Contractor Payment Terms: What's Fair, What to Avoid, and How to Protect Yourself

**Why payment structure matters**:

Construction projects are long-duration, high-value, and inherently risky. Payment structure manages the distribution of risk between homeowner and contractor:

• •If the homeowner pays too far ahead of work done, they have no financial leverage if quality falls short or the contractor fails to complete
• •If the contractor receives too little too late, they have cash flow problems that can slow the project and increase risk of insolvency
• •A well-structured payment schedule keeps both parties financially aligned throughout the project — neither party has an incentive to walk away at any point

**The four standard payment mechanisms and their purposes**:

**1. Mobilisation deposit**: *Purpose*: Covers the contractor's upfront costs — initial material procurement (concrete, blockwork, steel order), temporary site facilities, Health and Safety plan preparation, and sub-contractor booking deposits. *Appropriate level*: 5–10% of the contract value for most domestic projects. A £60,000 extension warrants a £3,000–£6,000 mobilisation deposit. *When it is payable*: After the contract is signed, ideally 2–4 weeks before the start date (to allow material procurement time). *Red flag*: A deposit request of 30–50% of the contract value before any work has started. This is not a mobilisation deposit — it is front-loading that leaves you with inadequate leverage if anything goes wrong.

• **2. Stage payments (progress payments)**:
• *Purpose*: Distribute the remaining contract sum in payments that are linked to visible physical progress milestones, so that the contractor is paid for work done and the homeowner never pays for work not yet completed.
• *Appropriate structure*: 3–5 stage payments aligned to clearly observable milestones. Example stage structure for a rear extension:
• •Stage 1 (after mobilisation deposit): Substructure complete (foundations, slab, DPC) — typically 20–25% of contract value
• •Stage 2: Superstructure to wall plate (brickwork/blockwork and roof structure) — typically 20–25%
• •Stage 3: Weathertight (roof complete, windows and doors in) — typically 15–20%
• •Stage 4: First fix complete (M&E first fix, insulation, plasterboard) — typically 15–20%
• •Stage 5 (less retention): Practical completion — typically 10–15%
• *What makes a stage payment legitimate*: The milestone it is linked to must be clearly verifiable by the homeowner or their professional adviser — not a contractor's claim about programme progress.

**3. Retention**: *Purpose*: A proportion of the contract value withheld by the homeowner at practical completion, held as financial security against defects that emerge during the defects liability period. *Appropriate level*: 2.5–5% of the contract value is standard for domestic projects. *How it works*: In most standard form contracts, retention is applied to each stage payment (e.g., 5% is withheld from each progress payment). At practical completion, half the retained amount is released; the other half is released at the end of the defects liability period (DLP). *Example*: On a £60,000 contract with 5% retention: £3,000 total retention is withheld across the project. At practical completion, £1,500 is released; the remaining £1,500 is held until the end of a 6-month DLP and released when the contractor has remedied all notified defects. *Why it matters*: The retention is the financial mechanism that gives the homeowner leverage to require the contractor to return and fix defects. Without it, a contractor who has been fully paid has little incentive to return for minor snagging.

**4. Final payment (retention release)**: *Purpose*: Closes out the financial relationship between homeowner and contractor after the DLP. *Payable when*: All defects notified during the DLP have been remedied to the homeowner's satisfaction (or a professionally agreed standard if disputed); a completion certificate has been issued by Building Control.

**Payment arrangements that should be rejected or queried**:

**Large upfront deposit (>15–20%)**:

• A deposit of more than 15–20% of the contract value before significant work has started is a red flag. It suggests either:
• •The contractor has cash flow problems and needs the homeowner's money to fund the project (or pay other creditors)
• •The contractor is front-loading to reduce the financial consequence if they fail to complete or perform adequately

The test is simple: the deposit should cover verifiable mobilisation costs, not fund the contractor's working capital. If a contractor insists on 40% upfront, ask them to itemise what the 40% is covering — if they cannot justify it by reference to specific material orders or sub-contractor deposits, this is a concerning signal.

**Stage payments not linked to progress milestones**:

Payment on dates ('20% at week 4, 20% at week 8') rather than progress milestones is dangerous. A contractor who is behind programme has the same payment date as one who is on time — there is no mechanism to hold back payment if the work is not progressing. All stage payments should be linked to clearly defined, observable milestones.

**Cash-only or no-VAT arrangements**:

• Requesting cash payment, or offering a 'no VAT' price, is a serious red flag. Legitimate contractors who are VAT-registered (as they are required to be if turnover exceeds £90,000) are legally required to charge VAT on their services and issue a VAT invoice. A 'no VAT' offer either means:
• •The contractor is not VAT-registered and is pricing below the threshold (possible for very small operators, but unusual for anyone running a project over £30,000)
• •The contractor is registered but is trying to evade VAT — illegal, and creates liability for the homeowner in some circumstances
• •There will be no audit trail of payments made — creating difficulties if a dispute arises

Always pay by bank transfer and always request a VAT invoice.

**Full payment at practical completion with no retention**:

Paying 100% of the contract value at practical completion leaves the homeowner with no financial leverage to secure defect remediation. The contractor has received full payment and has no financial incentive to return. Always insist on at minimum a 2.5% retention held until the end of the DLP.

**No written payment schedule**:

An oral payment agreement ('we'll sort out payments as we go') is legally weaker than a written schedule and creates ambiguity about when payments are due, what milestones trigger them, and what happens if the contractor claims a milestone has been reached before the homeowner is satisfied. Always insist on a written payment schedule as part of the contract documents.

**Consumer protection under the Consumer Rights Act 2015**:

• For domestic building contracts, homeowners have additional consumer protection rights under the Consumer Rights Act 2015, including:
• •The right to services carried out with reasonable skill and care
• •The right to services carried out within a reasonable time (if no time has been agreed)
• •The right to pay a reasonable price (if no price has been agreed in advance)
• •The right to remediation or partial refund if services do not meet these standards

These rights exist regardless of whether a written contract is in place.

**When payment disputes arise**:

• Payment disputes in domestic construction are common — a contractor claims a stage payment is due; the homeowner says the milestone has not been reached. A payment dispute becomes a serious problem when:
• •The contractor stops work because they claim they are owed money
• •The homeowner withholds payment because they are dissatisfied with quality
• •Both claim to be in the right with no written milestone definition to refer to

The best prevention is a well-written payment schedule with unambiguous milestone definitions, photographs taken at each milestone, and a professional (architect or project manager) to certify milestone completion.

**What to do if a contractor stops work claiming non-payment**:

1. Refer to the written payment schedule — has the claimed milestone been reached? If genuinely reached, pay promptly. 2. If the milestone has not been reached, put the position in writing to the contractor, citing the payment schedule clause and the milestone definition. 3. If the contractor claims the milestone HAS been reached and you disagree, request a professional assessment (architect, project manager, or independent surveyor) of what has been completed. 4. Do not make payments for work not done — this undermines all future leverage. 5. If the contractor threatens to walk off site over a disputed payment, take legal advice immediately — the contractor's right to suspend work for non-payment is qualified under the Housing Grants, Construction and Regeneration Act 1996 (which requires a formal notice and 7-day waiting period before suspension is lawful).

**The statutory right to suspend for non-payment (contractor's right)**:

Under the Housing Grants, Construction and Regeneration Act 1996 (as amended), a contractor in a qualifying construction contract has the right to suspend work if the homeowner fails to pay an undisputed payment by the due date. The contractor must first serve a 'suspension notice' giving at least 7 days' notice of the intention to suspend. If the payment is genuinely undisputed and overdue, the contractor's suspension right is lawful. If you believe the payment is disputed (because the milestone has not been reached or there are quality issues), you should serve a 'pay less notice' before the payment due date, specifying the amount you consider to be due and the basis for withholding any amount.

**Adjudication — the fastest route to resolving payment disputes**:

For any construction contract (regardless of value) entered into after 1 May 1998, either party can refer a payment dispute to adjudication. An adjudicator makes a binding decision within 28 days. Adjudication is significantly faster and cheaper than litigation. Even for smaller domestic projects (£15,000–£50,000), adjudication is a viable and proportionate remedy — the adjudicator's fee is typically £2,000–£6,000, and the loser pays the adjudicator's fees in most cases.