The fastest way for a small contractor to go broke on a profitable job is to pay for everything up front and get paid only at the end, so the fix is a deposit plus billing in stages. If you buy the materials, pay the crew every Friday, and do not see a dime until the final walkthrough, you are lending the customer the entire cost of the job for weeks or months, out of your own pocket. One slow-paying customer in that setup can freeze your whole business. Structuring the money so a payment lands at the start and again at each milestone keeps you close to even the whole way through. Get this right and cash flow stops being the thing that sinks you.
This is about how the money is timed across the job. It works together with two other pieces: what the contract has to say, and the money held back at the very end. This guide is the timing.
Why you never want to be the bank
Do the math on a plain job. Materials on day one. Labor every week. Nothing coming in until it is done. On a job that runs two months, you are carrying the full material and labor cost for the whole two months. If the customer then drags the final payment by another month, you are three months out of pocket on money you already spent. Meanwhile the next job needs a material deposit you no longer have.
That is not a profit problem, it is a cash-flow problem, and it kills contractors who are actually making money on paper. The margin is real, but it is trapped in work you have done and not been paid for. Deposits and progress billing exist to keep that gap small.
The deposit
A deposit is the payment you collect before you start, and its main job is to cover your early materials and lock the customer in. It shows they are serious, and it means you are not buying their materials with your money.
Two things to know:
- Many states cap how big a residential deposit can be, usually as a dollar amount or a percentage of the contract, whichever is lower. These caps are set state by state, and going over one can be a licensing or consumer-protection violation, not just a bad look. Get your state's cap from Working in Your State or the contract guide before you set a number.
- Some states require deposits to be held in escrow or bonded rather than spent, on certain jobs. Another reason to know your state's rule before you take the money.
Within the legal cap, size the deposit to cover the materials and mobilization you have to lay out before the first progress payment. That is what keeps day one from coming out of your pocket.
Progress billing
Progress billing means you invoice in stages as the work advances, instead of once at the end. Each stage is tied to a milestone both sides can see, so there is nothing to argue about when the invoice lands.
- Tie each payment to a visible trigger. Rough-in complete, materials delivered, drywall up, fixtures set. Concrete milestones, not calendar dates, so the customer can look at the job and agree the stage is done.
- Front-load a little where you fairly can. You spend more early, on materials and setup, so it is reasonable for the payment schedule to roughly track your costs rather than sit evenly. Do not overreach, but do not let the schedule leave you funding the expensive early phase alone.
- Keep the final payment modest. The last payment should be small enough that you can comfortably eat a short delay on it, because the final payment is the one most likely to get held up over a punch list. If most of your money is riding on that last check, one fussy customer controls your whole margin.
- Bill on time, every time. A progress schedule only works if you actually send the invoice the day the milestone hits. A late invoice restarts the customer's payment clock later than it needed to.
Write the whole schedule into the contract before the job starts, so nobody is renegotiating cash flow mid-project.
How it connects to getting paid faster and to retainage
Two other rules stack on top of your schedule. First, most states have prompt-pay laws that set how many days the customer or GC has to pay each invoice, and often owe you interest if they run late, so a clean milestone invoice starts a legal clock working for you. Second, on many jobs a slice of each payment is held back as retainage until the end, which is a separate bite out of your cash flow you have to plan around. Both are set by your state. See Retainage and prompt pay, and get your numbers from Working in Your State.
Common questions
How much deposit should a contractor take?
Enough to cover the materials and setup you pay for before the first progress payment, but no more than your state's legal cap. Many states cap residential deposits at a dollar figure or a percentage of the contract, whichever is lower, and some require deposits to be held in escrow. Going over the cap can be a licensing violation, not just poor form. Get your state's exact cap from Working in Your State before you set a number.
Is it legal to ask for money before starting work?
Yes, taking a deposit before you start is standard and legal, as long as you stay within your state's cap and any escrow rules. The deposit covers your early materials and confirms the customer is committed, so you are not financing their job out of your own pocket. Some states limit the size of a residential deposit or require it to be held a specific way, so confirm your state's rule in Working in Your State.
What is progress billing in construction?
It is invoicing in stages as the work advances, instead of billing once at the end. Each stage is tied to a visible milestone, like rough-in done or fixtures set, so a payment lands at each step and you are never carrying the whole job's cost yourself. It keeps a profitable job from becoming a cash-flow crisis. Write the schedule into the contract before you start, and send each invoice the day its milestone is hit.
How do I stop customers paying me late?
Bill in stages against clear milestones, keep the final payment small, invoice the day each stage is done, and lean on your state's prompt-pay law. A late payment hurts most when all your money is riding on one end-of-job check, so a staged schedule limits the damage. Most states set a deadline for each invoice and owe you interest if it is missed. Get your state's prompt-pay deadline and rate from Working in Your State.
The honest bit
- Residential deposit caps, escrow rules, prompt-pay deadlines, and retainage caps are all set state by state, and several have changed recently. This guide teaches how to structure the money. Get your state's actual figures from Working in Your State or the contract guide before you rely on them.
- This is general guidance, not legal advice. On larger jobs, have your contract and payment schedule looked over once by a construction attorney, because a schedule that keeps your cash flow healthy and stays inside your state's caps is worth the one-time cost.
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