How to Create a Payment Agreement for Your Contracting Business 

As a contractor, you need to understand how to create a contractor payment agreement. This document can help protect you from disputes with customers. 

Why do you need to worry about these disagreements as a contractor? Payment disputes and misunderstandings are extremely common in the home services industry. The Attorney General in Illinois claims that 20% of all legal complaints his office receives are between home service contractors and clients. Other states likely see a similar number of cases. 

A payment agreement is one of the tools you can use to avoid such legal headaches. This document does more than outline how much the client pays. It also provides details to help prevent misunderstandings. 

In this article, we will look more closely at payment agreements. Our discussion will touch on the benefits and legal considerations. We’ll also explore elements every agreement should have. You’ll see an example of a payment agreement, and we’ll give you some tips to get started creating your own contract. 

What Is a Payment Agreement? 

A payment agreement is a legally binding document. But it only becomes legal after you and your customer sign it. 

The agreement details the project and payment amount. The first goal is to ensure you get paid for your work.  

However, the document goes beyond the payment amount and deadline. It also covers the scope of the work and other details. For instance, it may include information about materials. And it might define what constitutes a finished project. 

For instance, you might get a contract for a kitchen renovation. It could include details about the type of countertop or tiles you must use. You might also add more minor details, like the variety of cabinet hardware or number of paint coats. 

On some projects, you might also add seemingly minor details. For example, you could explain how you’ll clean after the installations are finished. 

Why Payment Agreements Matter for Your Business 

There are three reasons why this agreement is vital for your business: 

• Ensure prompt payment: It helps you get paid. And it gives you recourse if you don’t get your money on time. 
• Plan your time: It defines the scope of the work. This detail lets you plan how long the project will take. 
• Manage your budget: You can plan payroll and investments based on expected earnings. 

Payment agreements also benefit customers. They have clear expectations, and they can plan ahead for the payment. 

Benefits of Using Payment Agreements for Contractors 

The payment and legal aspects of a contractor payment agreement are important. But these documents can benefit your overall business operation. Here are seven advantages you can expect from using payment agreements. 

• Get a clear payment schedule. The agreement can outline when you’ll get paid. The document can include an initial deposit to pay for materials. It might also include partial payments when you meet specific benchmarks. These details help you plan cash flow and income for your business. 
• Build trust with clients. The details of the project and payment create transparency. The client will know exactly what to expect. For instance, they can see itemized costs for materials and labor. You will also build trust with each benchmark that you reach. 
• Enjoy legal protection. The agreement does not guarantee you’ll get paid on time. But it does give you legal options if the client does not pay. In many cases, you’ll be able to resolve disputes quickly, and the contract will help you collect the payment without going to court. 
• Streamline risk management. An agreement lowers the risk of non-payment. It also limits other risks. For instance, clearly defined terms lower the chance you’ll spend more time than planned on the project. 
• Adjust for each project. You can easily tailor agreements for each job. For example, a client may wish to pay in installments during the project. Or, you could ask for an upfront payment because the project requires expensive materials. 
• Improve record keeping. Completed agreements can help with record-keeping. You can add agreement information to your accounting software. It can also serve as documentation for tax filings. 
• Avoid disputes. Disputes often arise from misunderstandings. A clear contractor payment agreement limits this risk. You can itemize each expense so the customer understands the entire cost. 

Detailed agreements can also help you educate your customers. They will better understand the different aspects of the project. For instance, they can see the cost breakdown for labor and materials. This can also help build trust and understanding of the overall price of the job. 

Key Elements to Include in a Payment Agreement 

The details of a contractor payment agreement can vary. Some may be quite complicated and include information like payment benchmarks. Others could be simpler and focus on labor and a few replacement parts. 

Despite these differences, every payment agreement will have many similar elements. Here are seven elements you’ll almost always use in your document.  

Personal Details 

Like all legal documents, payment agreements identify the people involved. This includes you and your customers.  

You should both include your name, address, and contact details. You’ll also need to add your business name. If the client is a business, they also need to add their company name. 

If the job site is different from the client’s address, you’ll include it, too. Other identifiers can also appear in the agreement. For example, you could add your general contractor’s license number, if applicable. 

Project Details 

You then need to put the scope of the project in writing. These details include the specific services you’ll provide. You need to be very specific in this section. Mention the project start and end dates. If needed, add benchmarks for longer projects. 

Also, you should detail all deliverables. These are the finished items that you give the client at the end of the project. The information should include materials and quality measurements. 

These details are important to limit the scope of the work. The customer won’t expect anything not included in the agreement. If they ask, you can say the work only covers the deliverables in the document. 

Payment Details 

This section details the cost of the project. It can include the total amount due after completion. You can also include the amount for a deposit or materials purchases if needed. 

If there are benchmarks, add the time or completion requirements for each payment. 

Payment Deadlines 

This part of the agreement deals with payment due dates. The deadline could be a specific date. Or, it might be a number of days after the client approves the work. 

For benchmark payments, provide the exact date or task completion that triggers the payment. 

This section can also include details about penalties for missing the deadline. This could be a penalty for late payment or referral to a collection agency. 

Payment Method 

Detail the payment methods you accept. These might be cash, check, credit, or debit cards. If you allow bank transfers, include your account number and routing number. You can also give information for online payments via your website or payment app. 

Make it clear that customers must use one of the methods you list. 

Exit Clause 

Explain how you or the customer can end the contract. List the steps or rules for doing so.  

For instance, a customer might change their mind about the project. Or, an emergency expense might ruin their budget. Similarly, you might have an emergency of your own and be unable to complete the project. 

This section shows both sides how and when to tell the other about the cancellation. It also talks about refunds or partial payments. For example, you might agree to return unused materials and refund the deposit. The customer could agree to pay for labor and materials already used, plus a small termination fee. 

Steps for Solving Disagreements 

You can lay out steps for solving disputes. This issue is different from not paying the bill. Often, it involves the customer saying the work was not complete or wasn’t good enough. They then refuse to approve the project for payment. 

The steps can include going to a mediator or arbitrator. Or, you could offer an option to negotiate with the help of lawyers. 

Another important detail is defining jurisdiction. Laws may vary slightly in different cities or counties. This detail will also decide where you’ll go to court if there is a lawsuit. 

Finally, the agreement isn’t legal until both you and the customer sign it. Leave a space for signatures at the end. 

Example Payment Agreement Template for Contractors 

Payment agreements can vary. However, most have the same basic details. Here is an example of a basic payment agreement. It can serve as an example for building a more customized contract. 

Parties 

Your company name and your name 

Your address 

Email and phone number 

License number or other identifiers 

Customer name 

Customer address 

Customer email and/or phone number 

Agreement 

This payment agreement is entered into on (Date) by (Your Company Name), known as the “Contractor,” located at (Company Address), and (Customer’s Name), known as the “Customer,” located at (Customer’s Address). 

Description of Services 

The Contractor agrees to perform the following services for the Customer. 

(Enter description of service.) 

(Enter description of service.) 

(Enter description of additional services, one by one, as needed.) 

Description of Deliverables 

The Contractor agrees to complete/deliver the following projects for the Customer. 

(Enter description of deliverable and due date. Be as detailed as possible to avoid misunderstandings.) 

(Enter description of additional deliverables as needed.) 

Payment 

The Customer agrees to pay the Contractor the following rate. 

• Labor: (Enter the desired rate per hour/day/week/or project.) 
• Materials: (Enter the amount of materials costs.) 
• Total amount: (Total estimate for the project) 

Change to payment amounts requires written authorization, signed by both parties. 

Expenses 

(Add an itemized list of materials or other expenses here, if needed.) 

Terms 

The Contractor will submit invoices after completion and approval of the work. Payments are due (number of days) after receipt. 

Payment methods include: 

• Check 
• Debit card 
• Credit card 
• Cash 
• Money order 
• ACH transfer to (routing number) (account number) 

Late payments are subject to a (percentage)% charge per month. Payments more than three months late are sent to a collections agency. 

Terminating the Contract 

Either party can end the contract in writing within (number of days) after this agreement. At this point, the Customer will pay the Contractor for labor completed and unreturnable materials. They will also pay a (percentage)% fee. The Contractor will refund any deposit not used to the Customer. 

Jurisdiction 

This agreement is made under the laws of (city, country, or state). Disputes will be resolved by mediation in (place of mediation) or in civil court (name of city, county, or state). 

Change Orders 

This agreement can be changed in writing by either party. The other party must agree in writing within (number of days) of the change order. 

Other Legal Agreements 

The Customer and Contractor cannot reveal the details of this agreement to third parties. They can do so only if the other agrees in writing. 

This agreement overrules any previous agreements between the Customer and Contractor. It only applies to the project detailed above. 

Signatures 

The undersigned agree to execute this legally binding agreement. 

(Your company) 

By: __(your signature)__ 

(Your name printed) 

(The date) 

(Customer’s name or company) 

By: __(customer’s signature)__ 

(Customer’s name printed) 

(The date) 

Legal Considerations for Payment Agreements 

A contractor payment agreement is a legal document. This means you have legal protections if you don’t get paid on time.  

At the same time, it also means you need to include specific details and meet other legal requirements of your industry. These considerations can differ depending on where you are and which services you provide. For example, local permit requirements differ from city to city. 

Here are the legal considerations to look at when making and signing your payment agreement. 

Non-Disclosure Agreements 

Contracts often have a non-disclosure clause. It states that you and your customer can’t reveal the terms of the contract to others. Your customer can’t tell others that you gave them a lower price, for example. Or, you can’t tell people details about the customer’s building. 

These clauses are often basic in residential contracts but can be more detailed if your customer is a business. 

You should always abide by these agreements to avoid voiding the agreement. 

Insurance 

You need insurance to work as a contractor. Your insurance covers liability and personal injury. If you make a mistake, your insurance policy will pay the customer for the damages.  

Customers will usually verify your insurance before the project begins. You might include insurance verification in the agreement. 

You should also consider fires, natural disasters, and other events. These are beyond your control but could affect your payment. You might consider a force majeure clause in your payment agreement. This section tells what happens if a disaster occurs.  

In most cases, the agreement is void if a natural disaster occurs. But, in some cases, you might try to get compensation for materials or work done before the unfortunate event happened. 

Language 

Make sure to use clear terms in the agreement. Err on the side of clarity in the document. For instance, include quantity, brand, and other identifiers, such as a stock keeping unit (SKU), when listing materials.  

Also, carefully describe deliverables. Consider using established standards, like the National Standard Plumbing Code, to describe the quality and completeness of work. 

Local Laws and Permits 

The agreement should not include work that breaks local laws or standards. Local authorities may have rules about wiring, fire safety, or ventilation.  

As the contractor, you are responsible for meeting these requirements. If you promise to do work that doesn’t comply with local codes, your agreement could be void. This could harm your case for getting payment in civil court. 

Verify all relevant building codes before you write the payment agreement. If you aren’t sure, it’s worth visiting a lawyer to get advice. Better to pay legal fees than to risk the payment for an entire project. Some lawyers will offer compliance checks for businesses. These may be more reasonably priced than a full consultation. 

Save Your Documentation 

You never know what details could be important. In a dispute or court case, a lawyer will collect all evidence. That could include receipts, emails, and invoices. File every communication and piece of paper from a project. Only dispose or delete once the project is done, and you get paid.