliers from the amounts the owner paid you for that work.
Some agreements tie the timing of subcontractor payments to the contractor’s receipt of payment from the owner.
A pay-when-paid clause makes payment to the subcontractor due within a stated period after the contractor is paid. A pay-when-paid clause affects when a subcontractor is paid, not whether they are paid. The contractor still owes the subcontractor payment, even if the owner never pays.
A pay-if-paid clause goes further and may shift the risk of the owner’s non-payment to the subcontractor. Courts interpret pay-if-paid clauses differently from state to state, so review your subcontract language with legal counsel before relying on this clause.
Retainage in Construction Contracts
Retainage is a percentage of each payment the owner withholds until a specified project milestone or upon project completion. The contract should clearly state how much will be withheld and when it will be released.
The retainage may be released in part as the project progresses, known as partial release of retainage, or released in full after completion of the work. Before signing the contract, negotiate when the retainage will be released. Partial release, as the project progresses, can improve cash flow on longer projects.
Your Rights When the Owner Doesn’t Pay
Your contract should state how many days the owner has to make the payment after receiving a payment application, and the amount of interest, if any, owed on late payments.
A201 gives you the right to stop the work when payment stalls. If the architect does not issue a certificate for payment within seven days of receiving your payment application, or the owner does not pay within seven days of the date set in the contract documents, you may stop the work after giving seven days’ notice. You are also entitled to an extension of the contract time and an increase in the contract sum to cover the delay.
The agreement should also state when payment failure is grounds for termination of the contract. Under A201, you may terminate the contract if the work has stopped for 30 consecutive days because the architect has not issued a certificate for payment and has not explained why, or because the owner has not paid within the time stated in the contract.
The owner may also terminate the contract if you fail to pay your subcontractors or suppliers under their agreements. The agreement should spell out the remedies for each type of termination.
Put Clear Payment Terms in Writing
Payment disputes often come down to unclear contract language, not unfinished work. A well-written owner/contractor agreement defines how you’re paid, when payment is due, what documentation is required, and what happens if payment is delayed. Clear payment terms keep projects moving.
AIA documents include standards-backed language for every stage of the construction payment process, from evidence of owner financing and payment applications to retainage and final payment. With an unlimited subscription, you get access to the entire AIA document library, so every project starts with trusted documents that protect cash flow and reduce payment disputes.
Frequently Asked Questions
A construction payment application (often called a pay application or pay app) is the contractor’s formal request for payment. It documents the work completed during a billing period and the amount due under the contract. Many contractors use AIA G702Â and AIA G703 to organize and submit payment applications.
Most contractors submit progress payment applications monthly unless the contract specifies milestone payments or another billing schedule. The contract should clearly define when payment applications are due and how long the owner must review and pay them.
A pay application is more detailed than a standard invoice. It typically includes a schedule of values, work completed to date, stored materials (when applicable), retainage, and the amount requested for payment. An invoice simply requests payment, while a pay application documents how the requested amount was calculated, which is more common on complex construction projects.
The Schedule of Values breaks the project into individual line items for materials and labor costs that support each pay application. It helps owners, contractors, and architects track progress, review payment requests, and manage project cash flow.
Your contract should specify how long the owner has to make a payment and what remedies are available if payment is delayed. Depending on the agreement, contractors may have the right to stop work, recover interest on late payments, or terminate the contract after following the required notice procedures.
Retainage is a percentage of each payment that the owner withholds until specified milestones or project completion to help ensure the work is completed as agreed.
