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Cash Flow for Contractors: Deposits, Progress Payments and Retainage
On a remodeling or construction job, the contractor usually pays for cabinets, lumber and crews weeks before the homeowner pays for the finished work, so the payment schedule written into the contract decides how much of the job the contractor finances.
At a glance
- A payment schedule sets when money arrives over the life of a job: the deposit at signing, progress payments as stages are finished, the final payment at completion and any retainage held back until after it.
- Construction businesses run on thin cushions; a JPMorgan Chase Institute study of 597,000 small businesses found the median construction firm held 20 days of cash outflows in reserve, against 27 days for small businesses overall.
- On an illustrative $60,000 kitchen remodel, a back-loaded schedule leaves the contractor $18,000 out of pocket by week three, while a schedule tied to material delivery and milestones never lets the job's cash go below zero.
- Tie each payment to a defined, visible stage of work, invoice the day each stage is done and know the deposit, prompt-payment and retainage rules that apply to your contracts.
General information, not legal/tax/financial advice; talk to a licensed professional about your situation.
Part 1 | Every job has a cash curve
The profit on a job is set at signing, while the cash is set by timing. A kitchen that will earn $15,000 can still drain the account for a month if the cabinets are paid for in week one, the crew is paid every Friday and the homeowner's big payments come at the end. The owner's inner voice says the job's profitable, so we're fine, and on paper that is true, but suppliers and crews are paid in weeks, not in margins.
The JPMorgan Chase Institute's data show why this matters more in construction than in most trades. The median construction business held about 20 days of outflows in cash, so a single job whose payments lag its costs by three or four weeks can absorb most of the cushion, and two such jobs at once can exhaust it.
Part 2 | The same job under two payment schedules
| Contract price (Assumption) | $60,000 |
|---|---|
| Cabinets and first materials, week 1 (Assumption) | $15,000 |
| Other materials, week 4 (Assumption) | $6,000 |
| Crew labor (Assumption) | $3,000 a week for 8 weeks |
| Total job cost (Calculated) | $45,000 |
| Milestone schedule (Assumption) | 10% at signing, 30% at material delivery (week 1), 30% at rough-in (week 4), 25% at countertops (week 7), 5% at completion (week 8) |
| Back-loaded schedule (Assumption) | 10% at signing, 40% at week 4, 40% at completion (week 8), 10% retainage released at week 12 |
| Deepest cash gap, milestone schedule (Calculated) | $0 |
| Deepest cash gap, back-loaded schedule (Calculated) | $18,000 |
Illustrative example; replace every assumption with your own numbers and check your state's deposit limits.
The milestone schedule keeps the deposit modest, which matters because the Federal Trade Commission notes that some state laws limit the amount a contractor can request as a down payment, and puts the larger payments at moments the homeowner can see for themselves, such as cabinets on site or the rough-in inspection passed. The FTC's own advice to homeowners is to make payments during a project contingent on completion of defined amounts of work, so a schedule built that way matches what careful customers have been told to expect.
Part 3 | Retainage and prompt payment on commercial and public work
Retainage is the share of each progress payment an owner or general contractor holds back until the work is accepted. On federal construction contracts, the Federal Acquisition Regulation allows retainage when satisfactory progress has not been achieved, caps it at 10% of the approved estimate, and says it should not be used as a substitute for good contract management. The federal prompt payment clause sets progress payments due 14 days after a proper payment request is received and requires prime contractors to pay subcontractors within 7 days of being paid. Most residential and private commercial work falls under state law instead, and state retainage and prompt-payment rules differ, so read the payment terms in every subcontract and ask your attorney which statute applies.
A payment-terms checklist for your next contract
- Deposit within your state's limit, collected before materials are ordered.
- Each progress payment named by a stage the customer can see, not by a date.
- A written change order, with its price and payment timing, signed before extra work starts.
- Invoices sent the day each stage is complete, with a pay link and due date.
- Retainage (if any) stated as a percentage, with the exact condition and date for release.
- A closing walk-through on the schedule, so the final payment is not waiting on a punch list nobody wrote down.
How you compare
- Your cushion: the median construction firm in the JPMorgan Chase Institute study held 20 days of cash outflows. Divide your cash balance by your average daily outflow to find your own number.
- Your deepest gap: for each job in progress, work out the week when costs paid most exceed payments received. Add the gaps for jobs that overlap; if the total is larger than your cash on hand, the schedule needs to change before the next contract.
- Your own baseline: check how many days passed between finishing each stage and receiving its payment on your last three jobs. That number tells you whether the delay lives in your invoicing or in your customers' paying.
Questions to ask this week
Which payments in our standard contract are tied to dates rather than visible stages? Rewrite them as stages.
What is our state's deposit limit for home improvement work? Check with your licensing board or attorney.
How long after a stage is finished does the invoice go out? Aim for the same day.
How much retainage are we owed right now, and when is each release due? List it with dates.
The next step is to map the cash curve of your current largest job, week by week, and redraft your standard payment schedule so no week dips below zero.
About this research: This article draws on the JPMorgan Chase Institute's study of cash balances at 597,000 small businesses, Federal Trade Commission guidance for homeowners hiring a contractor and the Federal Acquisition Regulation's retainage and prompt-payment provisions for federal construction contracts. State rules differ and are not covered here. The worked example is illustrative.
Sources
- Farrell, D. and Wheat, C. Cash is King: Flows, Balances, and Buffer Days. JPMorgan Chase Institute, 2016. 597,000 small businesses.
- Federal Trade Commission. Hiring a Contractor. 2014.
- Federal Acquisition Regulation. 32.103, Progress payments under construction contracts.
- Federal Acquisition Regulation. 52.232-27, Prompt Payment for Construction Contracts.
Related reading: How Much Deposit Should a Contractor Take, and How to Ask for It · Payment Plans and Financing for Big Home Projects · Job Costing for Contractors Who Hate Spreadsheets · Getting Paid on Time: Collections Without Losing the Customer
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