Well-structured subcontractor payment terms prevent disputes, protect cash flow, and keep projects moving. This checklist gives you a step-by-step framework for setting up, managing, and closing out payment terms on every subcontract.

A 2025 Dodge Data survey found that GCs using formal payment processing checklists had 38% fewer payment-related disputes than those processing payments ad hoc.

Pre-Contract Payment Terms Checklist

Set these payment terms before the subcontract is executed. Every item should appear in the written agreement.

Define the billing period as monthly, aligned with the calendar month. Set a specific pay application due date (the 15th is common). Establish a GC review period of 7-10 business days. Specify payment timing as Net 7 after owner payment or Net 30 from approval, whichever applies. Set the retainage rate and any reduction schedule. List all conditions precedent to payment. Include lien waiver requirements for each billing cycle. Address stored materials documentation requirements. Define change order payment procedures. Include final payment and closeout requirements.

Monthly Pay Application Processing Checklist

Run this checklist every billing cycle for every subcontractor.

Submission review. Confirm the pay application was received by the due date. Verify the sub used the correct format (AIA G702/G703 or your proprietary form). Check that the application number matches the sequence.

Documentation verification. Verify the attached lien waiver for the previous period. Confirm current insurance certificates are on file. Check certified payroll submission (prevailing wage projects). Review stored materials documentation if applicable.

Financial review. Verify that the schedule of values total matches the current contract amount including change orders. Check the math on all percentage calculations. Compare claimed percentages against field observations. Flag any line item with a percentage increase exceeding 30% from the prior period.

Compliance check. Confirm the sub meets all conditions precedent listed in the contract. Verify no outstanding backcharge notices. Check for any compliance holds (safety violations, quality issues).

Payment Processing Timeline

Step	Responsible Party	Deadline	Action
Pay app submission	Subcontractor	15th of month	Submit complete pay app package
Receipt confirmation	GC project team	Within 2 days	Acknowledge receipt, flag missing items
Field verification	PM / PE	Within 5 days	Verify claimed percentages on site
Documentation review	Project accountant	Within 7 days	Verify math, lien waivers, insurance
Approval / rejection	Project manager	Within 10 days	Approve or issue rejection notice
Owner compilation	GC accounting	By 25th of month	Include in owner pay application
Payment processing	GC accounting	Per contract terms	Process approved amount

Retainage Management Checklist

Track retainage for every subcontractor throughout the project.

Verify that retainage is calculated at the correct rate for each pay application. Track cumulative retainage by trade. Reduce retainage from 10% to 5% at 50% completion if your contract allows. Process retainage release within 30 days of scope completion. Require final lien waiver before releasing retainage.

Keep a retainage ledger that shows the running balance for each sub. Reconcile this ledger monthly with your accounts payable records. Discrepancies between the ledger and AP records indicate processing errors.

Lien Waiver Tracking Checklist

Lien waivers protect you and the owner from mechanics' lien claims. Track them rigorously.

Collect conditional waivers with each pay application (covering the current billing period). Collect unconditional waivers for the prior period (confirming receipt of the previous payment). Use state-specific waiver forms where required (California, Texas, and several other states mandate specific forms). Maintain a tracking log showing waiver status for every sub and every billing period.

Do not process a current pay application without receiving the unconditional waiver for the prior period. This is a non-negotiable payment condition.

Final Payment and Closeout Checklist

Close out each subcontract with a structured final payment process.

Verify all work is complete and accepted. Confirm punch list items are resolved. Collect final lien waiver (unconditional, covering all amounts through the final payment). Receive warranty documentation. Collect as-built drawings if required. Receive O&M manuals for installed equipment. Process final retainage release. Issue final payment within 30 days of receiving all closeout documents.

FAQs

What documents should accompany every subcontractor pay application? At minimum: the signed pay application form (G702), continuation sheet (G703), conditional lien waiver for the current period, unconditional lien waiver for the prior period, current insurance certificate, and stored materials documentation if applicable. Prevailing wage projects also require certified payroll.

How should a GC handle a pay application submitted after the deadline? Process late submissions on the next billing cycle. Include a provision in the subcontract stating that late submissions will be processed in the following period. This gives subs an incentive to submit on time without creating a payment dispute.

What is the proper retainage release procedure? After the sub completes their scope, conduct a final inspection. Identify any remaining punch list items. Release retainage (minus any holdback for punch list completion) within 30 days. Require a final unconditional lien waiver before releasing retainage.

Can a GC hold payment for safety violations? It depends on your contract language. If the subcontract includes a safety compliance condition precedent to payment, you can withhold payment for documented safety violations. Without this provision, withholding payment for safety issues may violate prompt payment laws.

What happens if a lien waiver is missing from a pay application? Reject the pay application and request the missing waiver. Do not process payment without a complete waiver package. A missing waiver means you cannot confirm that the sub has released their lien rights for prior payments.

How should GCs handle payment for work performed by a terminated subcontractor? Pay for work completed and verified before termination, minus any backcharges or costs to complete the remaining scope. Require a final lien waiver. Hold retainage until the replacement sub completes the work and you can assess total completion costs.

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