The first time a growing contractor signs a “real” contract, the number that catches everyone’s eye is the contract value. But a few months later, what determines whether the company is healthy or in crisis is not the value itself, but the construction payment terms hidden in the fine print.
Imagine you win a USD 500,000 joinery project. You mobilize, buy materials, hire teams — and then discover that 10% is locked as retention, another 10% is recovered as advance, and every payment is on 60‑day post‑dated checks. Your P&L looks fine on paper, but your bank account is empty.
How do you design, negotiate, and control construction payment terms so they protect your margins, reduce risk, and are actually manageable in a system like Odoo? That’s what this article will answer.
Key Commercial Terms You Must Speak Fluently
Before you can digitize or automate anything, you need a clear business understanding of the main financial terms used in construction contracts and purchase orders.
- Advance Payment
A payment made before work is performed or goods are delivered. Commercially, it acts like a short‑term loan from buyer to seller.
Example: On a USD 100,000 subcontract, the client pays 10% (USD 10,000) as advance so the subcontractor can buy materials. - Progress Payments
Partial payments linked to completed stages or milestones, typically certified monthly.
Example: A contractor submits a monthly payment application showing 30% of civil works completed; the client issues a payment certificate and pays that portion, minus agreed deductions. - Retention
A percentage of each payment withheld as security against defects or incomplete work.
Example: 10% retention is deducted from all certified work; 5% is released on handover, 5% after the Defects Liability Period. - Performance Bond
A guarantee (usually via bank guarantee) that the contractor will perform the contract as agreed.
Example: The client requests a 10% performance bond of the contract value, valid until practical completion, before issuing the notice to proceed. - CDC & PDC (Current‑Dated vs. Post‑Dated Checks)
CDC is a check payable immediately; PDC is dated in the future and only depositable on or after that date.
Example: Supplier receives a 25% CDC on purchase order issuance, and a 75% balance via 30‑day PDC after delivery to site. - Collateral & Bank Guarantee
Collateral is any security backing an advance or obligation; a bank guarantee is a strong form of collateral issued by a bank promising payment if the contractor defaults.
Example: For a large advance, the client rejects a simple security check and insists on a bank guarantee covering 10% of the contract value. - Letter of Credit (LC)
A bank‑to‑bank guarantee for international trade, assuring the overseas seller that payment will be made under specified conditions.
Example: A Middle East contractor imports equipment from India under an LC; the Indian supplier ships only after the LC is confirmed.
Why Construction Payment Terms Decide Who Survives
In construction, profit is often lost not in execution, but in the structure of payment terms. Two B2B scenarios illustrate the risk.
Example 1: MEP Subcontractor on a High‑Rise Project
An MEP subcontractor signs a USD 2M package: 10% advance, 10% retention, progress payments in 60‑day PDCs, and a 10% performance bond. On paper, it looks standard. In reality:
- Advance is quickly consumed in materials and mobilization.
- Every interim certificate is reduced by 10% advance recovery and 10% retention.
- Cash hits the bank 60 days after each certificate due to PDCs.
Result: negative cash flow for most of the project, delayed payroll, and missed supplier payments. A single rejected payment certificate can push them into crisis.
Example 2: Joinery Supplier with International Procurement
A joinery manufacturer secures a USD 500,000 supply‑and‑install contract:
- 10% advance against security check
- 50% on supply of materials
- 30% on installation completion
- 10% on touch‑up and warranties
- 10% retention & delay penalties for late completion
They import raw materials under a letter of credit. If they miscalculate how advance recovery and retention will impact each payment certificate, they might find that:
- They are always two steps behind their cash needs.
- They cannot fund site teams to finish on time, triggering delay penalties.
- The LC payments to foreign suppliers come due before they get paid locally.
Ignoring construction payment terms, or managing them in spreadsheets, directly translates into strained cash flow, disputes, and even insolvency — especially when projects scale.
Designing and Controlling Payment Terms with Odoo
To turn construction payment terms from a risk into an asset, you need two things: clear commercial logic, and systems that enforce that logic. This is where an ERP setup like Odoo, implemented by an experienced partner such as ERPixel, becomes critical.
1. Structuring Contracts into Milestones and Values
The transcript highlights a common misunderstanding: many teams treat “10% on shop drawings, 50% on supply, 30% on installation, 10% on touch‑up” as payment terms, when in reality these are a breakdown of the contract price.
In Odoo, each of these can be configured as:
- Contract lines (shop drawings, supply, installation, touch‑up).
- Each with its share of the total contract amount (e.g., 50k, 250k, 150k, 50k).
- Linked to milestones or stages in the project.
This lets your commercial team see, at any time, what work is done, what value is earned, and what remains, instead of a vague “percentage completed” email trail.
2. Automating Advance Recovery
Advance payment is powerful but dangerous if not recovered correctly. The logic in the transcript is clear: if advance equals 10% of contract value, then 10% of each certified amount should be deducted until the advance is fully recovered.
With Odoo:
- Create an “Advance” line or separate invoice when the client pays 10%.
- Configure a rule that, for every payment application / invoice, calculates 10% advance recovery based on cumulative work done.
- Stop recovery automatically when the total recovered equals the original advance.
This eliminates manual spreadsheets and ensures that construction payment terms for advance recovery are applied consistently across projects.
3. Managing Retention, DLP, and Performance Bonds
Retention and the Defects Liability Period (DLP) are often tracked in separate files — which is exactly how money gets “lost” or released late.
Odoo can be configured to:
- Deduct retention (e.g., 10%) from each certified payment automatically.
- Split retention into:
- Half released on practical completion / handover.
- Half released at the end of DLP (e.g., 12 months later).
- Track bank guarantees and performance bonds with:
- Issuance date and expiry date.
- Linked contract and project.
- Alerts when guarantees need extension or can be cancelled.
This way, the commercial and finance teams see, inside the ERP, exactly how much is held as retention, when it is due for release, and what guarantees are outstanding.
4. Integrating CDC, PDC, and Letters of Credit into Cash‑Flow Planning
Construction payment terms are not only about “how much” but “when”. CDC vs. 30‑day or 60‑day PDCs, and international LCs, dramatically affect cash availability.
With a proper Odoo setup:
- Checks (CDC/PDC) can be recorded with issue date, value, and maturity date.
- Dashboards show upcoming inflows and outflows by week or month.
- Letters of credit are linked to purchase orders and supplier invoices, so you see when obligations to foreign suppliers are triggered.
This allows management to see if a new contract’s construction payment terms will create a cash deficit months ahead, and adjust negotiation, financing, or procurement timing accordingly.
5. Payment Applications, Certification Time, and Delay Penalties
The transcript underlines “certification time”: the period needed for the client to verify your work before approving payment. If that is 14 or 30 days, plus 30‑day PDC, you may wait 60 days from submission to cash.
In Odoo, ERPixel typically configures:
- Structured payment applications based on work done by line item.
- A workflow for consultant/client approval, with timestamps to measure certification time.
- Automatic calculation of delay penalties if completion dates slip against contractual milestones.
This gives you objective data to negotiate future construction payment terms (“Our average certification time on your projects is 45 days; we need an earlier advance or shorter PDC”) and to manage risk on current ones.
As an official Odoo Partner, ERPixel helps construction and contracting companies translate all of these complex rules into a single, coherent ERP flow — from contract signature to final retention release.
Turning Complex Payment Terms into a Competitive Advantage
The key question was: how do you handle construction payment terms so that they support, not destroy, your business? The answer lies in understanding the terminology, designing contract structures that match your risk appetite, and implementing them in a system like Odoo that enforces the logic automatically.
When advance payments are properly secured and recovered, when retention and DLP are tracked, when CDCs, PDCs, bank guarantees, and letters of credit are visible in one place, construction payment terms become a strategic tool for controlling cash flow, not a source of surprises.
If you want to model your existing contracts inside Odoo, simulate cash‑flow under different payment terms, and automate payment applications and certifications, reach out to ERPixel. Our team specializes in Odoo development and ERP implementation for construction and contracting businesses, helping you turn complex commercial terms into clear, manageable workflows.
Contact ERPixel today to align your payment terms, your projects, and your ERP — and protect your margins on every contract you sign.
