How Do Contractors Get Paid? (Progress Payments, Retainage, Lien Waivers Explained)
By Fabio Freire, Founder & General Contractor at EZ-Estimates. Published 2026-05-01.
How Do Contractors Get Paid?
Contractors do not get paid all at once at the end of a job. Payment happens in stages, tied to milestones, with portions held back as retainage and exchanged for lien waivers. Here is how it actually works for residential and commercial construction in 2026.
The Quick Answer
Most contractors get paid in 4-6 progress payments tied to project milestones, with 5-10% retainage held until punch list completion. Each payment is exchanged for a signed lien waiver from the contractor and any subcontractors paid out of that draw.
A typical residential remodel:
- Deposit at signing: 10-25%
- Rough-in (mechanicals pass inspection): 20-25%
- Drywall (sanded, ready for paint): 20-25%
- Substantial completion (usable for intended purpose): 20-25%
- Final (after punch list signed off): 5-10%
That schedule keeps both sides protected. Contractor has cash flow to fund the work. Owner has leverage to ensure the work finishes.
Payment Methods
1. Progress Payments (most common)
- Tied to milestones
- Each draw is an invoice + lien waiver exchange
- Owner releases payment within 5-15 days of approval
2. Cost Plus
- Contractor bills actual cost + agreed markup percentage
- Common for high-end residential and unknown-scope work
- Higher cash flow risk for the owner (no fixed price)
3. Time and Materials
- Hourly rate for labor + materials at cost or cost-plus
- Used for repair work and undefined scope
- Always cap with not-to-exceed
4. Lump Sum (Fixed Price)
- Single contract amount, paid in milestones
- Most common for residential remodels
- Contractor takes the risk of cost overruns
5. Unit Price
- Per-unit pricing (per square foot, per linear foot)
- Common for site work, paving, demolition
- Lower risk, harder to bid
What Is Retainage?
Retainage (or "holdback") is a percentage of each payment held back until the project is complete. Standard retainage:
- Residential: 5-10% (often waived on smaller projects)
- Small commercial: 10%
- Large commercial / public works: 5-10% with reduction at substantial completion
- Federal projects: capped at 5% (Prompt Payment Act)
Retainage gives the owner leverage to ensure punch list items get fixed. It usually releases within 30-60 days of substantial completion.
What Is a Lien Waiver?
A lien waiver is a signed document that releases your right to file a mechanics lien for the payment received. Four standard types:
- Conditional Partial: effective only when the payment check clears
- Unconditional Partial: effective immediately, sign ONLY after the partial payment has cleared your bank
- Conditional Final: at project completion, effective when final payment clears
- Unconditional Final: project closeout, sign ONLY after final payment has cleared
The wrong type signed at the wrong time costs you the right to lien if payment never arrives. Always sign conditional first. Sign unconditional only after the bank clears the check. (See our free lien waiver template for all 4 variants.)
How To Set Up Your Payment Schedule
Three rules:
- Never accept "we will figure it out". The schedule goes in the contract.
- Front-load less than 30% before any work. Owners panic when contractors skip after a deposit. A 20% deposit is sane. A 50% deposit is a red flag.
- Tie milestones to specific deliverables, not dates. "After rough-in passes inspection" is enforceable. "After 4 weeks" is a schedule, not a milestone.
A solid residential schedule:
- 15% at contract signing
- 20% at materials delivery + demo complete
- 25% at rough-in (electrical + plumbing pass)
- 25% at drywall (sanded, primed)
- 10% at substantial completion
- 5% at final (punch list signed off)
This works for most $50K-200K residential remodels. Adjust percentages for your cash flow needs.
What If the Owner Does Not Pay?
If a milestone payment is late by more than 7 days:
- Stop work immediately. Notify the owner in writing. Do not continue on faith.
- Send a formal demand letter. State the contract amount, the missed payment, the cure period (usually 7-14 days per contract).
- Pre-lien notice (if your state requires it). California, Texas, Florida, and many others require pre-lien notice within a specific timeframe. File this on every job above a threshold (often $1,000-5,000).
- File a mechanics lien. Within the deadline (usually 60-120 days after last labor or materials delivery). The lien attaches to the property.
- Pursue collection or settle. Most owners pay once the lien is filed. If not, foreclosure on the lien is a multi-year process.
The leverage is the lien. Without it, you are an unsecured creditor.
Insurance Restoration Work
Insurance jobs have a different payment flow:
- Insurance company writes a check to the homeowner
- Homeowner endorses to the contractor (often co-payable to the mortgage holder)
- Multiple draws based on percent complete
- Final payment after final inspection from the adjuster
This is its own world. See How do contractors get paid from insurance companies for the full breakdown.
The Modern Way: Online Payment
Most owners want to pay by credit card or ACH transfer, not paper check. Set up:
- Stripe Connect or Square Build for credit card (2.5-3% processing fee)
- ACH transfers (free or $1-3 per transaction)
- Online portal so the owner pays from a link
EZ-Estimates includes Stripe Payments built in. Send the invoice as a clickable link, owner pays in seconds, money hits your account in 1-3 business days. No more chasing checks.
Templates and Tools
Stop Chasing Paper Checks
EZ-Estimates handles the full payment cycle: estimate → invoice → online payment → automatic lien waiver. Free 14-day trial.