While some general contractors like to get a substantial deposit before starting a project, construction lenders do not do business this way and nor should you. The first large payment should not released until all permits and approvals are in place, proof of insurance is provided, lien waivers are signed, and a substantial piece of work is completed, such as the foundation.
The contractor may want a down payment to pay for materials and rental equipment, and to pay his help and subcontractors such as excavation and foundation contractors. The contractor may argue that it is not his job to finance the project out of his pocket. On the other hand, most owners feel that it is not their job to finance the contractor’s business or to pay for work not yet completed or materials not yet delivered.
A reasonable payment schedule takes into account both these positions. You need to strike a balance where both parties share the costs and risks if the job runs into problems or is not completed for any reason. Neither party wants to be left “holding the bag”.
Some states, including California and Maryland, limit the size of the down payment on a home-improvement contract. Maryland allows up to one-third of the contract price, while California limits the down payment to 10% of the job cost or $1,000, whichever is less.
What’s fair? I don’t believe it’s reasonable to ask for a large down payment and to “front load” the budget, so the owner continually pays for work before it is completed. The contractor will not have to pay for materials until after his monthly bill comes in and subs know they will not get paid until the general contractor is paid.
Also, it is not the owner’s job to provide the contractor with working capital. If he does not have credit with suppliers or subs, and does not have enough cash to make payroll, that’s not a good sign.
It is the owner’s responsibility to pay promptly when agreed-to milestones are reached. The contractor should not have to wait to be paid for payment for work completed. Also there are situations where the owner needs to pay in advance. For example, if the job involves a large deposit on special-order materials, it is reasonable for the owner to make a significant contribution towards that deposit.
In order to the the costs and risks of the job shared equally, instead of a large down payment, try negotiating one of these options:
More frequent payments: Instead of five large payments, make ten smaller payments, but still tie them to work completed and materials delivered to the site.
On special-orders: You make the deposit yourself and purchase the materials. If things blow up, at least you will own the expensive windows, SIPs, or custom millwork when it arrives.
Agree to a reasonable down payment, but reduce the first one or two progress payments to avoid getting too far ahead on your payments.