Give you and your contractor peace of mind with a down payment agreement

The laws regarding agreements between homeowners and contractors for home improvements differ state to state. Some states require a specific down payment percentage for home improvements and construction, with a final payment due at the end, while other states may not have any required percentage.

While most large construction companies have their own standard contracts, many small companies don't. Having a down payment agreement can help protect you and your contractor and give you peace of mind that your contractor will complete your project as planned.

Down payment basics

A down payment is a good-faith payment that gets deducted from your overall cost of the construction or purchase. Often made by check or credit card, down payments may or may not be refundable, depending on your state and on the contract. For example, in California, when you hire a contractor, you have three days to change your mind about whether to go forward with or cancel the agreement.

Down payments for large projects usually fall within the range of 20% to 40% of the total cost of the project. A few states require that down payments be no more than one-third of the total price, while other states do not have any such restrictions.

In California, however, the state has strict guidelines for down payments to building contractors: the legal limit is either 10% of the total cost or $1,000, whichever is less. If you live in California and your down payment exceeds one of these amounts, whichever is less, the contract is illegal.

Down payment agreements

The rationale behind California's limits on down payments stems from situations where contractors have received payment then walked off the job or refused to do the work they were hired to do. The less you pay up front, the less you have to sue for if the contractor refuses to finish the work.

If you get a contract in other states requiring a large up-front payment, such as 50%, you should consider getting another contractor, as such large sums are often a red flag that the contractor isn't reputable. Unless the cost is prohibitive, a reputable contractor should be able to pay for materials up front, before they receive payment from you. Although most states allow for homeowners to pay for materials ahead of time, many consumer groups warn against doing so until you take delivery of the items.

In California, the payment schedule is included in the contract under the section entitled “Schedule of Progress Payments," along with the date, the amount due, and what work the payment covers. A progress payment schedule allows you to pay the contractor as the project moves forward. This way, you can see the progress made and not have to pay for everything at once.

Protect yourself with a lien waiver

If a homeowner fails to pay, the law allows contractors to file a mechanic's lien against their property. The lien affects their credit, and they are unable to borrow money or sell their house without paying off the lien. Sometimes, however, a contractor can waive a mechanic's lien.

You and your contractor can agree that the contractor waives the right to file a lien if you pay what you owe. A waiver and release can forgo a mechanic's lien on any of the progress payments or on all payments made to date and in the future. Most contractors won't agree to a waiver unless they've been paid pursuant to the progress payments, as it's not in the contractor's interest to waive a mechanic's lien against future payments.

If you're not sure about how to make a contractor's agreement in your state, you can have an attorney draft one for you, or use an online form.