How Much of a Deposit Should I Give to a Contractor?
Building a new home or remodeling your current home often entails working with a contractor to complete the project. Almost all contractors require a homeowner to advance money for the project as part of a deposit.
The amount of the deposit varies from contractor to contractor and is dependent on the type of project to be completed.
There is not a standard amount a homeowner must, or should, deposit with a contractor. Deposit amounts cover a range -- usually falling between 10 percent to 50 percent of the entire cost of the contractor's budgeted expenses, according to the Home Addition Plus website -- with the amount of the deposit being influenced by the scope of the project and the quality of materials used. For example, contractors working on large projects using several independent subcontractors and rare or expensive materials may require a larger deposit.
Before settling on a preferred contractor, prepare a request for proposal form to potential contractors that asks questions about how the project will be completed -- for example, time frame for completion, materials needed, cost of labor, deposit amount. Having a potential contractor break down how long it will take to complete the project and what the overall cost will be allows you to determine whether the required deposit is proportionate to the project's total costs.
Because there is not a mandatory or standard amount for a contractor's deposit, a contractor's requirements have the potential to be unduly exorbitant or inflated. If the requested deposit amount is over 50 percent or seems disproportionate to the project's needs, attempt to negotiate with the contractor to cap the deposit amount at no more than 25 percent of the project's total cost. Remember, you can walk away from a contractor if you do not like his deposit requirements. Use this to your advantage. Stress that while you would prefer to work with him, you will find a contractor who offers more equitable terms if you cannot reach a fair deal on the deposit amount.
Once you and the contractor agree on a deposit amount, put the terms of the agreement in writing in a homeowner-contractor agreement. Specify the amount being deposited with the contractor, how the deposit is to be applied to the project's costs, how deposit funds will be accounted for on financial statements and how any unused deposit funds will be returned to you.