How Progress Payments Work on Construction and Home Projects
What a progress payment is and when you'll see one
A progress payment is money paid to a contractor or builder in stages as work gets completed, rather than in one lump sum at the end. Instead of writing a check when the house is done, you pay when the foundation is poured, again when framing is up, again when electrical rough-in is finished, and so on. Each payment covers the work finished since the last one.
Progress payments are standard in construction because projects take weeks or months and contractors need cash to buy materials and pay workers along the way. Without them, a builder would have to front thousands of dollars out of pocket and wait until closing day to get paid back. Progress payments protect both sides: the contractor gets paid for real work done, and you don't hand over the full amount until you can see what you're paying for.
You'll encounter progress payments most often in home building, major renovations, and commercial construction. Smaller jobs—a new roof, a deck, a bathroom remodel—sometimes use them too, though some contractors ask for a deposit upfront and the balance on completion instead.
Key Takeaways
- Progress payments are released in stages tied to specific milestones—foundation complete, framing complete, inspections passed—not on a calendar schedule.
- The payment schedule is written into your contract and should list each milestone, the percentage of total cost due at each stage, and who inspects the work before payment is released.
- A lender or title company often holds the money in escrow and releases it only after a third-party inspector confirms the work matches the contract.
- If work stops or falls behind, you can withhold payment until it resumes or is corrected, which is your main leverage as the payer.
- Retainage—money held back at each stage—protects you if the contractor abandons the job or leaves defects unfixed.
How the payment schedule gets set up in your contract
Before work begins, you and the contractor agree on a payment schedule that breaks the total project cost into chunks. The contract should name each milestone—"foundation inspection passed," "framing complete," "drywall hung and inspected"—and state what percentage of the total cost is due when that milestone is reached. A typical schedule might be 20% at foundation, 30% at framing, 20% at rough-in, 20% at finish, and 10% held back until final walkthrough.
The contract also names who inspects the work before payment is released. This is often a third-party inspector you hire, your lender's inspector, or a municipal building inspector. The inspector's job is to confirm that the work shown in the contract was actually done and done correctly. Without that confirmation, the money doesn't move.
Read the payment schedule section carefully before you sign. Make sure the milestones are specific enough that you and the contractor won't argue about whether they've been met. "Framing complete" is clearer than "substantial progress." Ask what happens if work is delayed or if you find defects—does the payment hold until they're fixed, or does the contractor get paid anyway and you deduct later?
Who holds the money and when it gets released
In most construction loans, the lender or a title company holds the progress payment money in an escrow account. You don't hand cash directly to the contractor. Instead, the contractor submits a payment request (called a draw request or draw application) after a milestone is complete. The request includes photos, invoices, and proof that materials were delivered and work was done.
A third-party inspector then visits the site and confirms the work matches what was promised. If it does, the inspector signs off. The lender or title company then releases the funds to the contractor, usually within a few business days. If the inspector finds problems—work that doesn't match the contract, materials that weren't delivered, or code violations—payment is held until those issues are fixed.
If you're paying out of pocket without a lender, you still have the option to hire an independent inspector before each payment. This costs money upfront but gives you the same protection: proof that work was done before you pay for it. Some contractors will agree to this; others see it as a sign you don't trust them and may push back on price or timeline.
Retainage: money held back to protect you
Most progress payment contracts include retainage, a percentage of each payment that is held back and not released until the entire project is finished and inspected. Retainage is typically 5% to 10% of each draw. So if a milestone payment is $10,000 and retainage is 10%, the contractor gets $9,000 and you hold $1,000.
Retainage protects you if the contractor abandons the job, leaves defects unfixed, or doesn't pay subcontractors and suppliers. If those problems happen, you have money in hand to hire someone else to finish the work or fix what's wrong. Without retainage, you'd have to sue to recover costs, which takes months and money you may not have.
The retainage amount should be released after a final inspection shows the work is complete and meets code. Some contractors ask for retainage to be released earlier—for example, after 50% of the project is done—as a show of good faith. That's a negotiation point, but don't release all of it until you're truly satisfied the job is done.
What happens if work stops or doesn't meet the contract
If the contractor falls behind schedule, stops work, or delivers work that doesn't match the contract, you can withhold payment. This is your main leverage. A contractor who isn't getting paid will usually respond faster than one who is. Before you withhold, send a written notice explaining what's wrong and give a deadline to fix it—usually 5 to 10 business days. Keep a copy for your records.
If the contractor doesn't respond or fix the problem, you can hold the payment indefinitely. Some contracts allow you to hire another contractor to finish or fix the work and deduct that cost from what you owe. This is called "set-off" and should be spelled out in your contract before work starts. If it's not, consult a local attorney before you hire someone else, because the contractor may claim you breached the contract by not paying them.
If the contractor sues you for non-payment, you can defend yourself by showing the work didn't meet the contract. But litigation is expensive and slow. It's better to catch problems early—at each inspection—and hold payment until they're corrected.
Progress payments and your lender
If you have a construction loan, the lender controls the progress payment schedule. You can't change it without the lender's approval. The lender's inspector (or an inspector they hire) must sign off on each milestone before the lender releases funds. This adds time—usually 1 to 2 weeks per draw—but it protects the lender's investment and, indirectly, protects you by ensuring work meets code.
Some lenders require a certain percentage of the project to be complete before they'll release the first draw. Others require you to have paid for materials out of pocket before they reimburse you. Read your loan documents to understand the lender's rules. If you disagree with how much the lender will release, you can ask for a second inspection or provide additional documentation, but the lender has final say.
When the project is finished and all draws are paid, the construction loan converts to a permanent mortgage (if that's your loan structure). The lender will do a final inspection to confirm the house is complete and matches the original plans. Only then will they release the final draw and close the loan.
Progress payments on smaller projects and renovations
Not every project uses a formal progress payment schedule. A contractor replacing your roof might ask for 50% upfront and 50% on completion. A plumber might ask for the full amount when the job is done. These are simpler arrangements, but they shift more risk to you: if the contractor does poor work or abandons the job halfway through, you've already paid and have little recourse.
Even on smaller jobs, you can request a progress payment schedule. Offer to pay a deposit (usually 10% to 25%) to cover materials, then pay the balance in stages as work is completed. Put it in writing—even a text message or email counts—so there's no confusion later. If the contractor refuses and demands full payment upfront, that's a red flag. Reputable contractors understand that progress payments protect both sides.
Frequently Asked Questions
What if the contractor submits a draw request but the work isn't done yet?
The inspector will catch it. Their job is to confirm the work matches the contract before payment is released. If work is incomplete or doesn't meet code, the inspector will note it and the lender or title company will hold the payment. The contractor doesn't get paid until the problem is fixed and re-inspected.
Can I negotiate the payment schedule after the contract is signed?
Yes, but the contractor has to agree. If you want to change when payments are due or how much is held back, you'll need a written amendment signed by both of you. The contractor may ask for something in return—a higher price, a longer timeline, or fewer inspections. Any change should be in writing before work resumes.
What if I disagree with the inspector's decision to hold payment?
You can hire a second inspector at your own cost and submit their report to the lender or title company. If the second inspector says the work is complete, the lender will likely release the payment. If both inspectors agree work is incomplete or defective, you have grounds to withhold payment until it's fixed.
Do I have to use progress payments, or can I pay the contractor in full upfront?
You can pay however you and the contractor agree, but progress payments are strongly recommended. Paying in full upfront gives you no leverage if work stops or is done poorly. Progress payments ensure you only pay for work that's actually complete and inspected.
What happens to retainage if the contractor goes out of business before the project is done?
The retainage money stays in escrow (if held by a lender or title company) and can be used to hire another contractor to finish the work. If you held the money yourself, you have it available to pay for completion. This is why retainage is so important—it's your safety net if the contractor can't finish.