When it comes to paying your contractor or anyone who does work for you, a payment plan should be spelled out in the contract, and you should never pay for work that hasn't been done, except for the initial payment that goes with the contract.
The amount due when you sign the contract ranges widely, but a general rule is
10 percent of the overall job. In fact, some states limit the size of down payments to prevent fraud. In California, for example, the first payment is limited to 10 percent of the job total or $1,000, whichever is less. Some remodelers deservedly ask for more up-front money if they are ordering custom products that need to be fabricated ahead of time, such as countertops, windows and custom tile. But if you're wary of this arrangement, ask to pay the custom shop directly, or simply ask your builder for receipts.
For a job costing more than $25,000, payments should be pegged to job milestones. For example, when the job is 20 percent complete, a payment is required, and so on. The problem is, most homeowners have difficulty judging the progress of a large job. If you're having an addition put on and the framing and sheathing go up, what part of the job is complete? Actually, a very small percentage. And when it comes to plumbing, wiring and HVAC, these behind-the-wall systems can take weeks to complete. During this time you see little progress, though the remodeler knows a lot of work is getting done. These differing perceptions can be troublesome when the remodeler comes for a check and you complain that it doesn't look as though anything has been done since the last payment.
To solve this problem, my company, as do many others, schedules payments based on inspections. City building inspectors are required to inspect and sign off on the foundation and framing, as well as on electrical, plumbing and HVAC systems. These are easy milestones to tie the dispersal of funds to. Paying out around
15 percent of the overall job cost at each of these stages works fairly well, but you will need to add other milestones for later phases of the job that aren't officially inspected. The ones I use include "drywall up and mud applied," "finish carpentry completed," "painting completed" and "punchlist completed." Just make sure the final payment is at least 10 percent and that it isn't due until after the final punchlist has been completed.
You won't need as many milestones for a smaller job—they're overkill. For projects under $25,000, we like to use the third-third-third method. With this payout system, the homeowner pays one-third of the gross cost at contract singing, a third halfway through and a third at the end of the job, with 10 percent of the final payment held in escrow to ensure loose ends are tied up. (Again, check with the agency of your state government that regulates remodeling—often the department of consumer affairs—for any limits on down payments.) This system is easier for you and doesn't involve huge risk; remodelers like it because the checks they receive are substantial and allow them to pay off their material costs all at once.