Why Large Upfront Deposits Are Dangerous
The most common homeowner complaint in contractor disputes is: "I paid most of the money upfront and the contractor disappeared," or "the work stalled and they won't refund the deposit." Once you've paid 50% or more before significant work is complete, you've lost your primary leverage. The contractor has your money, and their financial incentive to finish the job is dramatically reduced.
Some states cap the maximum deposit a contractor can legally collect. In California, for example, contractors cannot request more than 10% of the contract price or $1,000 (whichever is less) as a down payment. Even in states without a legal cap, a deposit exceeding 10-25% of the total project cost should trigger caution. A contractor who insists on 50% upfront is either undercapitalized (meaning they're using your money to finish someone else's project) or planning to disappear.
How Milestone-Based Payments Work
A milestone payment schedule ties each payment to the completion of a specific, verifiable phase of work. Instead of paying a lump sum or splitting the total into equal monthly installments, you pay when concrete progress is delivered and confirmed. A typical structure for a residential remodel might look like this:
- 10% at contract signing: This covers initial mobilization, material ordering, and scheduling.
- 20% at demolition and rough-in completion: Paid after demolition is done, framing is complete, and rough plumbing/electrical passes inspection.
- 25% at drywall and mechanical completion: Paid when walls are closed up, HVAC is installed, and systems are tested.
- 25% at finish work completion: Paid when flooring, cabinets, fixtures, paint, and trim are installed.
- 10% at substantial completion: Paid when the project is functionally complete and passes final inspection.
- 10% retainage: Held until punch-list items are resolved and your final walk-through is signed off.
The exact percentages and milestones should be customized to your project. The principle is the same: never pay ahead of progress. Each payment should reflect work that has actually been completed, inspected (where applicable), and accepted by you.
What Retainage Is and Why It Matters
Retainage (also called a holdback) is a percentage of the total contract price that you withhold until the project is fully complete, including all punch-list items and final inspections. The standard retainage in residential construction is 5-10%. This amount gives the contractor a financial incentive to come back and finish the small items that otherwise get ignored: touch-up paint, cabinet adjustments, caulking, hardware installation, and cleanup.
Without retainage, contractors have no financial reason to return for punch-list work once they've received their final payment. Retainage ensures that the last 5-10% of quality — which often makes the difference between a satisfactory project and a frustrating one — gets completed. It should be written into your contract and tied to your written sign-off after a final walk-through.
Traceable Payment Methods
Always pay by a method that creates a paper trail: check, credit card, bank transfer, or online payment platform. Never pay in cash without a detailed receipt, and be extremely cautious about any contractor who insists on cash-only payment. Cash payments are nearly impossible to document in a dispute, and a contractor who won't accept traceable payment is often trying to avoid tax reporting, hide income from an insurance audit, or eliminate your ability to dispute charges later.
Credit card payments offer the additional benefit of chargeback rights if the contractor fails to deliver. Some homeowners use credit cards for deposits and checks for milestone payments to balance convenience with documentation. Whatever method you choose, keep copies of every payment record alongside the corresponding milestone approval. If something goes wrong, this paper trail is your evidence.
Lien Waivers
A lien waiver is a document signed by the contractor (and ideally their subcontractors and material suppliers) acknowledging that they've been paid for the work completed to date and waiving their right to file a mechanics lien against your property for that amount. You should collect a lien waiver with every milestone payment. This protects you from the scenario where you pay the contractor, the contractor doesn't pay their sub, and the sub files a lien against your house.
There are two types: conditional lien waivers (effective upon payment clearing) and unconditional lien waivers (effective immediately). Use conditional waivers when making payments and unconditional waivers after payments have cleared. Your state may have specific forms — check local requirements. If you're working on a project above $10,000, lien waivers are strongly recommended.
What to Do If a Contractor Demands Cash
Walk away. A contractor who demands cash-only payment is either operating without a license, without insurance, or without the intention of reporting income — all of which put you at risk. Cash eliminates your documentation trail, makes disputes unresolvable, and can even implicate you in tax fraud if the amounts are large enough. If a contractor gives a "cash discount," the savings aren't worth the risk. The discount is usually the tax they're avoiding, and the lack of documentation is the price you pay later.
If you encounter this behavior repeatedly from contractors in your area, report it through our verification system so the pattern can be tracked. Systematic cash-only operations often correlate with other trust failures: no permits, no insurance, and no accountability.
Put It All Together
Before signing a contract, make sure the payment schedule is written in, tied to milestones, includes retainage, and specifies traceable payment methods. Cross-reference this with the red flags in estimates guide to confirm the overall estimate is solid. Use the full verification checklist to complete your due diligence. For a printable payment schedule template, visit the Trust Library.
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