Payment terms are a critical part of every subcontractor agreement because they establish when, how, and under what conditions subcontractors will receive payment for completed work.
The payment terms you agree to directly affect how long you wait to get paid and how much of the project you’ll need to finance out of pocket. Depending on the contract, payment might be due when you submit an invoice, complete a milestone, or reach the end of a monthly billing period.
This guide breaks down the main subcontractor payment terms, with examples of how each one works. It also covers retainage, conditional-payment clauses, invoicing, legal protections, and ways to protect your cash flow.
What Are Subcontractor Payment Terms?
Subcontractor payment terms are conditions that define when and how a subcontractor will be paid for their work during a project. Clear payment terms help subcontractors manage cash flow and lower the risk of payment delays and disputes.
For example, a subcontractor can complete work and submit an invoice but still have to wait several weeks to be paid. During that time, they need to cover payroll, materials, equipment, and other project costs out of pocket.
Although payment terms vary by subcontract, they typically address:
Payment amount and schedule
The event that starts the payment period
Invoicing and payment application requirements
Retainage and conditions for release
Conditional-payment clauses
Late payment penalties or interest
Dispute resolution procedures
Payment methods
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The Most Common Payment Term Structures for Subcontractors
Subcontractor payment terms differ based on when payment is due and what triggers it. Here are the most common structures:
Net 30, Net 45, Net 60, and Net 90
Net payment terms specify how many days a contractor has to pay a subcontractor after the payment period begins:
Net 30: The contractor has 30 days to pay from the invoice date or another date specified in the contract.
Net 45: Extends that payment window to 45 days, giving the contractor more time to process the invoice.
Net 60: Allows 60 days for payment and leaves the subcontractor carrying project costs for longer.
Net 90: Gives the contractor up to 90 days to pay, creating the longest cash-flow gap of these four options.
When using this payment structure, the specific starting point for the payment period should be clearly stated in the subcontract agreement. For example, the contract should clarify whether the period begins when the invoice is submitted, received, approved, or when certain project requirements are satisfied.
Due upon receipt
‘Due upon receipt’ means payment is expected as soon as the contractor receives the subcontractor’s invoice. Unlike Net 30 or Net 60 terms, there is no specified waiting period before payment becomes due.
This payment structure is commonly used for smaller projects, one-time services, or situations where the subcontractor and contractor have agreed to a short payment cycle.
Subcontractors get paid sooner instead of carrying project costs through a 30-, 60-, or 90-day payment window.
Due-upon-receipt terms call for efficient invoice processing and put more immediate pressure on contractor cash flow. If subcontractor invoices are due before the contractor receives payment from the project owner, the contractor has to fund the gap. Several invoices coming due at once can put additional pressure on available cash reserves.
Before accepting due-upon-receipt terms, make sure the contract clearly defines when an invoice is considered received and any requirements for submitting a complete invoice. That definition eliminates any doubt about when the payment clock starts.
Deposits and upfront payments
Deposits and upfront construction payments allow subcontractors to receive part of their compensation before starting work. The upfront money can go toward materials, equipment, labor, and other costs the subcontractor would otherwise have to fund out of pocket.
The subcontract typically sets the upfront payment as a fixed amount or percentage of the total contract value.
Document the payment terms carefully, especially for larger deposits, to reduce disputes. The agreement should clearly state:
The deposit amount
When it is due
How it will be applied to the total contract price
Whether it is refundable if the project is canceled
It should also specify what happens if the scope of work changes or the project is delayed.
Milestone-based payments
Milestone-based payments link subcontractor payments to the completion of specific stages or deliverables within a construction project. Instead of waiting until the entire project is finished, subcontractors receive payment as agreed milestones are successfully completed.
For example, an electrical subcontractor receives one payment after completing rough-in work, another after equipment installation, and a final payment after testing and inspection. The electrical contractor gets paid as the job moves forward rather than waiting until the entire project is finished.
To minimize disagreements, clearly define what qualifies as completion of each milestone. Identify who should approve the work, the documents required, and when payment becomes due after approval.
Monthly progress payments
With monthly progress payments, the subcontractor bills the contractor monthly for work completed during each billing period. This structure is common on longer construction projects where work continues over several months.
The subcontractor submits a payment application or invoice at the end of each month detailing the work completed, materials supplied, and amount due. The contractor reviews the submission and releases payment based on the subcontract terms.
You can also download ServiceTitan's free subcontractor application for payment template to organize the project, billing, retainage, and payment details required for progress billing.
Knowing when the next billing cycle closes makes it easier to plan for payroll, materials, equipment, and other recurring expenses.
On the contractor side, monthly billing creates a regular point to verify completed work and budget for upcoming subcontractor payments.
Typical details to include in a monthly progress payment subcontract include:
The monthly billing date
Required supporting documents
Approval process
Payment deadlines
Any applicable retainage
Time-and-materials payments
Time-and-materials payments compensate subcontractors based on the actual labor hours worked and materials used during a project. This structure is useful when the full scope of work is difficult to define in advance or changes during the project.
Under this arrangement, the bill covers two things:
The actual time spent working on a project (billed at agreed hourly rates)
The actual cost of materials used, often with a markup
The subcontract agreement may also specify equipment charges, travel expenses, or other project-related costs.
Suppose a subcontractor is hired to repair electrical wiring for a contractor. The agreement charges $50 per hour for labor, plus the actual cost of materials used. If the subcontractor works 40 hours and uses $800 worth of materials, the payment would be:
Labor: 40 × $50 = $2,000
Materials: $800
Total payment: $2,800
The subcontract should specify the documentation required to support each invoice, such as timesheets, receipts, and material records. The contractor then verifies the charges against the agreed terms, including:
Agreed labor rates and a pre-set not-to-exceed limit to make sure project costs don’t skyrocket.
Allowable expenses and markup percentages.
Billing frequency.
Final payments
Final payment is the remaining amount paid to a subcontractor after the agreed scope of work is completed and the applicable payment requirements are satisfied.
Before releasing final payment, the contractor verifies that the subcontractor has completed the required work, addressed outstanding items, allowed any necessary inspections, and submitted any approvals or other documentation required by the subcontract.
Once those requirements are satisfied, the contractor releases the remaining balance and any retainage due.
Pay-When-Paid and Pay-If-Paid Clauses
Pay-when-paid and pay-if-paid clauses determine how the project owner’s payment to the general contractor affects when, or whether, a subcontractor gets paid. Pay-when-paid affects payment timing, while pay-if-paid can make owner payment a condition for the subcontractor to get paid.
Pay-when-paid clauses
A pay-when-paid clause ties a subcontractor’s payment timing to when the general contractor receives payment from the project owner. It generally delays payment rather than transferring the ultimate risk of owner nonpayment to the subcontractor.
For example, suppose an electrical subcontractor completes $40,000 of work and submits an approved payment application. The subcontract states that the general contractor will pay the subcontractor within seven days after receiving payment from the owner.
If the owner pays the general contractor 45 days late, the subcontractor waits longer for its $40,000 payment. During this time, the subcontractor covers payroll, suppliers, equipment, and overhead. The primary cash-flow risk is the funding gap the delay creates.
If the owner never pays, a pay-when-paid clause does not necessarily mean the subcontractor loses its right to the $40,000 altogether. Depending on the contract and applicable state law, the contractor may still have to pay after a reasonable period.
Pay-if-paid clauses
A pay-if-paid clause goes further. It can shift the risk of owner nonpayment from the contractor to the subcontractor, where such clauses are legally enforceable.
Suppose a plumbing subcontractor completes $40,000 of work. Its subcontract expressly states that payment from the owner is a condition precedent to the contractor’s obligation to pay. It also states that the subcontractor assumes the risk of owner nonpayment.
If the owner pays late, the subcontractor faces the same immediate cash-flow gap as under a pay-when-paid clause. The risk is greater if the owner never pays. If the clause is valid and enforceable, the subcontractor can lose its contractual right to recover the $40,000 from the general contractor. The subcontractor then has to absorb the unpaid amount.
The enforceability of pay-if-paid clauses differs by state. Some states enforce these clauses under certain conditions, while others restrict or prohibit them. Contract language and project type can also affect enforceability, so review applicable state requirements before accepting such a clause.
How should subcontractors negotiate these clauses?
Before signing a subcontract, determine whether the clause only delays payment or makes payment dependent on the general contractor receiving funds from the owner.
A pay-when-paid clause typically creates less financial risk because it addresses payment timing rather than making the subcontractor’s right to payment dependent on owner payment.
Negotiate a specific payment deadline and define what happens if the owner delays payment, disputes an invoice, or fails to pay. Also document invoice requirements and the process for resolving payment disputes.
What Is Retainage and How Does It Affect Subcontractor Cash Flow?
Retainage is a portion of a subcontractor’s payment that a contractor temporarily withholds until the subcontractor meets certain project requirements. It is commonly used in construction to encourage completion of work, correction of deficiencies, and fulfillment of contractual obligations.
Retainage is typically calculated as a percentage of each progress payment.
For example, suppose a subcontractor earns $20,000 for completed work, and the contract requires 10 percent retainage. The contractor withholds $2,000 and pays the subcontractor $18,000. The contractor releases the $2,000 retainage once the applicable conditions are met.
The subcontract should clearly specify the retainage percentage, when it will be withheld, and the conditions for release. It should also explain whether release of the subcontractor’s retainage is tied to the contractor receiving retainage from the project owner. Some state laws also regulate retainage amounts and payment deadlines.
The cash-flow problem is simple: the subcontractor has done the work but still can't use all the money they've earned. They need to cover payroll, materials, equipment, and other project costs while waiting for the retained amount to be released.
Before signing a subcontract, a subcontractor must factor the retainage percentage and expected release date into project budgets and cash-flow forecasts.
What Should a Subcontractor Invoice Include to Ensure Timely Payment?
A subcontractor invoice should include the project and billing details a contractor needs to verify the work, approve the invoice, and process payment.
The subcontractor’s business name and contact information
Invoice number
Invoice date
Project name and location
Contract or purchase order number
Billing period
Payment terms and due date
Labor charges, material costs, approved expenses, applicable taxes, and the total amount due
For progress or milestone-based payments, the invoice should identify the specific work completed and the corresponding payment milestone. If the contract includes retainage, the invoice should show the amount withheld and the resulting amount payable.
Subcontractors also need to include any supporting documentation, such as approved timesheets, receipts, delivery records, change-order approvals, progress reports, or lien waivers. Payment instructions should also identify the accepted payment method and the information needed to complete the payment.
Before submitting the invoice, check that the amounts, project information, payment terms, and supporting documents match the subcontract agreement. Discrepancies can hold up invoice approval and payment.
Legal Protections for Subcontractor Payment
Subcontractors have several legal protections for unpaid construction work, including payment bond claims, mechanic’s liens, prompt-payment laws, and breach-of-contract claims. Which protections apply depends on the project type and where the project is located.
Federal construction projects
The Miller Act protects certain subcontractors on qualifying federal construction projects by requiring the prime contractor to obtain a payment bond. Eligible unpaid subcontractors can pursue payment against the bond, subject to applicable notice and filing requirements.
The Federal Acquisition Regulation (FAR) also addresses subcontractor assertions of nonpayment. When a subcontractor reports nonpayment, the contracting officer can review whether the prime contractor complied with applicable payment requirements and whether its payment certification to the government was accurate.
State and local public projects
State and local public projects follow separate state payment-bond and prompt-payment requirements. The protections available and procedures for pursuing unpaid amounts differ by jurisdiction.
Private construction projects
For private construction projects, payment protections depend largely on state law and the contract. Depending on the project and jurisdiction, subcontractors can have access to:
Mechanic’s liens: Provide a way to secure an unpaid claim against the property improved by the subcontractor’s work, subject to state-specific eligibility, notice, and filing requirements.
Payment bond claims: Provide another source of recovery when a payment bond covers the project and the subcontractor qualifies to make a claim.
Prompt-payment laws: These set payment requirements and, in some jurisdictions, consequences for late payment.
Breach-of-contract claims: Allow subcontractors to pursue payment when the other party fails to meet its contractual payment obligations.
Before starting a project, figure out which payment protections apply and note any notice, documentation, and filing deadlines. Missing a required step or deadline can affect your ability to pursue payment.
Change Orders’ Impact on Subcontractor Payment Terms
Change orders can affect subcontractor payment terms by changing the scope of work, contract price, payment amount, or payment schedule.
Before starting changed work, review the subcontract’s change-order requirements and document the revised scope, price, schedule, and payment treatment whenever the contract allows. Some contracts require changed work to proceed before the parties finalize the resulting price or schedule adjustment.
Additional work can increase progress payments or add new payment milestones. If a change extends the project schedule, it can also push back when the subcontractor invoices for certain work and receives payment.
Document all approved changes, including written authorization, revised pricing, updated schedules, material costs, labor records, and relevant correspondence. When it's time to invoice, you'll have a paper trail showing what changed, who approved it, and what the extra work cost.
Before billing for changed work, verify that the invoice reflects the approved change and includes any supporting documentation required by the subcontract.
Best Practices for Subcontract Payment Terms
Clear subcontract payment terms help both parties understand when payment is due, what conditions apply, and what documentation is required.
Follow these best practices when setting or reviewing payment terms:
Put all payment terms in writing: Clearly document the payment schedule, contract amount, invoicing requirements, retainage, and payment deadlines in the subcontract agreement.
Define payment deadlines: State exactly what starts the payment period and when payment becomes due.
Clarify invoice requirements: List everything the subcontractor needs to submit for an invoice or payment application to count as complete.
Address retainage: Include the percentage withheld, when withholding starts, and what has to happen before the contractor releases the money.
Evaluate the cash-flow impact: Work out how much you'll have to spend on labor, materials, and equipment before the next payment arrives.
Establish a change-order process: Spell out who can authorize changes, how you'll price them, and how they'll appear on future invoices or payment applications.
Define dispute procedures: Set a process for raising and reviewing payment disputes, along with any deadlines for submitting documentation.
Avoid ambiguous payment conditions: Clearly define any conditions that affect when payment becomes due or whether payment is contingent on another event.
Maintain accurate payment records: Keep contracts, change orders, invoices, payment applications, approvals, supporting documents, and payment records organized throughout the project.
Review applicable laws: Check the payment and retainage requirements for the state and project type before finalizing the subcontract.
How Does ServiceTitan Help Subcontractors Manage Payment Terms?
ServiceTitan’s Construction Management Software helps businesses manage payment terms from both sides of the payment process. Subcontractors can manage progress billing, payment applications, retainage, and project financials, while contractors can organize vendor bills and payment deadlines for the subcontractors they hire.
Manage progress billing and payment applications
For subcontractors working on longer construction projects, payment often depends on completed work rather than one final invoice. With ServiceTitan's Progress Billing tools, businesses can bill customers as project work reaches each agreed milestone.
Subcontractors can create AIA-style Applications for Payment and continuation sheets using their schedule of values. These include previous billing amounts and the current amount due based on completed work and stored materials.
Once approved, change orders can also flow into the payment application, so billing aligns with changes to the project scope.
Subcontractors don't have to rebuild the same billing information every time they prepare a new pay application for a general contractor or project owner.
Track retainage throughout the project
Construction contracts often allow the general contractor or owner to retain part of each payment (retainage) until specified requirements are met. Tracking those amounts across multiple progress billings adds another step to the billing process.
ServiceTitan’s Application for Payment calculates retainage using either a project-wide percentage or percentages assigned to individual line items. Once configured, retainage is reflected on Applications for Payment and tracked across billing cycles until it is released and billed.
The running retainage balance stays with the project's billing records instead of sitting in a separate spreadsheet or across multiple invoices.
Apply payment terms to vendor bills
A contractor paying several subcontractors can also end up juggling different payment deadlines from one vendor to the next.
ServiceTitan’s Payment Terms feature lets contractors manage payment deadlines for both customer invoices and vendor bills in one system.
Businesses can create different payment terms for accounts receivable (AR) and accounts payable (AP). Terms can include Due Upon Receipt, Net 30, or another fixed number of days.
If a subcontractor is consistently paid under the same terms, contractors can assign a default payment term to the vendor record. ServiceTitan then applies that term to new bills for the vendor, reducing repetitive data entry for the accounting team.
Monitor project financials and outstanding payments
Payment terms are easier to manage when subcontractors can see how billing and payments fit into a project's overall financial position.
ServiceTitan’s Project Financials tools show information such as:
Budgeted versus actual costs
Billed and earned revenue
Retainage
Open invoices
Customer payments
Budgeted and actual project profit margins
Subcontractors can use this information to identify unpaid invoices and see retainage that hasn't been released yet. For contractors, the dashboard makes it easy to compare actual project spending against the budget.
Over to You!
Clear subcontractor payment terms tell everyone involved when money is due and what needs to happen before it gets paid. Put the payment schedule, invoice requirements, retainage terms, and change-order process in writing before work starts. That leaves less room for surprises once invoices start going out.
As projects grow, keeping track of all those moving pieces manually gets harder. ServiceTitan keeps billing and project financial information together, so you spend less time piecing together records from different places. Get a demo to see how ServiceTitan can support your business.
ServiceTitan is an all-in-one software platform built for residential and commercial trades. Its construction management tools help specialty contractors manage projects, crews, costs, documentation, progress billing, and project financials from one platform.
Frequently Asked Questions (FAQs)
Q1. Can a subcontractor stop work if payment is late?
A subcontractor may be able to stop work for late payment, depending on the subcontract and applicable state law. Before suspending work, review the payment and suspension provisions, submit any required written notice, and allow any required cure period. Stopping work without following the applicable contract and legal requirements could lead to a breach-of-contract claim or other consequences.
Q2. Are verbal payment agreements enforceable for subcontractors?
Verbal payment agreements may be enforceable in some circumstances, but enforceability depends on state law, the type of agreement, and any existing written subcontract. Written payment terms provide a clearer record of the agreed amounts, deadlines, and conditions. Put payment terms and any later changes in writing to reduce misunderstandings and provide documentation if a dispute arises.
Q3. How should a subcontractor handle a general contractor filing for bankruptcy?
If a general contractor files for bankruptcy, review your unpaid invoices, payment records, and any applicable lien or bond rights. Bankruptcy can restrict certain collection actions, so keep all project documentation and consult a construction or bankruptcy attorney as soon as possible. They can help you with filing deadlines, proofs of claim, and available payment remedies.
Q4. How can subcontractors improve cash flow despite long payment terms?
Subcontractors can improve cash flow by negotiating shorter payment terms, requesting deposits, invoicing promptly, and billing as soon as milestones are completed. Track outstanding invoices closely, maintain adequate cash reserves, and limit financial exposure to slow-paying customers. Accurate invoices and consistent payment follow-ups also help prevent avoidable delays.
ServiceTitan Software
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