Contractor payment terms that work: Models, structures, and templates

Clear payment terms prevent disputes and ensure contractors know when to expect payment. This guide covers the most common payment models—net terms, milestone-based payments, retainers, and deposits—with examples and templates you can use in your contracts.

The right payment terms depend on your relationship with the contractor, the project type, and your risk tolerance. We'll walk through each model, when to use it, and how to structure terms that contractors accept and finance can audit.

Net terms: Net 15, Net 30, Net 60

Net terms specify when payment is due after the contractor submits an invoice. "Net 30" means payment is due within 30 days of the invoice date. This is the most common payment model for ongoing contractor relationships.

Net 15 means payment is due within 15 days. Use this for smaller projects or when contractors need faster payment. Example contract language: "Payment due Net 15 from invoice date."

Net 30 means payment is due within 30 days. This is standard for most contractor relationships. It gives you time to review work, process it through your system, and arrange payment, while contractors receive payment in a reasonable timeframe. Example: "Payment due Net 30 from invoice date."

Net 60 means payment is due within 60 days. Larger companies use this with longer payment cycles. However, many contractors won't accept Net 60 terms because it's too long to wait for payment. Example: "Payment due Net 60 from invoice date." (Note: Many contractors will decline this.)

When to use net terms: Net terms work best for ongoing relationships where contractors submit monthly invoices for completed work. They're simple, predictable, and easy for finance to audit. Most contractors accept Net 30 as standard.

Milestone-based payments

Milestone-based payments tie payments to specific deliverables. Instead of paying after all work is complete, you pay as the contractor completes defined milestones. This reduces risk for both parties.

Example structure for a $10,000 project:

Milestone 1: Project kickoff and requirements (25% - $2,500) Milestone 2: Design mockups approved (25% - $2,500) Milestone 3: Development complete and tested (25% - $2,500) Milestone 4: Launch and handoff (25% - $2,500)

Each milestone has clear deliverables and a payment amount. The contractor invoices after completing each milestone, and you pay within your agreed net terms (typically Net 15 or Net 30).

When to use milestone-based payments: Milestone-based payments work best for project work with clear phases—design, development, testing, launch. They align payments with progress and reduce risk. You only pay for completed work, and the contractor receives payment in stages rather than waiting until project completion.

Retainers and deposits

Retainers and deposits are upfront payments that secure the contractor's time or cover initial costs. They reduce risk for contractors and demonstrate your commitment.

Retainer: A recurring upfront payment that secures a contractor's availability. Example: "$5,000 per month retainer for 20 hours of work. Additional hours billed at $150 per hour." Retainers are common for ongoing consulting or advisory relationships where you need guaranteed availability.

Deposit: A one-time upfront payment for project work. Example: "25% deposit ($2,500) due upon contract signing. Remainder due upon project completion." Deposits cover initial costs (licenses, tools, subcontractors) and demonstrate your commitment.

When to use retainers: Use retainers for ongoing relationships where you need guaranteed availability and consistent communication. Retainers work well for advisory roles or retainer-based consulting.

When to use deposits: Use deposits for new contractors or large projects where the contractor needs upfront money to cover costs. A typical structure is 25-50% deposit, remainder upon completion.

Comparing payment models

Net 30 is best for ongoing monthly work with trusted contractors. Risk level is low. Example: Monthly retainer or hourly work billed monthly.

Milestone-based is best for project work with defined phases. Risk level is medium (you pay as you go). Example: Website redesign, app development with phases.

Deposit + Net 30 is best for new contractors or large projects. Risk level is low (deposit covers initial costs). Example: 25% upfront, remainder on completion.

Retainer is best for ongoing advisory or consulting relationships. Risk level is low (recurring commitment). Example: $5K per month for guaranteed availability.

Late fees and grace periods

Late fees apply when you don't pay contractors on time. Including late fee terms in contracts protects contractors and incentivizes timely payment from you.

Standard late fee: 1.5% per month (18% annually) on overdue amounts. Example contract language: "If payment is not received within Net 30 terms, a late fee of 1.5% per month will be applied to the outstanding balance."

Grace periods: A buffer period (typically 3-5 days) before late fees apply. Example: "Payment due Net 30. Late fees apply after 35 days (5-day grace period)." Grace periods account for processing delays and prevent penalties for minor delays caused by banking or holidays.

Why include late fees: Late fees protect contractors financially if you miss payment deadlines. Including them in your contract demonstrates you take payment obligations seriously and will likely incentivize your finance team to process payments on time.

Aligning payment terms with milestones

For project work, align payment terms with milestones to create a clear payment schedule everyone understands:

Example: Website redesign project ($10,000 total)

Milestone 1: Kickoff and discovery (10% - $1,000) - Due upon contract signing Milestone 2: Design mockups (30% - $3,000) - Due Net 15 after design approval Milestone 3: Development (40% - $4,000) - Due Net 15 after development complete Milestone 4: Launch and handoff (20% - $2,000) - Due Net 15 after launch

This structure provides upfront payment to cover initial costs, then ties remaining payments to completed work. The contractor knows exactly when to expect payment, and you only pay for delivered work.

Contract language templates

For Net 30 terms:

"Payment is due Net 30 from invoice date. Contractor will submit itemized invoices by the 1st of each month for work completed in the prior month. Payment will be made via [Wise/PayPal/bank transfer] within 30 days of invoice receipt. Late fees of 1.5% per month apply to overdue balances after a 5-day grace period."

For milestone-based payments:

"Payment will be made upon completion of the following milestones: [list milestones with amounts and deliverables]. Contractor will invoice upon completion of each milestone. Payment will be made Net 15 from invoice date via [payment method]. Client must approve deliverables before payment is released."

For deposits and remainder payments:

"A deposit of 25% ($[amount]) is due upon contract signing. The remaining 75% is due upon project completion and approval of final deliverables. Deposits are non-refundable but will be credited toward the final payment."

Email template: Notifying contractors of payment

Subject: Payment sent for [Invoice #123]

Hi [Contractor Name],

Payment for Invoice #123 ($3,000) has been sent via Wise. Transaction ID: [ABC123]. Funds should arrive in your account within 1-3 business days.

Please confirm receipt once the payment arrives.

Thanks, [Your Name]

Common mistakes to avoid

Vague payment terms. "Payment upon completion" is too vague. Define exactly when payment is due (Net 15, Net 30) and what "completion" means (specific deliverables, milestones). Contractors need clarity.

No late fee clause. Without late fees, there's no incentive to pay on time. Include a standard late fee (1.5% per month) with a grace period.

Paying 100% upfront. Never pay the entire amount upfront unless you have a long-standing relationship. Use deposits (25-50%) or milestone-based payments to reduce risk if something goes wrong.

Not documenting milestone approvals. For milestone-based payments, document approval of each milestone before releasing payment. This prevents disputes about whether work was actually completed.

Inconsistent terms across contractors. Use the same payment terms for all contractors in similar roles. This simplifies accounting and prevents confusion or perceived unfairness.

Unclear payment methods. Specify exactly how you'll pay (Wise, PayPal, bank transfer) so the contractor knows what to expect.

Documenting payment approval

For every payment, maintain a clear record:

Contractor submits invoice with dates, deliverables, amounts, and any supporting documentation (time logs, screenshots, etc.).

You review and approve the invoice. Document your approval: who reviewed it, when, and what was approved. Mark it as "Approved for payment" in your system.

You send payment and record the transaction ID and date.

Contractor confirms receipt and you log the confirmation date.

This creates an audit trail from invoice through approval to payment to confirmation. It prevents disputes and makes year-end accounting straightforward.

The bottom line

Clear payment terms prevent disputes and ensure contractors know when to expect payment. The most common models are Net 30 for ongoing work, milestone-based payments for projects, and deposits for new contractors or large projects.

Include payment terms in every contract: when payment is due, how you'll pay, what happens if payment is late, and how milestones are approved. Use the templates above as starting points and adjust based on your specific relationship.

With clear terms and a systematic process to track approvals and payments, you'll avoid disputes, maintain good contractor relationships, and keep finance happy with clean audit trails.

Start with Net 30 as your standard for ongoing work. Use milestone-based payments for projects with defined phases. Use deposits for new contractors or large projects. Adjust based on your risk tolerance and the contractor's needs.

Communicate terms clearly upfront. A few minutes spent defining payment terms in writing prevents weeks of disputes later.