If you’re a contractor or subcontractor looking to expand your company, having clear terms and conditions in place is crucial. Not having such established conditions would negatively affect your customer, which is not advantageous for your company. In this post, we will be discussing typical payment terms for contractors.
Your contractor payment terms are one of the most crucial details you must attend to. If you’re a contractor, whether general or speciality, you may set your payment terms for building projects. Careful consideration is required since you are working to meet requirements in the building business, specifically in terms of the payment schedule.
Inconsistent payments and late payments may result if you do not have appropriate payment terms and conditions. Additionally, landlords might take advantage of the situation by having tenants work longer hours for the same income. In light of this fact, it is crucial for every independent worker or contractor to have clear payment terms established in advance.
Irregular and inconsistent payment terms are a huge business risk.
Now the issue is, how can you build a payment contract from the start without any previous knowledge? Use Moon Invoice to make accurate and presentable quotes and invoices. But let’s ignore it for the moment and discuss how to set up payment terms for contractors and what other considerations need to be made.
What is a Payment Term for a Contractor?
In general, payment terms are the conditions governing the payment component of a transaction, which the seller often communicates to the purchaser.
The terms of payment detail how much money the client must pay the general contractor in accordance with the final price. Typically indicated on invoices, payment terms outline a fair period during which the customer must pay for a service.
These keywords provide extra information, including:
- Acceptable Payment Methods
- Late Fees and Penalties
- How fast does the contractor anticipate payment after the completion of service?
- Any specific payment terms negotiated with the customer
Common Payment Terms for Contractors
If you’re a homeowner or a subcontractor, what should you anticipate when collecting payment? What kind of payment scheduled payments could a subcontractor anticipate for receiving the final payment?
Contractors are far more forgiving than they should be regarding payment conditions, as shown in the Levelset 2020 Construction Survey. Nearly half of all construction firms provide consumers with 30 days or more to settle their debts. Furthermore, 8% provide payment periods longer than 45 days.
Just 11% of construction businesses routinely add interest or penalties for payments that are made late. As much as 21% interest is added on for late payments.
Unfortunately, there is no incentive for a consumer to make an early and immediate payment.
Independent contractors have certain expectations on how their customers will compensate them, and they are outlined in the typical payment terms for contractors. Independent workers often have their payment terms spelt out in written agreements. Your business is agreeing to the freelancer contract’s conditions by signing it.
Common Construction Payment Terms by Project Size
The most prevalent payment structures may be classified mainly by the magnitude of the respective projects. Some phrases are exclusive to residential construction projects, while others are more frequent in commercial construction.
Standard payment schedules for major construction projects
Even smaller percentages are typically required for deposits on large residential projects, such as homebuilding. It’s very uncommon for a general contractor to ask for a 5-10% deposit followed by draws or progress payments at various points in the project’s duration.
Using these draws, the general contractor will make payments to its subcontractors.
However, applying this strategy to business endeavours is impossible. Generally, commercial contracts do not include deposits for general contractors. Instead, they’ll need to use their money or credit to keep the project working. Their subcontractors, in turn, will need to float their work on the project, and so on.
Payment-in-progress is standard practice for such projects. They correspond to the project’s development or value timetable. Each month, subcontractors will need to submit a payment request.
The subcontractors may also be required to wait for payment if the general contractor included a “pay when paid” condition in their contracts.
Commercial renovations might take months so you can forget about the 30-day payment terms for homes. Subcontractors may have to wait an average of 83 to 90 days to get paid after submitting an invoice.
Commercial ventures must also think about customer retention. Most subcontractors have to hold onto their money not just until the general contractor is paid but also until the end of the project (far after they have finished their work).
Until the final checks make their way down the chain, they will be in the red since the amount of retainage will be larger than their profit margin.
Standard payment schedules for medium-sized projects
Medium-sized projects often have contractor payment terms that are structured similarly to smaller works, with a few minor adjustments made by the contractor.
Medium-sized projects, such as those that take a few months to complete, are often completed by contractors in phases. Therefore, deposits are often lower, and payments are staggered at different stages. The down payment kickstarts the project, and the regular instalments keep it going.
Consider the case of a house makeover that will cost $100,000 and take six months to finish. The contractor may ask for 15% down, 25% after the first month, 30% after the second month, and the remaining 30% upon completion of the work.
The advance and down payment is taken to cover unforeseen project-related expenses.
The contractor must provide an invoice detailing the current balance and the due date for each instalment. It has already been established that it is not unusual for contractors to extend the payment deadline beyond the standard 30 days.
Standard conditions for funding smaller projects
Generally, contractors would ask for bigger percentages of the total cost upfront from smaller projects than larger ones. Typically, this initial deposit sum will cover the cost of the supplies and a portion of the work.
One must pay between 10 percent and 50 percent of the total cost before any work begins. The remainder of a project’s payment schedule is often not determined until after completion, after the first down payment.
Consider a simple garage renovation as an example. The contractor and the homeowner agree that $3,000 is fair. The typical first payment made by a homeowner to a contractor is $1,000.
Therefore, the remaining $2,000 is required upon the contractor’s completion of the deck.
The contractor hands in a $2,000 bill after the job is done. In most cases, homeowners are required to pay invoices for minor projects immediately upon receiving them. Also, Moon Invoice helps calculate contractor insurance costs by generating the contractor insurance invoice.
Make Your Invoice More Definite with Payment Terms
Moon Invoice lets businesses and professionals to add payment terms at the bottom of the invoice, making invoice more clear and concise.
How to Improve Your Payment Term Timely?
When managing and optimizing cash flow, few decisions are as crucial as selecting the most suitable payment terms for your company. To help you choose what terms to include in your invoice, consider the following:
Become familiar with the common terminology used in your field.
Many companies operate under the “Net 30” policy, which requires payments to be made within 30 days. However, it would help if you thought about what your consumer is used to when deciding on payment terms since they might differ from business to industry.
In the transportation sector, payment terms might range from 30 to 120 days. In landscaping, it is more customary to agree to terms of net 7.
Be aware of the cash flow situation at your company.
When establishing payment terms for invoices, it is vital to consider client expectations and industry norms. However, meeting your cash flow demands should be your priority.
As a result, it is essential to negotiate payment conditions after having a thorough understanding of your cash flow status.
When a client asks for trade credit, do you have the resources to provide it to them? What is your cash flow situation like? If you provide favourable payment terms, will it affect your ability to fulfil your financial commitments? Your ability to negotiate favourable conditions depends on your understanding of your company’s cash flow.
Impose penalties for late payments.
You may need to include late penalties or interest rates on your invoices to ensure you get paid on time. If a client is late in making a payment, you may charge them a late fee as a percentage of the sum due on the invoice.
Increasing their cash outflow is the last thing any business wants to do. So, these charges may encourage prompt payment or communication from clients who would otherwise go unnoticed.
Overdue payments are usually assessed a late charge of between 1.5% and 2%. But be sure to include the terms of the payment schedule on the invoice and the date by which it must be paid.
Use cutting-edge strategies to provide discounts for early payments
Customers might be incentivized to pay you on time by offering early discounts. Each party may profit from these reductions: the client can save money, and your business can get paid more quickly, increasing its cash flow.
Furthermore, you may prevent accruing additional debt by making use of creative invoicing strategies, such as early payment reductions. Early payment discounting may be accomplished using either a static or dynamic formula.
Customers are usually only provided two payment alternatives when using static discounting: full payment throughout the whole period of the invoice or a reduced amount paid by a certain date.
If a business agrees to terms of 2/10, for instance, it will save 2% on its invoice if it pays in full within the first 10 days after the invoice date. Alternatively, if the consumer pays the whole amount in less than 30 days, they will get a 2% reduction.
Suppose you’d want to provide your clients an incentive to pay their bills early. In that case, dynamic discounting is a more adaptable and cutting-edge alternative that allows you to monitor their invoices online and send them a payment request whenever you choose in return for a discount.
Make sure all of the terms are well-defined and written down.
Ensure all contracts and invoices clearly state the total amount owed, payment date, any applicable discounts or late penalties, and other relevant information. It is to your advantage to have clients fully grasp and accept your payment conditions.
Give new clients an oral explanation and put one in writing in the agreement or first communication. This will aid in avoiding misunderstandings and give supporting evidence in the case of a disagreement.
If your client does not make timely payments, having your conditions recorded in writing will offer you some leverage.
Set Your Payment Terms in Moon Invoice
There is a lot of rivalry in the market; therefore, maintaining a professional attitude about payments is essential. You may take several approaches to achieve an invoice format that works for you and your customer.
You can typically find a place to fit this information in if you’re using a Word or Excel invoice template; just be careful not to change the main layout of your invoice, or you risk losing customers and damaging your reputation.
Using Moon Invoice’s online invoicing software, you may use specialized sections for the payment conditions. You may discover a user-friendly layout that provides several options.
You may quickly and easily create estimates and invoices that adhere to standard industry practices for contractor payments. Try using an online estimate generator, invoice generator, or profit margin calculator on Moon Invoice and get rid of manual dependencies once and for all.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
