A subcontractor gets paid through monthly progress payments that move from the project owner to the general contractor and then down to the sub, released only after a properly documented payment application is submitted, the reported work is verified in place, and the required lien waivers and compliance paperwork are on file. The size and timing of each payment depend on the subcontract’s payment clause, the retainage percentage held back, and whether the general contractor has already been funded by the owner. Miss a document or a deadline and a payment can slip a full billing cycle; miss a statutory notice window and the legal remedies for nonpayment can disappear entirely.
What the Subcontract Payment Clause Controls
Two clauses in the subcontract decide when money is supposed to arrive, and the distinction between them matters more than most first-time subs realize.
A pay-when-paid clause sets a timing window, commonly 7 to 14 days after the general contractor receives funds from the owner. If the owner is slow, the subcontractor waits longer, but the general contractor still owes the money eventually.
A pay-if-paid clause makes the owner’s payment a condition precedent to the subcontractor’s payment. If the owner never pays, the sub may have no contractual right to collect. Courts in most states enforce these clauses when the language is explicit, though a handful of states have voided them on public policy grounds. Before signing, look for “condition precedent” language tied to the owner’s payment. That wording shifts the owner’s credit risk onto the subcontractor.
Nearly every subcontract also authorizes retainage: the general contractor withholds a percentage of each progress payment, typically 5% to 10%, and holds it until substantial completion. Many states cap retainage by statute, with the trend moving toward 5%. Retainage is usually the last check on the job and does not release until punch list work is finished and close-out documents are turned in.
The Paperwork Behind Each Payment Application
A payment application is only as strong as the documents behind it. One missing item gives the general contractor’s accounting team reason to reject the whole package and roll it to the next billing cycle.
Schedule of Values and the AIA Forms
The schedule of values divides the full contract price into individual line items with dollar amounts assigned to each. On every progress billing, the subcontractor reports a percentage complete for each line, calculates the amount earned to date, and subtracts what has already been paid.
Most general contractors want those numbers on standard AIA forms. The G702 (Application and Certificate for Payment) summarizes contract value, change orders, prior payments, retainage, and the current request. The G703 (Continuation Sheet) carries the line-by-line detail. Rounding errors or mismatches between the two forms routinely produce rejections, so the math needs to reconcile before submission.
Lien Waivers
General contractors require lien waivers with each payment application so the owner has assurance that paid subs will not later record a claim against the property. There are two kinds, and signing the wrong one at the wrong time is one of the more expensive mistakes a subcontractor can make.
A conditional lien waiver takes effect only after payment clears. It says, in effect, that lien rights are released for the billing period once the money actually arrives. If the check bounces, the rights survive. This is the correct waiver to sign when submitting an invoice or accepting a check that has not yet cleared.
An unconditional lien waiver takes effect the moment it is signed, whether payment arrives or not. Sign one before the funds clear and the lien rights for that amount are gone. Only sign an unconditional waiver after the money is in the bank.
Certified Payroll on Federal Jobs
On federally funded projects covered by the Davis-Bacon Act, subcontractors must submit weekly certified payrolls showing that every worker was paid at least the prevailing wage for the applicable classification. The standard form is WH-347, and each submission includes a signed Statement of Compliance certifying the payroll’s accuracy.1U.S. Department of Labor. Instructions for Completing Davis-Bacon and Related Acts Weekly Certified Payroll Form, WH-347 A missing certified payroll can hold up not just the subcontractor’s payment but the general contractor’s own draw from the federal agency.
How the Application Moves From Submission to Check
Most subcontracts specify a monthly billing cycle with a hard cutoff, often the 25th of the month. A submission one day late rolls to the following month. Keep proof of delivery every time, whether the application goes through construction management software, email, or certified mail. A dispute over whether an application was timely is a dispute a subcontractor cannot afford to lose.
After submission, the project manager reviews the application against the actual work in place. On many projects the architect or an owner’s representative walks the site before approving. If the reported completion percentage does not match what is physically built, the application is adjusted downward. Those contested reductions are one of the most common payment disputes in construction, and the time to resolve them is before the check is cut.
Once approved, the general contractor pays by ACH or check. The turnaround depends on the pay-when-paid or pay-if-paid terms and on how quickly the owner funds the general contractor’s draw.
Final Payment and Retainage Release
The final payment, usually the retainage balance, needs more than a standard application. General contractors typically hold it until the subcontractor delivers close-out documentation: as-built drawings, warranty letters, operations and maintenance manuals, final lien waivers, and any required inspection certificates. Unfinished punch list work also blocks release. Subs who treat the punch list as an afterthought often wait months for money they could have collected in weeks.
Backcharges and Deductions
A backcharge is a deduction the general contractor takes from a subcontractor’s payment for work the sub was supposed to do but did not, or for damage the sub caused. Common triggers include site cleanup, correcting defective work, damage to other trades’ installations, and safety violations. Backcharges can appear on the next pay application with little warning, and disputing them after the money is gone is harder than catching them in advance.
A legitimate backcharge requires the general contractor to notify the sub of the deficiency and give a reasonable opportunity to fix it before hiring someone else. Without prior notice and a chance to correct, the charge is worth pushing back on. Documentation matters on the sub’s side too: photos of completed work, daily reports, and correspondence about the alleged deficiency. The general contractor bears the burden of proving the backcharge was necessary and the cost reasonable.
Industry standards call for backcharge billing no later than the 15th of the month following the month the charge was incurred. A six-month-old cleanup charge dropped onto a pay application with no prior notice is a charge worth disputing formally.
Taxes on Progress Payments
Subcontractors are independent businesses, not employees. No general contractor withholds income tax or payroll tax from progress payments. That is entirely the subcontractor’s responsibility, and the tax consequences catch new subs off guard every year.
W-9, 1099-NEC, and Backup Withholding
For payments made in 2026, any general contractor that pays a subcontractor $2,000 or more during the calendar year must file a Form 1099-NEC reporting that income to the IRS.2Internal Revenue Service. Form 1099-NEC and Independent Contractors That threshold rose from $600. Before issuing the 1099, the general contractor needs a completed W-9 with the subcontractor’s taxpayer identification number.
Without a W-9 on file, the general contractor is required to withhold 24% of every payment and send it to the IRS as backup withholding.3Internal Revenue Service. Form W-9 (Rev. March 2024) Submitting the W-9 at project start, before the first invoice, avoids this entirely.
Self-Employment Tax and Quarterly Estimates
An independent contractor owes self-employment tax of 15.3% on net earnings: 12.4% for Social Security on earnings up to $184,500 in 2026, plus 2.9% for Medicare on all earnings with no cap.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)5Social Security Administration. Contribution and Benefit Base That is on top of regular income tax. Employees split Social Security and Medicare with their employer; a subcontractor pays both halves.
Because nothing is withheld, the IRS expects quarterly estimated tax payments covering both income tax and self-employment tax. Owing more than $1,000 at filing time without sufficient estimated payments triggers an underpayment penalty. The safe harbor: pay at least 90% of the current-year tax liability or 100% of the prior year’s tax, whichever is smaller.6Internal Revenue Service. Estimated Taxes Setting aside 25% to 30% of each progress payment for taxes prevents the April scramble.
Insurance as a Payment Precondition
Most general contractors will not release a first payment until the subcontractor’s certificate of insurance is on file. The typical subcontract requires commercial general liability insurance, automobile liability insurance, and workers’ compensation coverage, with the general contractor and often the project owner named as additional insureds.
Coverage minimums vary, but general liability limits of $1 million per occurrence and $2 million aggregate are common on commercial projects. Lapsed coverage mid-project lets the general contractor withhold payment until an updated certificate arrives. Sole proprietors with no employees can sometimes obtain a workers’ compensation waiver, but only in states that permit the exemption and only if the subcontract allows it. On larger projects, coverage may be required regardless.
Remedies When Payment Stalls
When progress payments stop and contract remedies go nowhere, subcontractors have statutory tools built specifically for construction payment disputes. Their deadlines are unforgiving. Missing a filing window by a single day can permanently destroy an otherwise valid claim.
Mechanic’s Liens on Private Work
A mechanic’s lien is a claim recorded against the property where the work was performed. It clouds the title and prevents the owner from selling or refinancing until the lien is resolved. That leverage makes the mechanic’s lien the strongest collection tool available on private projects.
Most states require subcontractors to serve a preliminary notice on the property owner before a lien can later be recorded. Preliminary notice deadlines vary widely, from 20 days after starting work in some states to 30 or 45 days elsewhere, with a few states requiring no preliminary notice at all. The deadline to actually record the lien after the last day of work also differs by state, typically 60 to 120 days. A missed deadline waives lien rights, so state-specific requirements are worth confirming at the start of a job rather than at the first missed payment.
Miller Act Bonds on Federal Projects
Mechanic’s liens are not available against government property. On federal construction contracts exceeding $100,000, the Miller Act requires the prime contractor to post a payment bond equal to the full contract price.7Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works
A first-tier subcontractor (one that contracted directly with the prime) that has not been paid in full within 90 days after its last day of work can sue on the payment bond without any prior notice. A second-tier party, meaning one that contracted with a subcontractor rather than the prime, must serve written notice on the prime contractor within 90 days of last work.8Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material Either way, any suit must be filed within one year of the last day on the project. Most states have their own “little Miller Acts” imposing similar bonding on state and local public projects, with their own notice deadlines.
Private Payment Bonds
Some private projects also carry payment bonds, particularly when the owner or lender requires one. Claim procedures follow the bond’s own terms rather than a statute. A common form requires second-tier claimants to give written notice within 90 days of last work, while first-tier subs can sue without preliminary notice. Suit on a private bond typically must be brought within one year of last work.
Prompt Payment Statutes
Nearly every state has a prompt payment act that penalizes general contractors for late payments. The penalty is usually interest that starts accruing automatically once the payment deadline passes. Rates run from around 1% per month in some states to over 15% per year in others. On federal contracts, the Prompt Payment Act sets the interest rate semiannually; for the first half of 2026 that rate is 4.125% per year.9Bureau of the Fiscal Service. Prompt Payment Many state prompt payment statutes also let the prevailing party recover attorney’s fees, which gives the interest penalty real teeth.
Joint Check Agreements
A joint check agreement is a non-litigation tool that protects lower-tier subs and material suppliers. The general contractor issues a check payable to both the subcontractor and the supplier. Neither can cash it without the other’s endorsement, which ensures the supplier actually receives the funds instead of the subcontractor pocketing them. These agreements often arise when a supplier threatens to halt deliveries over unpaid invoices. For general contractors, joint checks reduce the risk of paying twice for the same work and cut off potential liens from unpaid suppliers further down the chain.