What is a Payment Schedule? A Guide for Construction Project Managers

What is a Payment Schedule?

A payment schedule is a written document that shows how much a payer (like a builder or project owner) plans to pay to a claimant (like a contractor or supplier) in response to a payment claim. It explains:

• If the full amount of the claim will be paid.
• If less will be paid, with reasons why.

If a payer does not plan to pay the full amount of a claim by the due date, they must prepare and send a payment schedule. Ignoring a payment claim without taking action can lead to serious financial consequences.

Purpose of Payment Schedules

A payment schedule is a critical component of a construction contract that outlines the payment terms and conditions for a construction project. It defines the payment process, including the amount, frequency, and timing of payments, to ensure that all parties involved in the project are aware of their financial obligations. The purpose of a payment schedule is to provide a clear and transparent payment process that helps to prevent payment disputes and ensures that contractors and subcontractors are paid fairly and on time.

Why is a Payment Schedule Important?

A payment schedule is vital because:

1. It Keeps Things Clear: Both parties know how much will be paid and why any deductions are made.
2. It’s the Law: Payment schedules are required under the Security of Payment Act (SoPA). Not providing one could result in legal action.
3. It Ensures Construction Industry Security: Adhering to payment schedules as required by the Security of Payment Act helps maintain financial security and compliance within the construction industry.
4. It Prevents Misunderstandings: By explaining payment decisions, disputes are less likely to occur.
5. It Protects the Payer: If you don’t submit a payment schedule and disagree with the claim, you might be forced to pay the full amount even if you have valid reasons to withhold payment.

‍

Types of Payment Schedules

There are several types of payment schedules used in construction projects, including:

• Deposit and Final Payment: Commonly used for small construction projects, this schedule involves an upfront deposit and a final payment upon project completion.
• Progress Payments: Ideal for medium-to-large construction projects, this schedule allows for payments at regular intervals based on the project’s progress.
• Time-Based Payments: Payments are made at regular intervals, such as monthly or quarterly, based on the project timeline.
• Milestone-Based Payments: Payments are made when specific milestones or stages of the project are completed.
• Completion-Based Payments: Payments are tied to the completion of specific tasks or phases of the project.

Who Needs to Submit a Payment Schedule?

The respondent is the party that has received a payment claim under the construction contract. This could be a project owner, contractor, consultant, or even a project manager responsible for overseeing the contract. Essentially, any party required to make payments for work or services under the contract can be a respondent.

For example:

• A project owner becomes the respondent if they receive a payment claim from a contractor.
• A contractor is the respondent when a payment claim is issued by a subcontractor or supplier.
• A consultant or project manager may be the respondent if they are contractually obligated to pay for specific services or milestones.

A respondent must prepare a payment schedule if they do not intend to pay the full amount claimed by the due date. This applies even if the respondent believes the payment claim is invalid or they are not directly responsible for the work or service claimed.

Even if you agree with the full amount, its best practice to issue a Payment Schedule in response to a Payment Claim.

Progress Claim vs. Payment Schedule: What's the Difference?

Understanding the distinction between these terms is crucial:

• Progress Claim: A request made by a contractor to claim payment for work completed within a specific period. A payment claim is a formal notice that a respondent must address upon receipt, with specific timelines for responding to ensure compliance with relevant laws.
• Payment Schedule: A document issued in response to a progress claim, detailing how much will be paid and when.

As we described above, while a progress claim is initiated by the contractor (as an example), the payment schedule is typically issued by the party responsible for payment, such as the project owner.

What is the Due Date for Payment?

The due date is when the payment becomes legally payable. Usually, it’s set in the contract, but if the contract allows too much time (e.g., more than 10 business days), the Security of Payment Act overrides it.

If there’s ever a dispute, the due date is critical because deadlines for resolving disputes or taking legal action are calculated from this date.

Key Timeframes for Payment Schedules

Timeframes under the Security of Payment Act are strict:

• 10 Business Days: The respondent has 10 business days to issue a payment schedule after receiving a payment claim, unless the contract specifies a shorter period.
• 5 Business Days (Second Chance): If the respondent misses the first deadline, the claimant can send a second notice (called a section 17(2) notice). The respondent then has 5 business days to submit the payment schedule.

If these timeframes are missed, the respondent may lose the right to dispute the claim.

What Must a Payment Schedule Include?

A valid payment schedule must meet the requirements outlined in the Security of Payment Act (SoPA), which may vary by state or territory. To ensure compliance, the payment schedule should include:

1. In Writing: The payment schedule must be a written document, clearly addressed to the claimant.
2. Identify the Claim: It must clearly reference the payment claim to which it responds.
3. State the Payment Amount: Specify the exact amount the respondent agrees to pay, even if the amount is zero.
4. Explain Deductions: If the respondent intends to pay less than the amount claimed, the schedule must explicitly provide:
   • The amount being withheld.
   • The reasons for withholding payment (e.g., incomplete work, defective materials, or overcharging).
   • Supporting documentation, such as delivery dockets, site photos, completion certificates, or other relevant evidence.
5. State-Specific Requirements: Check your state or territory's SoPA provisions for any additional elements that must be included, such as wording or formatting requirements. For example:
   • Some jurisdictions may require detailed valuation calculations for withheld amounts.
   • Others might mandate specific timeframes for certain responses or additional notices.

Failure to meet these requirements can render the payment schedule invalid, which may expose the respondent to legal and financial risks.

How is a Payment Schedule Sent?

Serving a payment schedule correctly is critical to ensure it is legally recognized. Here are the most reliable methods:

1. Email: If the claimant has agreed to receive notices by email (as specified in the contract), this can be a fast and effective method. Try to use an official email address specified in the contract and where possible request both a delivery receipt and a read receipt to confirm the email was received and opened just to be sure.
2. In Person: Hand-delivering the payment schedule is one of the most direct methods. Obtain a signed and dated receipt from the claimant or their representative to confirm receipt.
3. Express Post (With Tracking): This method allows you to track the delivery in real-time. Keep the tracking receipt as evidence of dispatch and delivery.
4. Courier (Signature Required): Using a courier with a signature requirement provides a solid proof of delivery. Ensure the recipient's signature is dated to verify the exact delivery time.
5. Fax (Only if Allowed): If the contract permits service by fax, ensure you:
   • Retain a full-page fax journal as proof of transmittal.
   • Avoid sending lengthy or color documents, as these may not transmit properly.

Tips for Serving a Payment Schedule

By following these best practices, you can minimize risks and ensure the payment schedule is served in a way that protects your legal and financial interests.

Why Some Payment Claims Are Rejected

Payment claims can be rejected, or a payment schedule may respond with an amount less than the claimed amount (even $0), for several valid reasons. These reasons often arise due to issues with the claim itself or problems with the work or services provided. Here are some common scenarios where this can occur:

When responding with $0 or less than the claimed amount, the respondent must:

• Clearly outline the reasons for the adjustment in the payment schedule.
• Provide sufficient detail and supporting evidence to justify their position (e.g., site photos, inspection reports, or written notices).

A well-documented payment schedule reduces the likelihood of disputes and ensures compliance with the Security of Payment Act.

What Happens If You Don’t Provide a Payment Schedule?

Failing to issue a payment schedule on time can lead to:

1. Paying the Full Amount: You may have to pay the entire claimed amount, even if parts of the claim are invalid.
2. Losing Dispute Rights: If you don’t submit a payment schedule, you can’t dispute the claim through adjudication.
3. Legal Action: The claimant can take you to court or adjudication for the full amount.

Clearly defined construction payment schedules are essential for managing payment timelines, avoiding disputes, and maintaining project timelines and budgets.

Benefits of Using a Payment Schedule

Using a payment schedule in a construction project provides several benefits, including:

• Compliance with Law and Contracts: A properly issued payment schedule ensures compliance with the Security of Payment Act and the terms of the construction contract, avoiding penalties or legal challenges.
• Improved Construction Project Management: Payment schedules create a transparent process for tracking project progress and identifying potential issues early, enhancing overall project management efficiency.
• Clear Payment Terms: A payment schedule establishes clear payment terms and conditions, preventing disputes and ensuring all parties understand their financial obligations.
• Timely Payments: By detailing the amounts and due dates, a payment schedule ensures contractors and subcontractors are paid fairly and on time, maintaining positive cash flow and financial stability.
• Reduced Risk: It minimizes the risk of payment disputes and non-payment, protecting contractors and subcontractors from financial hardship and costly legal battles.

Best Practices for Payment Schedules

1. Use Payment Schedule Templates: Pre-designed payment schedule templates ensure that all essential details are included, reducing the risk of errors or omissions.
2. Follow Conditions Precedent for Payment: Ensure that all contractual conditions precedent—such as submitting invoices, providing warranties, or meeting specific milestones—are satisfied before issuing the payment schedule. Failure to meet these requirements could lead to disputes or invalid payment claims.
3. Comply with Contract Requirements: Check the construction contract for specific terms regarding payment schedules, such as the required method of service, timelines, or format. Adhering to these contract requirements ensures legal compliance and protects your rights in case of a dispute.
4. Be Specific: Clearly outline the reasons for any deductions or withheld amounts in the payment schedule. Provide supporting documents like site photos, certificates, or inspection reports to substantiate your decisions.
5. Track Deadlines: Carefully count business days to ensure that the payment schedule is issued within the timeframe specified by the Security of Payment Act or the contract. Missing a deadline can have serious financial and legal consequences.
6. Keep Records: Retain copies of all related documents, including the payment claim, the payment schedule, and proof of service (e.g., courier receipts, tracking numbers, or email read confirmations). These records are invaluable if disputes arise.

By integrating these practices, you can ensure that your payment schedules are not only comprehensive and clear but also fully compliant with both legal and contractual obligations.

Managing Payment Schedules

Effectively managing payment schedules is critical to maintaining smooth operations in construction projects. Given that multiple payment schedules may need to be handled simultaneously, organization and attention to detail are essential.

Here are some best practices for managing payment schedules:

1. Set Up a Folder Structure and Filing System:
   • Create a clear, organized folder structure for storing payment schedules, related documents, and correspondence.
   • Use separate folders for each project and payment claim to ensure that all documentation is easy to locate and reference.
   • Consider using digital document management tools to keep records secure and accessible.

1. Set Up a Payment Tracking System:
   • Use a tracking system to monitor payment claims and payment schedules for each project.
   • Include details such as total project value, value of completed work, previous payments made, and the remaining balance to help track financial progress accurately.
   • Spreadsheets or specialized construction management software can help streamline this process.
2. Use a Payment Schedule Template:
   • Utilize pre-designed templates to ensure consistency and compliance.
   • Templates should include all required details, such as claim references, payment amounts, deductions, and reasons for adjustments.
3. File and Store All Related Documents:
   • Save all claims, invoices, supporting documents, and correspondence related to each payment schedule in the appropriate folder.
   • Proper documentation helps resolve disputes and ensures compliance with both contractual and legal requirements.
4. Communicate with Parties Involved:
   • Maintain open communication with contractors, subcontractors, project owners, and other stakeholders to keep everyone informed about payment schedules and any changes.
5. Monitor Cash Flowand Actuals:
   • Track cash flow carefully to ensure timely payment of the invoice and to identify potential financial issues before they escalate.
6. Address Disputes Promptly:
   • Handle any payment disputes quickly and fairly to prevent them from disrupting the project. Use proper documentation and communication to resolve conflicts effectively.

By implementing these practices, you can manage payment schedules efficiently, reduce the risk of errors or disputes, and ensure smoother financial operations across construction projects.

Payment Schedules and Security of Payment Act

The Security of Payment Act was designed to ensure contractors and subcontractors get paid fairly and on time. It requires payment schedules to:

• Be submitted within strict timeframes.
• Clearly explain deductions.
• Protect the rights of claimants and respondents during disputes.

The Act overrides any contract provisions that try to reduce these protections, such as clauses that delay payment or limit interest on overdue amounts.

Consequences of Ignoring the Act

Not following the Security of Payment Act can result in:

• Full liability for the payment claim.
• Denial of adjudication rights.
• Financial penalties and project delays.
• Damaged professional relationships.

Example: When Things Go Wrong

Let’s say a subcontractor claims $50,000 for completed work, but the main contractor disagrees with $10,000 of the claim. If the contractor doesn’t issue a payment schedule in time:

1. The subcontractor can demand the full $50,000, even though $10,000 is disputed.
2. The contractor loses the right to explain or dispute the claim.
3. The subcontractor applies for adjudication and gets the full amount.

This scenario highlights why payment schedules are critical.

Payment Schedule and Project Benefits

Overall, everyone wants the project to get done as soon as possible. Payment Claims and Payment Schedules are the key steps that occur on a regular and recurring basis on construction project. Without them, no one gets paid, and food doesn't get put on the table of people/families working on the project.  

Be sure to balance the merit of progressing the project, the relationships involved and the costs of what a breakdown over payment understanding might do to your project or client's end capability. Sometimes, the cost of delay isn't worth it.  

Conclusion

A payment schedule isn’t just paperwork—it’s a critical tool for managing construction payments and staying legally compliant. By issuing a clear and detailed payment schedule on time, respondents can avoid financial risks, legal disputes, and damaged relationships.

Whether you’re a builder, contractor, or subcontractor, understanding how to use payment schedules effectively under the Security of Payment Act ensures smoother projects and protects your interests.