Commercial Contractor Payment Schedules and Structures

Payment schedules and structures define the timing, triggers, and amounts of money exchanged between project owners, general contractors, and subcontractors throughout a commercial construction engagement. This page covers the principal payment structures used in US commercial construction, the mechanisms that govern each, and the decision factors that guide contractors and owners toward one structure over another. Understanding these structures is foundational to evaluating commercial contractor contract types and managing project financial risk.

Definition and scope

A commercial contractor payment schedule is a contractual instrument specifying when payments are due, what conditions must be satisfied before payment is released, and how payment amounts are calculated. Payment structures operate at two levels: the macro level (the overall payment model embedded in the contract) and the micro level (the specific milestone or period triggers within that model).

Payment schedules apply to every tier of the commercial construction chain — owner to general contractor (GC), GC to subcontractors, and subcontractors to suppliers. Federal construction contracts are governed in part by the Prompt Payment Act (31 U.S.C. §§ 3901–3907), which mandates payment to prime contractors within 14 days of the government receiving a proper invoice, and requires GCs to pay subcontractors within 7 days of receiving payment from the owner. At the state level, prompt payment statutes vary — 49 US states have enacted some form of private or public prompt payment law (National Conference of State Legislatures, "Prompt Payment," ncsl.org).

The scope of a payment schedule intersects directly with lien waivers on commercial contractor services, bonding requirements, and subcontractor management on commercial projects.

How it works

Commercial payment structures are activated by one of two mechanisms: time-based triggers or milestone-based triggers.

Time-based (periodic) payment releases funds on a regular schedule — typically monthly — based on a payment application submitted by the contractor. The application documents the percentage of work completed during the period, calculated against a Schedule of Values (SOV). The SOV is a line-item breakdown of all contract work, submitted at project outset and approved by the owner or owner's representative. The American Institute of Architects publishes AIA Document G702/G703, the standard Application and Certificate for Payment form used across the industry to formalize this process.

Milestone-based (draw) payment releases a predetermined lump sum when a defined phase of work is certified complete — foundation poured and inspected, structural steel topped out, substantial completion achieved. This structure is common on smaller commercial projects or design-build engagements.

Retainage applies under both mechanisms. Owners typically withhold 5–10% of each progress payment as security against incomplete or defective work. At substantial completion, retainage is released subject to a punch-list clearance. Some state statutes cap retainage — California, for example, caps public project retainage at 5% under California Public Contract Code § 7201.

A typical payment cycle for a monthly billing structure runs:

1. Contractor prepares and submits the pay application by a cutoff date (often the 25th of the month).
2. Owner's architect or construction manager reviews and certifies the amount within 7–14 days.
3. Owner releases payment within the contractually specified window (commonly 30 days from application).
4. GC pays subcontractors within 7 days of receipt (federal Prompt Payment Act standard) or per state statute.
5. Retainage is tracked separately and released at final completion or substantial completion milestones.

Common scenarios

Lump-sum contracts with scheduled draws are standard in tenant improvement work. A commercial tenant improvement contractor may agree to four draws: mobilization (10%), rough-in completion (30%), finish installation (40%), and final acceptance (20%). Each draw is tied to observable completion events.

GMP (Guaranteed Maximum Price) contracts use monthly progress billing against an approved SOV, with savings (actual costs below the GMP ceiling) shared between owner and contractor per an agreed split. This structure appears frequently in construction management services delivery.

Unit-price contracts — common in commercial excavation and sitework — bill per measurable unit of work completed (cubic yards excavated, linear feet of pipe installed). Payment varies with actual quantities, not a fixed total.

Federal and public agency projects impose additional structure. The federal Miller Act (40 U.S.C. §§ 3131–3134) requires payment bonds on federal construction contracts exceeding $150,000, ensuring subcontractors and suppliers have a payment remedy outside of lien rights, which do not attach to federal property.

Decision boundaries

Choosing a payment structure involves weighing risk allocation, project complexity, and the owner's cash management needs.

The commercial contractor bid process and the contract negotiation phase are the points at which payment structure is established — changes after execution are administratively complex and often require formal amendments.

Retainage rate is a key decision boundary. Higher retainage (10%) provides owners greater security but places cash flow pressure on contractors and subcontractors, who must finance withheld amounts. Lower retainage (5%) or retainage reduction at milestones (common in federal contracts per FAR 32.103) reduces that burden while accepting more owner exposure on completion risk.

References

• Prompt Payment Act, 31 U.S.C. §§ 3901–3907 — US House, Office of the Law Revision Counsel
• Miller Act, 40 U.S.C. §§ 3131–3134 — US House, Office of the Law Revision Counsel
• AIA Document G702/G703 – Application and Certificate for Payment — American Institute of Architects
• Federal Acquisition Regulation (FAR) Part 32 – Contract Financing — Acquisition.gov
• National Conference of State Legislatures – Prompt Payment Laws — NCSL
• California Public Contract Code § 7201 — California Legislative Information