Contractor payment schedules and holdbacks, explained

The principle: pay for work done

A payment schedule sets out when you pay and how much. The safest schedules tie each payment to a stage of work you can see and check, such as "rough plumbing inspected," not to a calendar date.

Official guidance points the same way:

• The FTC says not to pay the full amount up front and never to make the final payment until the work is done and you're satisfied.

• California's CSLB says payments to the contractor cannot exceed the value of the work performed, apart from the limited down payment.

• NSW Fair Trading says progress payments must match the work done, and contracts over $20,000 must include a progress payment schedule.

• Ontario's renovation guidance says not to pay the full amount before the work is finished.

The first payment, the deposit, has its own rules. See our guide on how much deposit a contractor should ask for. This guide covers everything after it.

A sample stage-based schedule

This is a synthetic example for a fictional kitchen job priced at $20,000.

Northgate Renovations (synthetic), Contract NR-2291, payment schedule:

Stage 1, deposit on signing: $1,000

Stage 2, demolition complete and site cleared: $3,000

Stage 3, rough plumbing and electrical complete and inspected: $5,000

Stage 4, cabinets and countertops installed: $6,000

Stage 5, substantial completion, all fixtures working: $3,000

Stage 6, final payment after punch list complete: $2,000

Why this works: each stage is visible, and two of them depend on an inspection or a working result. The last payment is big enough that the contractor has a reason to come back for the small items on your punch list (the final list of fixes).

Warning signs in a payment schedule

• Front-loaded payments. Half the price due before any work is installed.

• Date-based payments. "Week 2: $5,000," whether or not anything was done in week 2.

• Vague stages. "Progress payment 2" with no description of what's complete.

• Materials paid long in advance. Sometimes reasonable for custom items, but ask for the supplier invoice and when delivery is due.

• No final retention. The last payment is tiny or due before completion.

Australian staged payments

Some Australian states set progress payment stages in law.

• Victoria. Consumer Affairs Victoria publishes fixed stage percentages for new home building, for example 10% at base, 15% at frame, 35% at lock-up and 25% at fixing for a contract covering all stages. Deposit limits are 10% for contracts under $20,000 and 5% for contracts of $20,000 or more.

• New South Wales. Contracts over $20,000 must have a progress payment schedule, either fixed stage payments, payments as work is performed, or a mix.

Other states and territories have their own rules. Check your state's fair trading or building regulator before signing.

Canada: statutory holdbacks

Several provinces require the owner to hold back part of each payment. The money protects you if the contractor fails to pay its subcontractors or suppliers, who may otherwise be able to register a lien (a legal claim) against your property.

Ontario. The Construction Act requires each payer to retain a holdback of 10% of the price of services or materials as they're supplied, until liens that could be claimed against it have expired or been dealt with. A contractor's lien generally expires 60 days after the earlier of publication of a certificate of substantial performance or completion, abandonment or termination of the contract. The Act has more detailed rules, including for subcontractors.

British Columbia. The Builders Lien Act requires a holdback of 10% of the greater of the value of work and materials provided or the amount paid. A separate holdback account is required, but not for contracts where the total value is less than $100,000. Liens generally must be filed within 45 days after a certificate of completion is issued, or after the contract or improvement is completed or abandoned. The holdback period generally ends 55 days after the same events.

Alberta. The Prompt Payment and Construction Lien Act requires the owner to retain 10% of the value of work done and materials furnished for 60 days from the certificate of substantial performance, or from completion if no certificate is issued. Liens for services or materials can generally be registered within 60 days, with longer periods for some types of work, such as concrete.

Other provinces and territories have their own lien laws, and Quebec's system is different. Before releasing a holdback, check whether any lien has been registered on your property title. A qualified professional can explain how the rules apply to your job.

United States: lien waivers

US states have mechanics lien laws that can let unpaid subcontractors or suppliers claim against your home, even if you paid your contractor. There's no national holdback rule. Common protections:

• Lien waivers. A signed statement from a subcontractor or supplier that it has been paid and gives up lien rights for that amount. Illinois' licensing regulator tells homeowners to obtain lien waivers signed by any roofing supplier and licensed subcontractor.

• Notices. California's CSLB tells homeowners to ask whether the contractor provided a "Notice to Owner," which describes liens and how to prevent them.

• Retainage. Some contracts let you keep a percentage until completion. This is a contract term, so it has to be written in.

Rules and forms vary by state. Check your state contractor board or consumer protection office.

How to pay each stage

1. Walk the site and confirm the stage is actually complete.

2. Check any required inspection has passed.

3. Match the invoice to the schedule plus any signed change orders.

4. Where relevant, collect lien waivers or check the holdback.

5. Pay by a traceable method. The FTC warns against wire transfers, gift cards, payment apps, cryptocurrency and cash after a disaster, and Illinois suggests a check payable to the company, not an individual.

6. Keep a dated record of each payment.

Get a second pair of eyes on your payment terms

EasyToDecode is launching soon. Upload your quote or contract, and it will quote the payment schedule line by line, flag front-loaded or date-based payments and missing holdback or final-payment terms, and draft questions for your contractor. See how it works or join the waitlist.