A deferred payment schedule is a financing arrangement in which payments for construction work are delayed and spread over a set period rather than being due immediately upon completion.
Worked example
A £350,000 fit-out is agreed with £100,000 payable at completion and the remaining £250,000 in five equal monthly instalments of £50,000. The contractor has paid its subcontractors and suppliers by the end of the job, so it carries the £250,000 until the Client pays.
At a borrowing cost of 8% a year, charged monthly on the opening balance, the financing cost is about £1,667 + £1,333 + £1,000 + £667 + £333, or £5,000. If the price did not cover that cost, £5,000 of margin has gone.
Why Use a Deferred Payment Schedule?
- Helps clients manage cash flow by deferring large expenses.
- Enables contractors to secure contracts with flexible payment terms.
- Can be beneficial when financing is structured around project milestones.
Potential Risks
- Contractors may experience delayed cash flow, affecting their ability to pay subcontractors and suppliers.
- Interest or fees may apply, increasing overall project costs.
Deferred payments in the cash flow
Show the contractor's costs paid out in the cash flow forecast at the dates they fall due, and the client's instalments at the dates agreed. The gap is the peak funding need.
In the CVR the work is still valued as it is done, so a deferred payment appears as money owed by the client, not as lower value. Chase it as a debtor and consider whether the price should include an interest or financing charge.
In the UK
A deferral sits alongside the payment mechanism the Construction Act requires. A construction contract must still set due dates and a final date for payment, and a Pay-When-Paid Clause is not allowed in most cases.
A Subcontractor that agreed to defer should get the terms in writing, and check how they fit with the Retention and payment rules. The government has also announced a 60-day limit on payment terms, not yet law, which may restrict how long a payment can be deferred.
Related terms
Pay-When-Paid Clause, Retention, Progress Billing, Cashflow Forecast, Net Payment Terms.
Planyard's cash flow forecasting shows when each cost goes out and each payment comes in, so the funding gap from a deferred schedule is visible before you sign.
