Construction Contract Payment Terms

My actual New Year’s resolution is to put out more informative content. Let’s start with payment terms in a contract: 1) What is Payment Based on? Why are you paying? “Because they are doing work for me.” Sick, great response. I mean specifically, why are you cutting a check at that very moment? What triggered the need to pay (major project item, a time frame passed, job done, etc)? 2) Payment Structure There are many different ways that payment can be structured. Usually it’s dependent on the type of work (maybe someone is building software for you) and relationship of the parties (person or company is working with you on an ongoing basis). 3) Per Milestone/Project A common structure is payment per stage of a project (or just completion). Think construction: x% up front, x% once you hit some critical path item, and then finally x% when the job’s done. If this is what you’re doing, a clearly defined scope and understanding amongst the partiesis key. If the vendor/contractor gets paid after “kitchen repaired” and you thought that included appliance electrical work (and it doesn’t), it’s a payment dispute. 4) Quarterly/Monthly/Weekly Pay You could be paying for ongoing work that may end on a certain date in the future (or not). Think IT support for your company. Generally, you’re going to get an invoice on a certain day and have to pay within x calendar days (called Net X days). Timing of payment is important here. Can you pay within 15 calendar days (Net 15) of the date of an invoice? Maybe your company does check runs twice a month so that’s fine. Maybe that’s too fast for your accounts payable folks (or you). 5) Bespoke Payment Sometimes payment terms are unique and based on the industry/type of service or product. Like paying a base subscription fee (monthly payment) and an amount in additional once a certain amount of data has been used (milestone). 6) General Considerations A) Make sure there is a mechanism in place to handle disputed payments (like the kitchen example) (if you can hold that payment and pay whatever isn’t in dispute). B) If you’re the vendor, collection language is important (interest + fees). C) What happens to payments made upfront? Is it a deposit? If so, what happens to it? (Applied at the beginning? The end? Returned if work isn’t performed?) D) Can you off-set what you owe by how much you paid to fix the work the vendor did? E) What if we terminate the agreement? Consider language that clearly defines exactly what is owed (and what isn’t) when one party terminates the contract. F) Is payment final or just an estimate? Clarify, clarify, clarify. G) Is there a mechanism in place for when the scope/time/contract price changes? Very important and needed by both parties. H) In the same vein as G), are you approving (in writing) changes to the contract? Just a quick, non-exhaustive list of considerations for payment terms. Consult with an attorney.

Payment Terms can kill your company. In Construction, it's normal for the big contractors to squeeze smaller subbies and put them on long payment terms. You are stuck between rock and a hard place, you want to work with the big boys and secure the work, but you are risking becoming an overdraft facility for the main contractor. The problem is if there are any delays onsite, the payment terms you have agreed to can go out of the window and you can be left chasing your money. It might be your fault, but it could be out of your control, and having to pay the bills and wages every week, a delay in getting paid can cause you a real headache. Cash in your bank is king, and I have seen too many good companies go down due to cashflow problems. My advice in any negotiation, is try and secure the quickest payment terms you can, seek professional advice, and make sure before signing up to anything you understand the scope of works you have committed to, and don't take on a project if you are hoping that variations will turn you a profit. Remember, anyone can promise you anything going forward, and further contracts mean nothing if you didn't make any money from the current one. Construction companies go bang for lots of reasons, but late payments will take you down quicker than a ship hitting an Iceberg. Always remember don't put all your eggs in one basket, and you have not earned anything until it's in your bank account.

PAYMENT TERMS in Procurement: Very Important matter when procuring!! Refer to the conditions under which a buyer agrees to pay a supplier for goods or services. These terms are crucial because they affect cash flow, supplier relationships, and financial planning for both parties. 🔑 Key Payment Terms in Procurement: 1. Payment Period:  o Specifies how long the buyer has to pay after receiving the invoice. o Common formats: Net 30, Net 60, etc.  e.g., Net 30 = Payment is due within 30 days of the invoice date. 2. Early Payment Discounts:  o Offers discounts for paying earlier than the due date. o Example: 2/10 Net 30 = 2% discount if paid within 10 days; otherwise, full payment due in 30 days. 3. Advance Payments: o Full or partial payment made before delivery. o Common in international or custom orders. 4. Milestone Payments/ Progress Payments: o Payments made at specific stages of project completion. (e.g., 30% upfront, 40% upon delivery, 30% after acceptance). Common in construction and large projects. 5. Payment Methods: o Letter of Credit (LC): A bank guarantees payment upon fulfillment of contract terms. o Bank Transfer (Wire Transfer, ACH): Direct electronic transfer of funds.  o Check or Cash on Delivery (COD): Payment made upon receipt of goods. o Credit Card/PayPal: Common for smaller transactions. 6. Late Payment Penalties: o Interest or fees are applied if payment is delayed beyond the agreed terms. 7. Retention Clauses: o A portion of payment (e.g., 5-10%) is withheld until project completion or a warranty period ends. (common in construction contracts). 8. Recurring Payments (Subscription Model): o Used for ongoing services (e.g., SaaS, maintenance contracts). 🧩 Factors Influencing Payment Terms: Supplier Relationship: Strong relationships may allow for extended terms. Industry Standards: Some industries have typical payment norms (e.g., construction often uses milestone payments). Buyer’s Cash Flow: Companies may negotiate longer terms to manage liquidity. Supplier’s Financial Stability: Suppliers may demand upfront payment if they have cash flow concerns. Economic Conditions: Inflation or financial instability may lead to stricter terms. 🧩 Why Payment Terms Matter For Buyers: > Manage cash flow > Build trust with suppliers > Negotiate better deals For Suppliers: > Ensure timely payments > Reduce credit risk > Plan production and inventory For Procurement Teams: > A strategic tool to strengthen supplier relationships and improve working capital. Best Practices for Negotiating Payment Terms: • Balance cash flow needs with supplier reliability. • Use early payment discounts if financially beneficial. • Ensure clarity in contracts to avoid disputes. • Consider supply chain risks when setting terms. • Align payment terms with internal cash flow cycles. Businesses must negotiate terms that balance their cash flow needs with supplier sustainability to maintain a resilient supply chain.

Today's contract tip is about the basics of drafting payment terms. Almost all businesses need an invoice to make a vendor payment. The problem is that many contracts don't properly address that requirement. Typical contracts say: “Buyer will pay Seller X within 30 days of the Effective Date.” Or “Buyer will pay Seller X per widget within 30 days of delivery.” These contracts later say, “Seller will send Buyer invoices at [email address].” Notice that the triggering event (here Effective Date or delivery) is a condition for payment, but the invoice submission is not. Every commercial contract should include two conditions for payment: receipt of Seller’s invoice AND the triggering event. So “Buyer will pay Seller the price within 30 days after the later of Buyer’s receipt of the invoice or Seller’s delivery of the widget.” Or “Seller will invoice Buyer no earlier than the delivery of the widget. Buyer will pay the invoice within 30 days.” Make sure the Buyer's obligation to pay does not kick in unless it has an invoice AND the event has occurred. It is in their best interest to make sure payment terms are clear and reflect actual business practices. Do you ever see this provision missing the requirement elements? #HowToContract #contracts #lawyers

what is "Interim payment application" ? In #quantitysurveying (QS), an interim payment application refers to a formal request made by a contractor to the client for payment during the #construction process. It typically occurs at regular intervals, such as monthly, and is based on the work completed and materials supplied up to that point. The application includes details of the work done, any variations or changes, and the associated costs. The purpose is to ensure that the contractor receives timely payments to cover their expenses and maintain cash flow throughout the project. The client assesses the application and releases payment accordingly, often after verification by a quantity surveyor or other relevant parties. The process of interim payment applications involves several steps: ☄️Measurement of Work Done: The quantity surveyor (QS) or site engineer measures the completed work and verifies it against the project plans and specifications. Quantities are often measured using standard methods like the New Rules of Measurement (NRM) or the Standard Method of Measurement (SMM). ☄️Preparation of Payment Application: The contractor compiles a comprehensive payment application. This document outlines the work completed, materials supplied, any variations, and associated costs.The application often includes supporting documentation, such as invoices, receipts, or progress reports. ☄️Submission to the Client: The contractor submits the payment application to the client according to the agreed-upon schedule, usually monthly. Some construction contracts may have specific forms or templates for payment applications. ☄️Client Assessment: The client reviews the payment application to ensure accuracy and compliance with the contract terms.A quantity surveyor or project manager may be involved in the assessment to verify the measurements and costs. ☄️Valuation of Work: The client values the completed work based on the agreed-upon rates or prices in the contract. Adjustments may be made for variations, delays, or other factors affecting the valuation. ☄️Certification and Approval: Once the valuation is completed, the client certifies the payment application. Certification indicates that the work has been verified and is in accordance with the contract.The payment application is then submitted for approval. ☄️Payment Release: Upon approval, the client releases the payment to the contractor. Payments may be subject to a predetermined retention amount, which is a percentage held back until the completion of the project.

Do you have cash flow woes? ✨ Today’s Tuesday Tip: CLEAR PAYMENT TERMS IN CONTRACTS = MORE CASH FLOW. When payment terms are too vague, you leave room for misunderstandings, delayed payments, and unnecessary tension. For example, simply saying “payment due upon receipt” doesn’t set clear expectations. What does “upon receipt” mean—immediately, within 24 hours, or within a week? Instead, opt for clear, specific language: “Payment is due within 7 calendar days of the invoice date.” “A late fee of X% will be applied for payments received after 30 days.” Here’s why this matters: 1️⃣ Protects Your Business: Specific terms create a legally sound foundation, ensuring your rights are clear in case of disputes. 2️⃣ Builds Trust: Setting expectations upfront demonstrates professionalism and makes it easier for clients to plan accordingly. 3️⃣ Streamlines Operations: You can better manage your cash flow and forecast income when payment terms are clear. Clarity in payment terms can make or break your client relationships and your cash flow. If you’re unsure how to draft payment terms that are clear and enforceable, let’s chat! Helping businesses create strong agreements is one of my favorite parts of what I do! 💕 Together, we got this!