Standard Subcontractor Payment Terms: What You Need to Know

Subcontractors are an essential component of construction projects, but getting paid on time can be a challenge for many. This is because of the long payment cycles and complicated payment terms that are often associated with the construction industry. For subcontractors, understanding the standard payment terms is crucial to ensure timely payment and avoid any potential disputes.

Here are some standard subcontractor payment terms that every contractor should know:

1. Payment Schedule

The payment schedule outlines the timing and frequency of payments to subcontractors. It is typically set out in the subcontract agreement and will depend on the project`s duration and milestones. The most common payment schedules are monthly, bi-weekly, or weekly. It`s essential to be aware of the payment schedule and ensure that it`s reasonable and aligns with your financial needs.

2. Payment Method

The payment method outlines how the subcontractor will receive payment. The most common methods are paper checks or electronic payments. It`s important to clarify the payment method with the contractor and ensure that the payment method works for your business.

3. Retainage

Retainage is a percentage of the payment that is withheld until the project`s completion. It serves as a guarantee that the subcontractor will complete their work to the satisfaction of the contractor. Retainage typically ranges from 5% to 10% of the total payment amount. It`s important to be aware of the retainage percentage and factor it into your cash flow planning.

4. Change Orders

Change orders are changes to the original scope of work agreed upon in the subcontract agreement. They can affect the payment schedule and payment amount. It`s essential to clarify how change orders will impact payments and ensure they are documented accurately.

5. Dispute Resolution

Disputes are common in the construction industry, and subcontractors should be aware of the dispute resolution process outlined in the subcontract agreement. It typically involves mediation or arbitration to resolve the dispute. It`s essential to understand the dispute resolution process and ensure that it`s fair and reasonable.

In conclusion, it`s essential for subcontractors to understand the standard payment terms to ensure timely payment and avoid any potential disputes. Payment schedules, payment methods, retainage, change orders, and dispute resolution should be clearly outlined in the subcontract agreement. By understanding the terms and negotiating fair payment terms, subcontractors can protect themselves and their business interests.