Progress billing and deposits for contractors

On any job longer than a few days, the question is not whether you will get paid but when.

If you buy the materials, pay the crew every week and invoice only at the end, you are lending the client money for the length of the job, interest-free. Deposits and progress billing fix that by matching payments to the work.

This guide covers:

• how to set a deposit
• the two ways to structure progress payments
• how retainage works
• what to do when a payment is late

Two worked examples show the numbers on a $42,000 kitchen remodel.

Why deposits and progress payments matter

Cash flow, commitment and less risk

Three reasons, in order of importance:

1. Cash flow. Materials and labor are paid as the job goes. Payments that arrive with the work keep your bank account ahead of your costs instead of behind them.
2. Commitment. A client who has paid a deposit has a stake in the job going ahead on schedule, and so do you.
3. Risk. If something goes wrong mid-job, a dispute or a client who stops paying, progress billing limits how much of your work is unpaid at any moment.

Setting the deposit

The deposit buys materials and holds the date

A deposit is paid at signing, before work starts. It typically covers materials that must be ordered, especially custom or special-order items like:

• cabinets
• windows
• countertops

It also secures the client's place in your schedule.

Check your state's deposit rules first

Some states regulate home-improvement deposits. In California, a deposit on a home-improvement contract cannot exceed 10% of the contract price or $1,000, whichever is less.

Other states have their own rules, and some have none. Your state's contractor licensing board is the place to look.

Size the deposit to your upfront costs

Where the law allows it, set the deposit to cover your real upfront exposure. For a job with $15,000 of special-order cabinets, a deposit that does not cover the cabinet order leaves you financing the client's kitchen.

If capped, plan the deposit around the order

If your state caps the deposit below that, do one of these instead:

• structure the first progress payment around the materials order
• have the client buy the special-order items directly

Two ways to bill progress payments

Milestone billing pays at events the client sees

The contract lists events, and each one triggers a fixed payment:

• demolition complete
• rough-in inspection passed
• cabinets installed
• final walkthrough

Milestone billing is the usual approach on residential remodels because it is easy for clients to see and verify.

What makes a good milestone

Good milestones are:

• Visible. The client can see the cabinets are in.
• Objective. "Rough-in inspection passed" is a fact. "Plumbing mostly done" is an argument.
• Front-loaded slightly. Payments should keep slightly ahead of your costs, not behind them, while staying within what your state allows.

Percent-complete billing follows a schedule of values

On larger jobs, progress billing often follows a schedule of values: the contract price split into lines, each with its own value. Each billing period, you bill the percentage of each line completed, minus what was already billed.

A pay application or draw request is the formal version, common when a lender releases funds in draws.

Milestones usually suit a home remodel

Percent-complete billing is more precise but takes more paperwork and invites debate over percentages. For a single-family remodel, milestones usually work better.

Lenders and commercial clients often require a schedule of values.

Worked example: milestone schedule for a $42,000 kitchen

Five payments on a $42,000 kitchen

Example: A full kitchen remodel at a contract price of $42,000.

How the schedule adds up

• Shares: 10 + 25 + 25 + 25 + 15 = 100.
• Amounts: 42,000 × 0.10 = 4,200; 42,000 × 0.25 = 10,500; 42,000 × 0.15 = 6,300.
• Total: 4,200 + 10,500 × 3 + 6,300 = 4,200 + 31,500 + 6,300 = 42,000.

Keep the final payment at 15%

The final payment, 15%, is large enough that the client has a reason to wait for the punch list to be finished. It is small enough that you are not carrying most of the job's value until the end.

In California, move the capped deposit later

In California, the deposit on this job would be capped at $1,000, since 10% of $42,000 is $4,200 and the cap is the lesser amount.

The remaining $3,200 of that first 10% would move into later milestones, for example by adding it to the second payment: $10,500 + $3,200 = $13,700.

What the schedule does for cash flow

Example: Say the kitchen costs you $33,600 to build, leaving $8,400 of profit on the $42,000 price. Costs are what you have paid out to date, and the cabinets, $12,000, are paid for when ordered.

Here is where your bank account stands at each milestone, assuming each payment arrives promptly after it is invoiced.

How the cash flow numbers check out

• Costs rise by $2,000 for demolition plus $12,000 for cabinets, then $7,000, $7,600 and $5,000: 2,000 + 12,000 + 7,000 + 7,600 + 5,000 = 33,600.
• Payments add up the schedule: 4,200, then + 10,500 three times, then + 6,300, reaching 42,000.
• The final position, $8,400, is the job's profit, 42,000 − 33,600.

A single end invoice leaves you $33,600 out

Now compare a single invoice at the end. By the time the cabinets and countertops are in, you would have paid out $28,600 and received nothing, and by the final walkthrough, $33,600.

Tie the second payment to the cabinet order

The milestone schedule keeps you ahead at every step. The tightest moment, $700 ahead after the cabinet order, shows why the second milestone is tied to ordering cabinets.

That payment exists to fund the biggest purchase on the job.

Worked example: percent-complete billing

Draw 1 on the same kitchen

Example: The same kitchen, billed against a schedule of values with a 10% deposit applied to the first draw.

The checks: 3,000 + 8,000 + 14,000 + 7,000 + 4,000 + 6,000 = 42,000. Earned: 3,000 + (8,000 × 0.75 = 6,000) + (14,000 × 0.25 = 3,500) = 12,500.

Subtract the deposit from the first draw

Retainage takes another $1,250 off

With 10% retainage, the owner would hold back 12,500 × 0.10 = $1,250 until completion. This draw would then be 12,500 − 1,250 − 4,200 = $7,050.

How retainage works

Retainage is money held until the end

Retainage is a percentage of each progress payment, often 5% or 10% on commercial work, held back by the owner until the job is complete.

It protects the owner if the contractor leaves work unfinished. It also means you finish the job with money still owed.

Three things to settle in a retainage clause

If a contract includes retainage:

• Make sure it says exactly when the retained amount is released, such as at substantial completion or after final inspection.
• Price the cost of waiting into the job.
• Track retained amounts separately so they do not disappear from your receivables.

Some states limit retainage percentages or set deadlines for releasing it. Check your state's rules, especially on public work.

Writing the payment schedule into the contract

Four details for every payment

The payment schedule belongs in the signed estimate or contract, not in a later email. For each payment, state:

• The amount, as dollars or a percentage of the contract
• The trigger: the date, milestone or completion percentage
• When it is due after it is invoiced, such as due on receipt or within 7 days
• What happens if it is late: whether work pauses, whether a late fee applies under the contract

Pick one rule for billing change orders

Approved change orders also need a payment rule. Either bill each one on the next progress invoice after it is signed, or bill it in full when signed.

Pick one and write it down.

Explaining the schedule to clients

Explain it when you present the estimate

Homeowners who have never remodeled may not expect to pay before the job is done. Walk through the payment schedule when you present the estimate, not when the first progress invoice arrives.

Three points clients understand

Three points usually land:

• Each payment matches visible work. They pay when they can see the result of that stage: the old kitchen gone, the inspection card signed, the cabinets on the wall.
• The deposit buys their materials. Special-order cabinets and countertops are made for their kitchen and cannot be returned. The deposit or the first progress payment pays for them.
• The last payment waits for their approval. The final share is due after the walkthrough and punch list, which gives them leverage to make sure the job is finished right.

Clients who know the schedule pay on time

A client who understood the schedule at signing pays progress invoices without surprise. A client who first hears about it from an invoice may wonder whether something has gone wrong.

When a progress payment is late

A late progress payment is a warning sign. Act on it early.

Four steps when a payment is late

1. Call, do not email. A late payment often means a question about the work. Find out what it is.
2. Fix what is legitimate. If something is unfinished or wrong, fix it, document it and resend the invoice.
3. Follow your contract. If the contract allows you to pause work for nonpayment, say clearly and in writing when work will pause and what restarts it.
4. Protect your lien rights. Many states require a preliminary notice early in the job to keep the right to file a mechanic's lien, and every state sets deadlines for filing. Learn yours before you need them.

The get paid faster guide covers follow-up schedules in more detail.

Pro forma invoices and draw requests

Lenders may need a bill before payment

Some clients, particularly those paying with a construction loan, need a document before the payment is due so their lender can release funds.

A pro forma invoice shows what is coming

A pro forma invoice works for this: it shows what will be billed without being a demand for payment. The pro forma invoice generator makes one in a minute.

Deposits and progress payments in BuildWell

Bill any share of the signed estimate

In BuildWell, you can invoice any percentage of a signed estimate as a deposit, then progress payments and the balance as the work moves.

Every payment is recorded against its invoice, so you and the client always see what has been paid and what is left.

Clients pay from a link on their phone

Clients pay from a link on their phone:

• by card or bank transfer through Stripe, if you have connected it
• with the Zelle, Venmo, Cash App, PayPal or check details you list

Keep the paperwork in step

Show the running total on every invoice

Every progress invoice should show the whole picture:

• contract total
• approved change orders
• payments received
• what this invoice bills

When the client can see the running total on each invoice, the final bill holds no surprises. A missing payment stands out right away instead of at the end of the job.

Checklist

• Deposit set within your state's limits and tied to real upfront costs
• Progress payments tied to visible, objective milestones
• Payment schedule written into the signed contract
• Retainage terms, if any, with a clear release trigger
• A rule for billing change orders
• A plan for late payments, including your state's lien deadlines

With that in place, the money arrives with the work, and you finish every job ahead instead of behind.