SUBCONTRACT FINANCIAL TERMS, DEFINED.
The contract terms that decide when a subcontractor gets paid include retainage, pay-when-paid versus pay-if-paid, the schedule of values, the pay application, lien waivers, and backcharges. Each one moves cash timing, and misreading any of them is how a profitable job turns into a cash problem. Plain-language definitions are below.
A subcontract is a cash flow document before it is anything else. Buried in the language are the terms that decide how fast you bill, how much is held back, what you have to sign to get paid, and who can charge what against your work. Most subcontractors learn these terms the expensive way, after a pay-if-paid clause leaves them holding a loss or a backcharge eats a job’s margin. This page defines the terms that matter in plain language, grouped by the part of the cash cycle they affect, so you can read a subcontract for what it actually does to your money.
HOW AND WHEN YOU BILL.
The breakdown of your contract into billable line items.
The schedule of values divides your contract price into line items you bill against as work completes. How you structure it decides cash timing: front-load mobilization and early phases, within reason, and cash arrives sooner. A flat or back-loaded SOV starves the early months when your costs are highest.
The monthly invoice that releases payment.
A pay application is the formal request for payment, submitted on the GC’s schedule, showing work completed against the SOV. Miss the monthly cutoff and your payment slips a full cycle, often 30 days. The discipline of billing every pay app on time, every month, is one of the largest cash levers a subcontractor controls.
Time and material, billed against actual cost.
Time-and-material work is billed at actual labor and material plus a markup, instead of a fixed price. The cash risk is lag: T&M billed monthly instead of within 48 hours creates permanent uncollected float, because the cost goes out now and the bill goes in weeks later.
WHAT GETS HELD, AND WHO PAYS.
The percentage held back until closeout.
Retainage, also called retention, is a percentage of each payment, often 5% to 10%, that the GC holds until the job is complete. It is money you earned and cannot collect yet, and it should be tracked as its own receivable. Forgotten retention is the most common uncollected cash a subcontractor is owed.
Two clauses that look alike and are not.
Pay-when-paid means the GC pays you within a reasonable time after the owner pays them; the risk is timing. Pay-if-paid means the GC only pays you if the owner pays them; the risk is the entire loss. Pay-if-paid shifts the owner’s nonpayment onto you, and it is the single most dangerous clause in a subcontract.
A fixed penalty for delay.
Liquidated damages are a pre-agreed dollar amount charged per day of delay you cause. They can erase a job’s margin fast, which is why documenting delays that are not your fault, with timely delay notices, is a financial defense, not just paperwork.
WHAT MOVES THE CONTRACT VALUE.
The document that captures changed work.
A change order is a written modification to the contract value for work added or changed. Work built without a signed change order is work you gave away. Sending a change order every time conditions change, before the work is performed, is how margin survives a change-heavy job.
A cost charged against your contract by others.
A backcharge is a deduction the GC or another trade applies to your payment for cost they claim your work caused, cleanup, damage, or delay. An undocumented or disputed backcharge can quietly take margin off a job, so they should be challenged in writing with evidence, not absorbed.
What you sign to get paid, and what it gives up.
A lien waiver is a document releasing your right to file a mechanic’s lien for the amount paid. Conditional waivers take effect only when payment clears; unconditional waivers take effect on signing. Signing an unconditional waiver before the check clears can leave you with no claim and no payment.
READ THE CONTRACT AS A CASH DOCUMENT.
Every one of these terms moves your cash, your risk, or your margin. A subcontractor who reads a contract for its financial terms, not just its scope, knows which clauses to push back on and which holdbacks to track before signing.
The Construction CFO builds the billing standards, change-order discipline, and retention tracking that turn these terms from traps into managed line items, as part of CFOS for subcontractors doing $1M to $12M.
FREQUENTLY ASKED.
