In the construction industry, incentive pay is often built into compensation plans to drive the sale and successful delivery of construction contracts. Construction contracts typically involve large-scale projects, long sales cycles, and even longer delivery timelines – especially for high-value contracts.
Milestone-based payments are a form of incentive compensation that tie payouts directly to project progress, helping ensure that once a project is in motion, it keeps moving forward. For an industry quite literally built on long-term projects, milestone-based incentives are essential to keeping compensation fair for both the account manager who closes the deals, and business owners trying to navigate their organization’s finances.
What are Milestone-Based Payments?
Milestone-based, or phase-based, commissions are when incentives are broken out into separate payments that are issued at key phases of long-term projects. It’s particularly common in industries such as construction, where project timelines are usually long and drawn out. It helps ensure that projects are kept on track and that payments are only issued after completion of outlined phases. With each completion of a project phase, it triggers a payment to the account manager.
While each project is different, especially commercial versus residential projects, some key phases that mark the progress of construction projects include:
- Contract Execution: Once the project has been agreed to and the contracts have been signed, it will trigger initial payment to the rep for securing the project.
- Design or Pre-Construction Phase Completion: Next, preliminary or schematic designs must be drafted, necessary permits must be acquired, and any other pre-construction deliverables must be completed in order to trigger the next payment.
- Start of Construction or “Groundbreaking”: The next payment trigger is when project mobilization occurs, and construction crews hit the scene with boots on the ground to begin the actual construction.
- Substantial Completion or Key Progress Milestone (50% completed): For the next payment to be considered, the project must meet a key developmental milestone. A 50% completion rate is the most common example for this.
- Final Completion or “Handover”: The final payment for the project will be issued upon completion of project. This includes any final inspections, client acceptance of the work, and the overall fulfillment of all contract terms. The handover phase concludes with total revenue realization and the project being formally closed out.
These are just some of the key milestones that make up long-term construction projects and they may not all be used as triggers for commission payments. These phases may be consolidated further to simplify payouts, but every organization is different. The terms of how payments will be issued will be built into the contract of the agreement.
Pros of Milestone-Based Payments
Cash Flow Management & Forecasting:
First and foremost, the biggest pro to utilizing milestone-based pay schedules is that it allows accounting teams to better manage financial planning. Rather than a lump sum commission payment when the deal closes, having staged payments ensures cash flow readiness for the business, especially when revenue is contingent on completion of the project in question.
Dispute Reduction:
When structuring project timelines, project phases have clearly defined and measurable objectives, which prevent any potential questions or disputes about the accompanying incentive pay. The project requirements are the project requirements and incentive payments are only issued once those requirements are met.
Risk Mitigation:
While closely connected and tied to cash flow management, risk mitigation deserves its own category on our list because it is worth reiterating how much risk there can be when talking about projects that span several months or multiple years. There can be delays, deals can fall through, or snags that make it impossible to finish the project within the expected timeframes. Milestone-based commissions help mitigate risk by spreading payments over the course of a deal rather than paying all at once at the beginning. This avoids potential overpayment for incomplete deals, or in situations where projects or phases may extend due to unsatisfactory work.
Flexibility & Negotiability:
As projects drag on, it’s not uncommon to make adjustments to project requirements. This can tip the scale both ways in terms of revenue generated. You may have some projects that come in under initial expected costs – rare, but it happens! Or, you might have projects that incur additional costs due to enhancements, scope creep, or unforeseen circumstances. Either way, issuing commission payments only once a given phase is completed and the customer has paid ensures that you have flexibility to account for changing variables and scope.
Ensures High Performance:
Your clients will expect high quality deliverables for every phase of the project. Tying incentives to each phase of the project ensures that your account managers will deliver excellence throughout the lifecycle of the project – not just at the beginning. It’s a way of continually motivating your account managers to maintain the highest standards of quality for each stage of the project.
Biggest Challenges with Tracking Milestone-Based Payments
In the construction industry, milestone-based commission payments are generally the preferred compensation method for large scale projects that extend over a long period of time. As we talked about above, there are many reasons why it makes sense to incorporate this into your compensation plan, however, the biggest pitfalls that come with these incentives are the struggles and complexity of tracking and managing payments.
Below are some of the challenges that come with milestone-based payments and how Core can help automate some of these processes.
Tracking Long-Term Payouts:
Unlike recurring commissions such as residuals, milestone-based commissions can be much more difficult to track in the long-term due to varying completion schedules. Additionally, milestone-based commissions are more tied to the completion and execution of specific terms in a given agreement. So, while there are usually estimated timeframes for which the work will be completed in, the actual delivery of those efforts can vary greatly depending on what is required at each stage.
Core’s platform allows you to run commission cycles on any pay schedule that you need, and with as many cycles as you need based on how and when payment is received from your customers. To simplify this process even further, you can easily sync your financial applications with Core to track exactly when customer payments hit your account, so you know when commissions should be distributed to your team.
Percentage-Based Payouts
Oftentimes the structure of milestones payments is based on percentages. For example, the account rep may make 1-5% of the total contract, but that percentage is broken up even further based on where they are in the project phase. An organization may choose to pay an equal percentage of the total contract for each phase completed, or in some cases it’s set up so that the rep will receive the biggest portion of their cut during the initiation of the project and the closeout of the project.
The more the percentages of the overall commission payment are broken out, the more complicated it can be to not only calculate the appropriate amount for the rep, but to also maintain adequate tracking for both how much the rep has received and how much they are expected to receive by the completion of the project.
With Core, commissions are calculated automatically based on whether conditions are met in the criteria established for each commission rule. This means that all predetermined criteria for a rule must be met for the calculation to occur. Or, as described above, you can create rules that only calculate commissions once that revenue has hit the company account.
Transparency for Reps
Because of the complexity involved in tracking and managing milestone-based payments for account managers, it is absolutely essential that your reps have clear visibility into their earnings for a given project. Your account managers will want to be able to see what the expected overall commission will be for the project as well as monitor their progress throughout each stage.
Core’s online web portal allows an easy and intuitive place for your account managers to log in and access their pay detail reports. Additionally, Core’s customizable dashboard options can help account managers track where they stand against the total anticipated commission for a project.
Automate Milestone-Based Commissions with Core
For industries like construction that have so many external and complicating variables affecting the outcome on major deals, milestone-based commissions is a preferred compensation method because it helps protect the finances of the business and ensures quality delivery of projects. There are many reasons why a business would select this incentive structure over others, but it is nearly impossible to track and manage these compensation plans with accuracy without introducing automation to the process.
Manual tracking through spreadsheets or emails leaves too much room for human error, delays, and inconsistent payouts – especially when multiple milestones, products, or exceptions are involved. Using an automated commission tracking platform like Core, ensures milestones are tracked in real time, payments are calculated consistently based on defined rules, and both managers and reps have clear visibility into progress. The result is faster, more reliable payouts, reduced administrative burden, and greater confidence in the integrity of your compensation process.
Schedule a demo to learn more about Core’s automation tools for managing milestone-based incentive pay.