Construction Law

The builder is asking for a large down payment on the project. Do I have to pay this?

By Brian Farkas, Attorney
How much do you have to pay a home improvement contractor up front?

If you need some work done on your home, you will likely engage the services of a builder (also known as a “contractor”). When you first speak with a possible contractor, you will describe the basic work you are looking for: perhaps a renovated bathroom, a new roof, or the digging and installation of a swimming pool in your yard. The contractor will then likely give you an estimate of the cost for this scope of work (the work you are asking for) based on the time, labor, and materials that will be necessary.

Usually, the homeowner pays the total in multiple stages. It is possible that your contractor may demand a large down payment for the project. Obviously, this sort of down payment gives the contractor some working capital in order to hire the necessary laborers or buy the necessary materials, and also gives the contractor some confidence that you have the ability to pay. (Contractors fear situations where they expend significant resources to renovate a home, and then get stiffed by the owner).

Like with any contract, your contract with the builder is subject to negotiation. You are not required to accept this request and pay whatever down payment the contractor initially demands. You might propose alternatives. For example, instead of a large lump sum down payment, you could suggest paying that sum each week over the course of several weeks at the beginning of the project. Alternatively, you could suggest making lump sum payments to the contractor when certain milestones are achieved--like when the bathroom sink is installed, or when the electricity is connected.

This sort of solution gives the contractor the safety of not expending too much work without payment, while giving you the safety of not paying too much before you see some tangible progress. Another option is to agree to pay a down payment, but also hold an equally large portion of money until the work is entirely complete (this is often called “retainage”). Retainage gives owners some bargaining power if the contractor fails to perform.

Realize, however, that some contractors literally cannot afford to go out and buy materials unless you pay for them up front. In such a situation, you might need to pay a minimum amount. For reassurance about whether the materials really cost that much, ask for copies of the receipts.

When you are in the negotiation stage, it is important to get estimates from at least two different contractors. You would be foolish to immediately accept whatever price the first contractor you speak with gives, and even more foolish to pay a seemingly unreasonable down payment. Talk to multiple contracting companies. Perhaps not all of them will require big down payments, or some might be amenable to alternative fee arrangements. At the very least, having multiple quotes in hand will give you more bargaining power with the first contractor and show that you intend to negotiate.

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