How to Pay a Contractor Safely: Down Payment Limits, Milestone Payments and Lien Releases

What milestone payments are

A milestone payment, also called a progress payment, is a payment tied to a defined stage of work. Instead of one deposit and one final bill, the contract lists each stage, what it includes and what it costs. You pay for a stage when it is done.

The FTC's advice is to make payments during a project depend on the completion of defined amounts of work. If the work falls behind schedule, the payments are delayed too. That keeps your money roughly in step with the value of what is built in your home.

An example schedule

Here is how a mid-size bathroom remodel might be split. The stages and shares are an illustration, not a legal standard; the right split depends on your contract and your state's rules.

Notice that each stage ends with something you can check: a passed inspection, a test or a finished surface.

State limits on down payments

Several states limit how much a contractor can take before work starts. The FTC tells consumers that some state laws limit down payments and suggests contacting a state or local consumer agency to learn the rule where you live. Three examples follow.

California: $1,000 or 10 percent, whichever is less

California spells out its rule in detail. Under Business and Professions Code sections 7159 and 7159.5, the down payment on a home improvement contract may not exceed $1,000 or 10 percent of the contract price, whichever is less. On a $40,000 kitchen, that means the most a contractor can ask up front is $1,000. On a $6,000 job, it is $600.

The rules continue past the deposit. According to the Contractors State License Board (CSLB):

• every home improvement contract must show the down payment amount and the statement, in bold type of at least 12 points, that it may not exceed $1,000 or 10 percent of the contract price, whichever is less;
• if the contract has a payment schedule, it must appear under the heading "Schedule of Progress Payments" and show the amount of each payment and the work, materials or services it covers;
• the contract must state that it is against the law for a contractor to collect payment for work not yet completed or for materials not yet delivered.

CSLB says contractors who break these rules face discipline, and a violation of the payment rules in section 7159.5 is punishable as a misdemeanor. California also requires a written contract for any home improvement project over $500 in combined labor and materials. One exception to know about: CSLB notes that contractors with a blanket performance and payment bond are not required to set up a schedule of payments.

Maryland: one-third

Maryland's home improvement law, Business Regulation section 8-617, says a contractor may not demand or receive any payment before the home improvement contract is signed, and may not take a deposit of more than one-third of the contract price before or at signing.

Florida: more than 10 percent triggers deadlines

Florida does not cap the deposit in the same way. Instead, Florida Statutes section 489.126 says a contractor who receives an initial payment of more than 10 percent of the contract price for work on a home must apply for the needed permits within 30 days of the payment and start work within 90 days after the permits are issued, unless there is just cause or you agreed in writing to a longer period.

Other states

Rules differ, and they change. Before you sign, check your state's contractor licensing board or attorney general's consumer office for current deposit and payment rules. If the deposit a contractor asks for seems high, ask which law allows it.

FTC advice on paying contractors

The FTC's guidance for homeowners comes down to a few habits:

1. Don't pay cash. For smaller projects, pay by check or credit card. Many people arrange financing for larger ones.
2. Try to limit your down payment, and check your state's limit.
3. Make payments depend on finished amounts of work.
4. Put the payment schedule for the contractor, subcontractors and suppliers in the contract.
5. Keep a record of every payment, along with the contract and any change orders.
6. Don't make the final payment, or sign an affidavit of final release, until you are satisfied and know the subcontractors and suppliers have been paid.

The FTC also lists payment-related warning signs of a scam: a contractor who only takes cash, asks you to pay everything up front, or suggests you borrow from a lender they know.

Paying by credit card

The FTC notes a protection that comes with credit cards. If you have a problem with services charged to a card and have made a good faith effort to resolve it with the seller, you can contact the card company and withhold payment, up to the amount of credit outstanding for that purchase plus related finance charges.

Change orders and the final bill

Changes during a job are normal: you pick a different tile, or the crew finds rot behind a wall. Each change should be a written change order that states the new work, the price and any effect on the schedule, signed before the work is done. The FTC notes that some state or local laws limit how far the final bill can exceed the estimate unless you approved the increase.

Lien releases: the step people forget

Paying your contractor in full does not always mean everyone on the job has been paid. The FTC warns that if a subcontractor or supplier is not paid, state law may let them file a mechanic's lien against your home. Its advice is to ask the contractor, and every subcontractor and supplier, for a lien release or lien waiver.

California sets four statutory forms in its Civil Code:

A practical sequence is to collect conditional releases with each milestone and unconditional releases once the money has cleared. Other states use different forms, so ask your contractor which ones apply.

How milestone payments work on GOLDGCP projects

GOLDGCP helps you set up the payment schedule around milestones from the start:

1. Before work begins, the contract divides the job into stages, each with a defined scope and amount.
2. The contractor completes a stage. You can follow progress in the client portal.
3. You review the stage and approve it.
4. You pay the contractor for that stage, directly, only after your approval.
5. The next stage starts, and the cycle repeats until the final stage is approved.

Because every payment follows your approval of finished work, the schedule fits the FTC's advice and progress payment rules like California's. Every contractor you are matched with has also passed six-step vetting, including state license verification and an insurance check. The full process, from ZIP price to the final walk-through, is on the how GOLDGCP works page. Pros can read about milestone invoicing on the GCP Pro software page.