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How Much and When to Pay Your Contractor

As a Realtor, my aim is to get the right person in the right house, from the start. I want that new family to beam with joy when they walk into their new place.

But inevitably, they will tackle a project at the house — be it something they need right away or an idea they’ve hatched after living in the space for a few years. They need to bump out the kitchen, or turn a half bath into a full, or build a mother-in-law room above the garage.

And then we often hear that classic tale of woe from the homeowner: “My contractor ripped me off!” or its common cousin: “My contractor won’t return my phone calls!”

Odds are, your contractor isn’t trying to scam you. He or she may have overbooked. Or, sadly, he or she might just be incompetent. But your strategy for combating either of these issues is the same: Don’t overpay them at the front-end.

In the first scenario, a properly structured payment strategy will ensure that the contractor comes back to complete a substantial amount of work to hit the next payment milestone. In the second scenario, a good strategy ensures the work is completed to your satisfaction before the contractor digs deeper into your pockets.

The contractor does this kind of work all the time. The homeowner? Not so much. So it’s the homeowner that is more likely to be taken advantage of in the situation.

So how much is too much? And how often should you pay your contractor?

The answer will vary depending on the kind of job. Each contractor is going to have his or her way of doing things, and money-down preferences will vary some based on whether the work is more labor-heavy or more reliant on materials that need to be purchased to begin work. So there’s no absolute set of payment rules. (If it’s a small job without custom materials, some contractors won’t require any money upfront, believe it or not.)

Paying in three installments

But there are some good general guidelines. For new construction or additions to a house, expect to pay:

  • A portion of money at the front for materials, permits and the like. Asking for an itemized list is perfectly appropriate.
  • A substantial amount of the contract price when rough-in is finished. (It’s usually a good idea to hold this payment until the local inspection is done, as an encouragement for the contractor to quickly make good on any outstanding issues flagged by the county or city inspector.)
  • The balance upon completion of the work.

If that upfront charge seems high, do a little local research. Most states have rules that prevent contractors from taking more than a certain amount of money down. Most typically, it’s around a third of the total cost. But in California, the rule is 10 percent down, or $1,000, whichever is less.

Most importantly, look out for No. 1.

As Tim Carter writes for The Washington Post, “Forget about hope when it comes to contractors! You can control your money and when a contractor gets it, and you can absolutely ensure that you’ll get top-quality work that will stand the test of time.”

Two things to avoid

There are also two things you should never do:

  1. Pay the full price of a job up front. Approving a contract and paying for a job are two different things. With small-money jobs, you’re at a heightened risk for both out-and-out thievery (the contractor never shows up for work) or shoddy work with no easy recourse. A lousy contractor in these cases is wagering that you won’t go to the effort to take them to court.
  2. Pay the total price before it’s 100 percent complete. In builder land, a general contractor makes up a punch list for the subcontractors to work through before they’re released from a job. You should do the same thing with your contractor, and hold back at least 10 percent of the total job as a sort of escrow. Keep that last bit of money until every ding in your sheetrock is fixed, every piece of stone backsplash is in place, or every paint splotch on your floors is cleaned up.

Don’t feel bad about pushing back on payments. Remind that contractor who’s asking for too much, too soon that he or she isn’t paying their employees in advance. And the contractor pays the lumberyard upon delivery — or possibly not until the next billing cycle. Money is the only leverage the homeowner has in the project. On the flip side, if a contractor isn’t paid, he can place a lien on your property to recover the money.

There are other red flags about a contractor, too. How Stuff Works has culled 10 of the best. Does he or she not want to sign a contract? Did they bid extremely low with a reasonable explanation why? These are some of the cues that you might want to turn to one of your other bidders instead.

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