Contractor Payment Schedules: How They Work and What to Agree Before You Start

There are two common structures for construction payment schedules: stage payments (based on calendar time) and milestone payments (based on defined completion events). Both are legitimate — but milestone payments are generally better for the client because they tie payment to delivery rather than time.

**Stage payments (time-based)**: Payments are made at defined calendar intervals — for example, weekly or monthly valuations where the contractor submits an application for payment covering all work done to date. Common in larger commercial contracts and on longer residential refurbishments. Under the Housing Grants, Construction and Regeneration Act 1996 (as amended), any construction contract over a certain threshold must include payment terms — and most commercial contracts use a monthly valuation cycle.

For domestic clients (homeowners commissioning works on their own home), the 1996 Act does not apply directly — but its principles of interim payments and the right to be paid for work done underpin most standard construction contracts.

• **Milestone payments (event-based)**:
• Payments are triggered by defined, verifiable completion events — for example:
• •Deposit (before mobilisation): 10–20%
• •Completion of groundworks and slab: 15%
• •Completion of superstructure (walls and roof weathertight): 20%
• •Completion of first fix (plumbing, electrics, insulation, plasterboard): 15%
• •Completion of second fix and decoration: 15%
• •Practical completion and handover: 15%
• •Retention release (after defects period): 10%

Milestone payments are preferable for clients because they require the contractor to complete a defined, visible scope of work before a payment is triggered — reducing the risk of paying ahead of value delivered.

**The deposit**: A deposit is standard practice on residential construction projects and is legitimate for genuine mobilisation costs (material orders, scaffold erection, preliminary site setup). A deposit of 10–15% of the contract value is reasonable. Be cautious about deposits over 20% — the more you pay upfront, the less leverage you have if problems arise. Never pay a deposit without a signed contract in place.

The payment clause in your contract should specify:

**1. Payment milestones or intervals** Clearly defined — either as dates (for stage payments) or as verifiable completion events (for milestone payments). Avoid vague milestones like 'completion of first stage' — define exactly what is included (e.g., 'foundations excavated, concrete poured, inspected by Building Control, and floor slab completed').

**2. Payment amount at each stage** The £ amount or % of contract value due at each milestone. These should add to 100% across all milestones, including the retention release.

**3. Retention** Retention is a sum withheld from each interim payment — typically 2.5–5% of the contract value — held as security against defects. Retention is held until practical completion (when half is typically released) and the remainder is released after a defects liability period (typically 6–12 months). For a £60,000 extension, 5% retention = £3,000 — a meaningful sum.

**4. Payment period** How many days from the contractor's application to payment. Standard residential contracts: 7–14 days from invoice. Ensure your contract specifies the payment period — a contractor should not expect to be paid on the same day an invoice is submitted.

**5. What happens on variation** Any change to the agreed scope of works (a variation) should be agreed in writing before it is executed, with a fixed price or day rate clearly stated. The contract should specify that variations require written sign-off from the client and a written quote from the contractor before the additional work proceeds.

**6. What triggers the final payment** Clearly define what 'practical completion' means for the final payment: a completed snagging list, Building Control sign-off, all services commissioned and working, and all waste removed from site.

• **Red flags in payment terms**:
• •**Upfront payment of more than 20% before any work starts**: aggressive upfront payments remove the client's leverage and are common in cowboy contractor operations. Legitimate contractors do not need more than 10–15% upfront.
• •**No retention provision**: a contractor who refuses any form of retention is not giving you security against defects after practical completion.
• •**Cash-only payment with no receipts**: a legitimate building contractor will issue invoices, accept bank transfer, and be VAT-registered on any project of meaningful scale.
• •**Milestone payments tied to dates rather than completion events**: payment becoming due on a specified date regardless of whether the milestone has been achieved removes the incentive to complete on time.
• •**Asking for accelerated payment 'to buy materials'**: legitimate contractors include material costs in their pricing. Requests for additional advance payments mid-project to fund material purchases that were already in the contract are a warning sign.

• **Client protections**:
• •**Always use a signed, written contract** — even for smaller projects. JCT Minor Works (available from the RIBA bookshop) is a standard form suitable for residential extensions; the Federation of Master Builders also provides a model domestic contract.
• •**Pay by bank transfer** — creates a documentary record. Never pay cash without receipts.
• •**Photograph work before each milestone payment** — create a dated photographic record of the state of the works at each stage.
• •**Check Building Control inspections are happening** — the inspector's visits to the site at foundation, structural frame, insulation, and drainage stages confirm that the work is being done correctly. If the contractor is avoiding Building Control inspections, this is a serious concern.
• •**Exercise retention** — do not release retention before the defects period has expired, regardless of contractor pressure.