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 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. In some cases, the contractor may need to make a substantial deposit of his own on special-order materials. The contractor may argue that it is not his job to finance the project out of his pocket, while your position is that you do not want to finance the contractor and pay for work not yet completed or materials not yet delivered.
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. 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 your 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. On the other hand, if the job involves a substantial deposit on special-order materials, it is reasonable to make a contribution towards that deposit.
While it’s not the contractor’s job to finance your project. He has a right to be paid promptly for work completed. Instead of a large down payment, try negotiating one of these options (or find another contractor):
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 small down payment, but reduce the first one or two progress payments to avoid getting too far ahead on your payments