Contractor Payment Terms and Late Fees: How to Get Paid on Time
Deposits, milestones, net terms, late fees, retainage, and the pay-if-paid clause that can leave you unpaid entirely. What each one means and how to set yours.
The short version
- Tie every payment to a verifiable milestone, not a calendar date. "On completion of rough-in" is provable; "on the 15th" invites an argument.
- Shorter net terms cost you nothing to ask for. Net 14 is entirely reasonable for residential work; net 30 is a commercial-sector habit, not a law of nature.
- A late fee only works if it is in the contract, specific, lawful in your state, and actually enforced. States cap interest rates, and unlawful rates can be unenforceable.
- Pay-if-paid and pay-when-paid are not the same clause. One delays your payment; the other can eliminate it. Know which one you signed.
Good contractor payment terms do four things: take a deposit before you commit resources, tie progress payments to milestones you can prove, keep the net period short, and make late payment expensive enough that you are not the client's cheapest source of credit.
That last point is the one that goes unspoken. When you deliver work and wait sixty days to be paid, you are financing your client's business at zero interest — while paying your own suppliers and crew on time. Payment terms are the mechanism that stops it.
The structure of a payment schedule
A well-structured schedule keeps you slightly ahead of your costs at every stage of the job. You should never be in a position where you have spent significantly more than you have collected.
| Payment | Trigger | Typical share | What it covers |
|---|---|---|---|
| Deposit | On signing | 10–33% (subject to state caps) | Scheduling, initial materials, commitment |
| Mobilisation | Materials delivered to site | 20–30% | Material costs before labour begins |
| Progress 1 | Defined phase complete (rough-in, first fix) | 20–25% | Labour to date |
| Progress 2 | Second defined phase complete | 15–20% | Continuing labour |
| Substantial completion | Work usable for its intended purpose | 10–20% | Bulk of remaining balance |
| Final | Punch list done, inspection passed | 5–10% | Retention against snagging |
Deposits: know your state cap
Several states limit what a residential contractor may collect before work starts — expressed as a percentage of the contract, a flat dollar figure, or the lower of the two. Some require the deposit to be held in a specific way.
Exceeding the cap is not a technicality. It can expose you to penalties and action against your licence, and it can make the payment provision unenforceable. Check your state contractor licensing board before setting a standard deposit percentage.
Net terms: how long the client has to pay
Net terms define the window between invoice and payment. Every day you add is a day you fund the job.
| Terms | Meaning | When it fits |
|---|---|---|
| Due on receipt | Payable immediately | Small residential jobs, one-off customers |
| Net 7 | Seven days from invoice date | Residential work, established clients |
| Net 14 | Fourteen days | A good default for most small contractors |
| Net 30 | Thirty days | Commercial clients, GC relationships |
| Net 45 / 60 | Forty-five or sixty days | Large commercial and institutional work — price this in |
| 2/10 net 30 | 2% discount if paid within 10 days, otherwise due in 30 | When you want to buy speed with margin |
The 2/10 net 30 structure is worth understanding. You are offering a 2% discount to be paid twenty days earlier. Annualised, that is expensive money — roughly 36% — so use it deliberately, on invoices where the cash timing genuinely matters, not as a standing policy.
Late fees that actually work
A late fee is only useful if it satisfies four conditions.
- It is in the signed contract. Adding a late fee to an invoice when the contract never mentioned one is generally unenforceable.
- It is specific. State the rate, the basis (monthly or annual), and when it starts accruing.
- It is lawful in your state. States cap the interest rate you can charge on overdue commercial debt. Exceeding the cap can render the provision void — and in some states carries further consequences.
- You actually apply it. A late fee you never charge trains clients that your terms are decorative.
"Invoices are due within fourteen (14) days of the invoice date. Undisputed amounts remaining unpaid after the due date accrue interest at 1.5% per month (18% per annum), or the maximum rate permitted by applicable law, whichever is lower, calculated from the due date until paid in full. Client is responsible for all reasonable costs of collection, including attorney fees."
The "or the maximum rate permitted by law, whichever is lower" phrasing matters. It keeps the clause enforceable even if your stated rate exceeds a state cap, rather than voiding the provision entirely.
The suspension right beats the late fee
Interest accruing on an unpaid invoice does not help your cash position this month. The right to stop work does.
"If any undisputed invoice remains unpaid more than seven (7) days after its due date, Contractor may suspend work on written notice until payment is received. The completion schedule shall be extended by the period of suspension plus a reasonable remobilisation period, and remobilisation costs shall be charged to Client."
This is the clause that changes behaviour. A client who is slow to pay usually becomes prompt when the crew stops arriving.
Retainage
Retainage is a percentage of each progress payment held back until the job is complete — security for the owner that snagging will be finished.
It is standard on commercial and public work, historically 5–10%. Many states now regulate it: capping the percentage, requiring release within a set period after substantial completion, and requiring interest on retainage held in escrow. Several states have tightened these limits in recent years, so check your current state statute rather than relying on what was true a few years ago.
If your contract includes retainage
- The percentage is within your state's statutory cap
- There is a defined release date — commonly tied to substantial completion, not to the owner's convenience
- Retainage reduces or stops after a set percentage of completion, if your state allows it
- You know the deadline for demanding release, and it is in your calendar
- Subcontractor retainage you hold matches the terms you are subject to upstream
Pay-when-paid vs pay-if-paid
If you subcontract to a general contractor, this is the most consequential distinction in your agreement, and the two clauses look almost identical on the page.
| Pay-when-paid | Pay-if-paid | |
|---|---|---|
| What it does | Delays the timing of your payment until the GC is paid by the owner | Makes the GC being paid a condition of your right to payment at all |
| If the owner never pays | You are generally still owed — after a reasonable time | You may have no claim against the GC |
| Who carries the risk | The general contractor | You |
| Enforceability | Widely enforced as a timing mechanism | Void or heavily restricted in a number of states; elsewhere requires very clear language |
Either way, protect your lien rights independently. A lien runs against the property, not against the general contractor's solvency — which is exactly why it survives when a payment clause does not.
Getting paid faster: the operational side
Terms set the framework. Habits determine whether you actually collect.
- Invoice the day the milestone is hit. An invoice sent a week late is paid a week late, plus the delay you built in.
- Attach the evidence. Photos of completed work, the signed inspection, the delivery note. It removes the "let me check with my husband" step.
- Invoice the deposit the same day the contract is signed. Momentum is highest at signature and decays quickly.
- Make paying trivial. Bank details on the invoice, a card link, whatever removes friction. Every extra step adds days.
- Follow up on a schedule. Day 1 after due date, day 7, day 14 by phone. Consistency reads as professional, not aggressive.
- Escalate deliberately. Suspension notice, then formal demand, then lien notice within your state's deadline. Know the deadlines before you need them.
Payment terms clause you can adapt
Payment. The Contract Price is $[amount], payable as follows: (a) $[amount] on execution of this Agreement; (b) $[amount] on delivery of materials to the site; (c) $[amount] on completion of [defined milestone]; (d) the balance on Substantial Completion and passing of final inspection. Invoices are due within fourteen (14) days of the invoice date. Undisputed amounts unpaid after the due date accrue interest at 1.5% per month (18% per annum) or the maximum rate permitted by law, whichever is lower. If any undisputed invoice remains unpaid more than seven (7) days after its due date, Contractor may suspend performance on written notice until paid, and the schedule shall be extended by the period of suspension plus reasonable remobilisation time. Client shall pay all reasonable costs of collection, including attorney fees. Client may withhold payment only for amounts genuinely disputed in good faith, and must notify Contractor in writing of the basis for any dispute within five (5) days of receiving the invoice.
That last sentence is quietly important. Without it, a client can withhold the entire invoice over one disputed line item. With it, they must identify the dispute and pay the rest.
Frequently asked questions
What late fee can a contractor legally charge?
It depends on your state — most cap the interest rate chargeable on overdue debt, and the cap can differ between consumer and commercial transactions. Rates around 1–1.5% per month are common in contracts, but the enforceable maximum is set by state law. Always include the phrase "or the maximum rate permitted by law, whichever is lower" so an over-stated rate does not void the whole clause.
Can I charge a late fee if it is not in the contract?
Generally no. A fee added unilaterally to an invoice, when the signed agreement never mentioned one, is not a term of the contract. Put late-payment provisions in the contract before the work starts — retrofitting them onto an invoice does not work.
What deposit percentage is normal for a contractor?
10–33% is the common range, weighted toward the higher end when you are ordering materials up front. Several states cap residential deposits by percentage or dollar amount, so the ceiling is set by law rather than by convention. Check your state contractor board before you standardise a figure.
What is retainage and do I have to accept it?
Retainage is a percentage withheld from each progress payment until the work is complete, typically 5–10% on commercial jobs. It is negotiable on private work and often mandated on public work. Many states cap the percentage and require release within a set period after substantial completion — check the current statute, since several have tightened these rules recently.
Should I stop work if a client does not pay?
Only if your contract gives you the right, and only after following the notice procedure it specifies. Walking off site without a contractual suspension right can put you in breach — turning a payment dispute into a much worse problem. This is exactly why a suspension clause belongs in every contract you sign.
How do I handle a client who disputes part of an invoice?
Require, in the contract, that disputes be notified in writing within a short window and that undisputed amounts be paid on time regardless. That prevents a small disagreement being used to withhold the whole invoice. Address the disputed item separately and in writing, and keep working the rest of the payment schedule.