Meaning
Installment schedule where disbursements are triggered by the successful completion of specific project deliverables. This arrangement aligns the financial incentives of the buyer and the supplier. Milestone payments ensure that the contractor has enough cash to continue while the buyer only pays for proven progress.
It is common in long term construction or software development contracts.
Trigger Event
Specific technical requirements must be met before a payment is authorized. When milestone payments are defined in a contract, the criteria for success should be objective and measurable. This prevents disputes between the two parties.
Risk Transfer
Burden of performance remains with the supplier until the work is accepted. If milestone payments are linked to a demonstrated rate of production, the buyer is protected from a failure to scale. The supplier takes on the initial cost of the labor and materials.
Funding Cycle
Cash flow for the project depends on the speed of the engineering team. When milestone payments are delayed, the supplier may struggle to pay its own vendors. This creates a risk of project stagnation.
Proper planning of these intervals is necessary to keep the operation running without interruption. A clear audit trail for each deliverable ensures that the funds are released on time.
