Progress Billing, Deposits, and Retainage
Structure how you get paid on a job so your crew is never funding the customer's project out of your bank account.
Contracting is one of the few businesses where you routinely buy the materials, pay the labor, and do most of the work before the customer pays in full. Win three big jobs at once and your bank balance can go down even as your backlog goes up.
How you bill matters as much as what you charge. Deposits, a clear progress billing schedule, and a plan for retainage are what keep a growing contractor solvent. The broader idea is covered in Cash Flow vs. Profit.
Deposits: useful, and sometimes capped by law
A deposit helps cover materials and shows the customer is committed. But many states regulate deposits on residential home-improvement work to protect homeowners. California is a well-known example: for home improvement contracts, the down payment generally cannot exceed $1,000 or 10% of the contract price, whichever is less.
How the California cap plays out
On a $6,000 job, 10% is $600, so $600 is the maximum. On a $45,000 job, 10% would be $4,500, but the $1,000 limit controls. Other states have their own rules, and some have none, so check your state contractor board before you write deposit terms.
Where deposits are capped, contractors usually rely on a schedule of progress payments tied to completed work (for example, a payment when rough-in passes inspection). Some states also restrict billing ahead of the work, so match your payment schedule to real milestones.
Progress billing the AIA way
On commercial jobs, many general contractors and owners use American Institute of Architects (AIA) style pay applications, often the G702 summary and G703 continuation sheet. The core is a schedule of values: the contract broken into line items, each with a dollar value. Each month you bill the percentage of each line completed.
A month-three pay application (illustrative, $400,000 contract)
- 1
Work completed to date
Across all schedule-of-values lines, you have completed $180,000 of work, including stored materials if the contract allows.
- 2
Subtract retainage
At 10% retainage, $18,000 is held back, leaving $162,000 earned and payable to date.
- 3
Subtract prior payments
You were paid $112,500 on the first two pay apps.
- 4
Current amount due
$162,000 minus $112,500 equals $49,500 on this application.
- 5
Submit on time, every time
Most GCs have a monthly cutoff. Miss it by a day and your cash can slip by 30 days or more.
Retainage: your profit, held hostage
Retainage (or retention) is a portion of each payment the owner or GC holds until the job is substantially complete. It is commonly in the range of 5% to 10%, though contracts vary and many states limit retainage on public projects, and some on private ones too.
In that example, retainage can be bigger than your whole profit. If it arrives three to six months after you finish (and punch lists, closeout documents, and the GC's own payment timing all push it later), your profit sits on someone else's balance sheet. Plan for it. Track retainage receivable as its own line, and chase release as hard as you chase pay apps.
Try it
Cash Flow Forecast
Model a few months where retainage is outstanding and a big pay app arrives late. How long can you cover payroll and supplier bills?
Lowest point
$1,711
in Mar
Cash in 12 months
$81,948
Average monthly net
$4,329
Starts from Jan. Simplified model: sales follow the seasonal pattern you pick, variable costs scale with sales, fixed costs stay flat, and taxes are not included.
Mechanics' liens and lien waivers
A mechanics' lien is a legal claim against the property you improved when you are not paid. It is one of the strongest collection tools in any industry, but it is built on deadlines. Many states require a preliminary notice early in the job, and then a lien must be recorded within a set number of days after you finish. Miss a deadline and the right can disappear.
A lien waiver is a document giving up some or all of your lien rights in exchange for payment. Waivers come in four basic flavors: conditional or unconditional, and progress or final. Several states, including California and Texas, require specific statutory forms.
Myth or fact? Tap to flip
Quick check
A GC asks for an unconditional final lien waiver before the check is issued. What is the safer response?
Words to know
- Schedule of values
- A contract broken into line items with dollar values, used to bill progress each period.
- Retainage
- A percentage of each payment held back until the job is substantially complete.
- Mechanics' lien
- A legal claim against improved property that secures payment for labor or materials.
- Conditional lien waiver
- A waiver that takes effect only once the stated payment is actually received.
Finished reading?
Track your progress through Construction & Home Services.
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