Contractor Down Payments Explained
Contractor agreements in the US typically call for partial payment before the project is undertaken, with the balance due on project completion. Such down payments are a measure of assurance that the contractor will not abandon or delay the job, and they demonstrate that the client is serious about letting the job and not wasting the contractor’s time and money.
In many states, some form of guaranteed down payment is required in all consumer repair contracts. For example, a Colorado statute requires that, as a prerequisite to enforcement, a consumer contract state that any payments must be "conditional upon the commencement of work on a contract . " Florida prohibits a contractor from contracting for payment until after he has confirmed the existence of necessary permits and licenses for the job, and Massachusetts bans pre-payment in all residential contracts. A few states (including Illinois) go further, barring construction contractors from requesting significant down payments and requiring that they accept progress payments based on work completed.
Depending on local law, contractors in many jurisdictions may ask for a down payment of up to 1/3 of the project cost before they generally cannot demand more until the work is completed. In such cases, the parties will need to negotiate the balance between the contractor’s desire for an advance against the risk that the contractor will not complete the work. To some degree, this will depend on the owner’s creditworthiness.
State-by-State Rules on Down Payments
Regulations governing down payments may vary from state to state. Here’s a brief overview (where available) of how states handle these contracts:
New York: New York is one of the few states that does not have a law regulating consumer down payments for home improvement or repair work. Acquiring a criminal conviction under the General Business Law 771 statute could result in potential fines and/or imprisonment.
Ohio: Contractors can ask for as much as one-third of the contracted amount in some construction work. For example, a contractor can claim as much as $7,500 or one-third of the contract amount for building or altering a single-family residence. However, down payments on other kinds of contracts are limited to one-third of the contract value.
Texas: Down payments exceeding 10% of the total contract sum are prohibited by the Texas Property Code.
Pennsylvania: Pennsylvania General Assembly House Bill No. 1531 allows contractors to ask for a down payment of up to one-third of the contracted estimate. The contractor can also ask for installments that cumulatively do not exceed one-half of the total contract amount.
Rhode Island: Rhode Island law states that down payments on home improvement and repair contracts cannot exceed one-third the total contract sum.
Montana: Montana statutes state that when the down payment exceeds 50% of the total contract amount, the consumer can demand the return of all paid funds.
California: California law holds that a contractor may not require a down payment of more than 10% of the contract price, unless the contractor has a greater down payment under the express terms of the customer’s written authorization.
Connecticut: Connecticut law prohibits contractors from asking for or accepting a down payment or deposit of more than 20% of the contract amount (or $200, whichever is greater).
Calculating the Correct Amount for Down Payments
As a general guideline, a consumer & contractor should follow the procedures spelled out in the state contractor down payment statute regarding the amount of the contractor’s down payment. If the state does not have a contractor down payment statute, the consumer and contractor should review the relevant laws of conscionable or unconscionable contracts and transactions, and standard "contract formation" good business practices. And of course, a consumer should always attempt to live within their budget.
Many state contractor down payment statutes have a prohibition on asking for or requiring a deposit greater than 10% of the total cost or $1,000, whichever is less. As such, in those states both the consumer and the contractor should ensure that the contractor’s down payment is either at or below 10% of the total cost of the project, or under $1,000, whichever is less, and that any contractor is not taking possession of the consumer’s money for longer than 15 days without having first either performed some of the work the consumer is paying for, or having paid for the materials or services ordered.
Legal Considerations Regarding Down Payments
Understanding Contractor Down Payment Terms Across the States
There are many legal considerations for contractors to keep in mind when demanding certain down payments and for consumers as well. Here, we break down some of the most important considerations on a state-by-state basis.
Contracts over $7500:
MI requires deposit of between 1/3 and 2/3 of the project price. The down payment can be less than 1/3 if the contract is paid by credit card or check. If the job is canceled, the consumer has a right to get back the money within 10 days.
MD and VA: Contractors cannot take a deposit that they call a down payment. After the consumer signs the contract you may only get 1/3 of the total. You may not ask for the rest. The amount of the deposit you can charge at the start of the project is negotiated after the initial contract signing. Systems dealers complain bitterly about this law, which they believe makes it impossible for them to function, but the law has been on the books for many years and is well-known in the industry.
NY: Contractors can demand no more than $500 or one half of the contract price, whichever is less as a deposit. Once the work has begun, the contractor can demand more money to continue. "Bait and switch" is a great fear of the New York State Legislature. They believe contractors might otherwise demand a large down payment, do a little of the work, and then discontinue. Because of this, contractors must document invoices and contracts carefully. A simple "Scope of Work" is not enough. Be sure to include payment terms in detail if you intend to request progress payments. Contractors who violate these provisions are liable for three times the amount of the down payment plus attorney fees and costs of the action.
NJ: For contracts under $500, NJ contractors can take 10% of the contract price as a down payment. Any agreement for a deposit higher than 10% is void and unenforceable. For contracts over $500 but less than $20,0000, we recommend no more than 1/3 (or less) as a deposit. The balance can be broken down into progress payments, installments or other billing increments.
Common Mistakes & How to Avoid Them
There are three common issues with confusing contractor down payment terms:
- It is more difficult for contractors to get a reasonable down payment when they don’t have an agreement with the homeowner regarding down payments that is enforceable.
- Even if the homeowner and contractor have agreed to a specific down payment procedure, it may still be difficult for the contractor to enforce, particularly if down payment amounts, dates, and consequences for not paying are not expressly set forth in the contractor agreement or other work orders.
- Homeowners often unknowingly withhold, or forget about, mandatory statutory disclosures that need to be completed with regard to such down payment procedures.
These issues may be easily avoided by taking the following tips into consideration:
• Make sure that the contractor agreement specifies exactly what work is included with the down payment, as well as what required deposits must be paid before the work commences .
• The contractor agreement should expressly state that (a) Title 16, Chapter 18 does not apply, or it does apply with the specific exceptions that are included in the contractor agreement; and (b) the contractor’s deposits are received in accordance with A.R.S. § 32-1154 and A.R.S. § 32-1156.03, as amended (i.e., that the deposit(s) and/or down payment(s) do not exceed 10%, and that the work being performed is not a remodeling, alteration, or repair).
• Keep in mind that none of the provisions of A.R.S. §§ 32-1154 and 32-1156.03 provide any kind of incentive for homeowners to contract with licensed contractors (as opposed to doing the work themselves) and clients and customers are not automatically bound by any provisions of these statutes. Therefore, the contractor agreement should specify the parties’ agreement as to the procedure for down payments, including specifying any statutory disclosures which must be made.
Closing the Deal with Clear Terms
For contractors, reaching an agreement is often just the beginning of the contract process. The amount of the down payment, the timing of the payment, and the scope of what is covered by it, should be clearly spelled out in the agreement they enter into with the homeowner. Failure to do so can lead to disputes about the amount of labor and materials that have been paid for by the homeowner, the type of labor and materials that were covered by the payment, and even the stage of construction or improvement that the payment was meant to cover. Any disputes between a homeowner and a contactor will be much easier to resolve when it is clear from the language of the contract itself which party to the agreement can reasonably be expected to bear any particular set of costs.
When working on a project with more than one contractor, such as when general contracting sub-contractors or third-party lenders are involved in a given project, it is especially important for each agreement to be clear with regard to the parties’ respective duties and obligations. General contractors who enter into an agreement with a homeowner in which labor and materials covered by a large down payment are to be provided by subcontractors should memorialize their right to reimbursement from the homeowner should any subcontractor fail to provide the labor or materials that have been promised by the contractor to the homeowner. Including reimbursement terms is a good practice generally in contractor agreements, but it is especially advisable in situations where more than one contractor is providing services because there is an increased risk that all homeowners might make the mistake of assuming that damages resulting from breaches by subcontractors will be fully absorbed by a single general contractor.
Agreeing with a homeowner to pay a material vendor or subcontractor directly and deduct the full cost of the payment from the amount owed to the homeowner is one possible way to prevent such potentially confusing situations from arising, but it involves unwanted risk for contractors. First, agreeing to pay a vendor or subcontractor directly and then deducting that amount from the total amount owed for the project puts the contractor in a position of acting as a project banker. Furthermore, the contractor’s obligation to act as a banker for the homeowner arguably may extend to labor performed or materials supplied by a subcontractor that were not contracted for initially by the contractor as part of the initial contractor agreement, unless the contractor contractmodifies its agreement with the homeowner to ensure that any agreements for later performance of labor or supply of materials are outside the scope of the contractor’s existing obligation to pay for all labor and materials for the project up front.
Additional Resources
If you encounter issues with contractor down payments, there are resources available to assist you: Bankruptcy attorneys—can provide options for dealing with creditors, including refusing to repay the debt because of fraud by the contractor Legal aid services—pro bono attorneys can sometimes assist those of low income or who have a disability The Federal Trade Commission (FTC)—consumer information is available on a wide variety of topics, including protecting yourself from fraud and abuse by home repair contractors; the FTC handles consumer complaints and questions and refers consumer complaints to local attorneys for action Better Business Bureaus (BBB)—information on local businesses and where they stand on issues with consumers; BBBs offer dispute resolution services for directly resolving complaints with businesses Consumer protection agencies—consumer protection agencies for your state can provide information on their websites or by phone . They also operate telephone hotlines and provide hands-on assistance in filing complaints against contractors.