This is an issue of great controversy in the remodeling industry. Almost every website and resource out there, especially the various state contractor licensing boards, advocate that giving a remodeling contractor an advance payment any greater than 10% is perilous and completely unnecessary. Those in the know, know that to be false.
Here are the facts:
1) Contractors use advance payments for 3 main reasons: paying for materials and long lead items (things that take a while to arrive from the supplier), securing the availability of important subcontractors and demonstrating that you are serious and committed to your project.
2) If urgent materials, long lead items and subcontractor deposits amount to more than 10% of your project then the deposit is justified. After all, why should a contractor cash flow a homeowner's project?
IMPORTANT TIP
The deposit should be repaid throughout the project pro-rata from every payment. It’s easier on the project’s cash flow this way. So, if it’s a $100,000 project and you advance the contractor $20,000 then each subsequent payment for progress should have 20% ($20,000/$100,000) taken off to repay the advance payment.
Let’s shatter a couple of myths while we are here:
Myth # 1 - The contractor has credit with suppliers, they should pay for my materials – that’s fine, but you will pay the interest charge on that credit and won’t necessarily know how much you are being charged. Why pay more unnecessarily?
Myth # 2 - I know what I want, I will just buy the finishing materials myself – If you do this you will take on the responsibility for everything arriving, coming off the truck, being stored safely and dealing with damaged goods, returns etc. Best to grant coordination responsibility to the contractor. Also, if something doesn’t show up and a sub contractor has to wait, or return later, you may lose them to another job. This will no doubt slow you down and cost you more.
If you absolutely refuse to budge on releasing a larger than advised advance payment, ask the contractor to buy a performance bond from a reputable surety company. This will protect you and your advance payment up to the value of the contract in the event the contractor disappears with the monies.
You may also want to show the contractor a sanitized bank statement proving you have the funds so as to remove any doubt about your ability to pay for the project.