Contractor payment terms that work

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, project type, and 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 invoice date. This is the most common payment model for ongoing contractor relationships.

Net 15: Payment due within 15 days. Used for smaller projects or when contractors need faster payment. Example: "Payment due Net 15 from invoice date."

Net 30: Payment due within 30 days. Standard for most contractor relationships. Gives you time to review work and process payment. Example: "Payment due Net 30 from invoice date."

Net 60: Payment due within 60 days. Used by larger companies with longer payment cycles. Many contractors won't accept Net 60 terms. Example: "Payment due Net 60 from invoice date."

When to use: Net terms work best for ongoing relationships where contractors submit monthly invoices for completed work. They're simple, predictable, and easy to audit.

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:

• 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 work best for project work with clear phases (design, development, launch). They align payments with progress and reduce risk—you only pay for completed work.

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 to the project.

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

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 and demonstrate commitment.

When to use: Use retainers for ongoing relationships where you need guaranteed availability. Use deposits for new contractors or large projects where the contractor needs to cover upfront costs (tools, licenses, subcontractors).

Payment model comparison

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.

Standard late fee: 1.5% per month (18% annual) on overdue amounts. Example: "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 period: 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.

When to use: Include late fee terms in all contracts to protect contractors. Grace periods are optional but recommended—they prevent disputes over 1-2 day delays caused by bank processing or holidays.

Aligning terms with milestones

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

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 milestones.

Communication templates

Contract clause 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."

Contract clause 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."

Email template: Payment sent notification:

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

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

Paying 100% upfront: Never pay 100% upfront unless you have a long-standing relationship. Use deposits (25-50%) or milestone-based payments to reduce risk.

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

Inconsistent terms: Use the same payment terms for all contractors in similar roles. This simplifies accounting and prevents confusion.

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 relationship with the contractor.

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