What protections should homeowners require in a contractor deposit agreement to avoid losing money if work stalls?

Short answer

Protect yourself by putting money controls and performance triggers in the contract: a small deposit (or escrowed) tied only to delivered materials, milestone-based progress payments with 5–10% retainage, clear start and completion dates with a cure/termination clause and delay credits, lien waivers from all subs/suppliers for every payment, change orders in writing, and proof of licensing/insurance with you listed as additional insured. Use joint checks or direct-to-supplier payments for big material buys, and make final payment only after inspections, punch list completion, and receipt of unconditional final lien waivers.

What to include and why it matters

A strong deposit agreement prevents cash from getting ahead of work. If the job stalls, these protections help you pause payments, recover unearned funds, and avoid mechanic’s liens:

• Deposit limits and escrow: Keep the deposit small (often 10% or less; some states cap it at $1,000 or 10%). Preferably hold it in escrow or pay only after materials are on site.
• Milestone-based payments: Pay for measurable work (e.g., demo complete, rough-in passed) rather than dates. Include 5–10% retainage kept until final completion.
• Firm timelines: Written start date, substantial completion date, and a cure/termination path if work stalls (e.g., 5 business days’ notice). Consider delay credits (e.g., $100–$200/day) for contractor-caused delays.
• Lien protection: Require conditional lien waivers with each invoice and unconditional final waivers from the GC, subs, and suppliers at the end. Use joint checks or pay suppliers directly for large purchases.
• Scope and specs: Detailed materials list (brand/model), installation standards, and a written change order process.
• Insurance and licensing: Current license, general liability, workers’ comp, and you named as additional insured. Request endorsements, not just a certificate.
• Permits and inspections: Assign responsibility for permits. Tie payments to passing inspections.
• Warranty and closeout: Written warranty, manuals, and as-built photos. Final payment happens only after the punch list is complete and waivers are in hand.

Local law matters. For example, California limits deposits to the lesser of 10% or $1,000. Some states require specific cancellation notices. Check your state contractor board or consult an attorney.

Step-by-step: Building a safer payment structure

1. Pre-checks (1–2 hours)

   • Verify license status and complaints via your state board.
   • Collect insurance certificates and endorsements (GL, WC) naming you as additional insured.
   • Call at least two recent references and ask about schedule and change orders.

2. Lock the scope (1–3 hours)

   • Attach a detailed scope with brands, model numbers, finish schedule, and allowances.
   • Define quality standards (e.g., “tile set per ANSI A108”); require manufacturer instructions followed.

3. Set payments and retainage (30–60 minutes)

   • Deposit: cap at 10% or state limit. Prefer escrow. If not escrow, pay only after materials land on site.
   • Milestones: tie payments to visible work and inspections.
   • Hold back 5–10% retainage until final completion + waivers.

4. Protect against liens (30–60 minutes per payment)

   • Progress payments only upon receipt of matching conditional waivers from GC, subs, and suppliers.
   • For big ticket items (windows, roofing, cabinets), use joint checks or pay the supplier directly.

5. Manage changes (ongoing)

   • No verbal change orders. Require signed change order with cost, time impact, and updated milestone schedule.

6. Closeout

   • Final payment only after: punch list done, jurisdictional final passed, manuals provided, and unconditional final waivers received from all tiers.

Useful tools and materials

• Contract template with milestone schedule and retainage
• Lien waiver forms (conditional progress and unconditional final)
• Escrow service or title company account (fees ~$300–$1,000/project)
• Joint check forms/checkbook; digital payments with memo lines and invoice numbers
• Spreadsheet or project management app for tracking milestones and waivers
• Smartphone/camera for photo documentation
• Lockable jobsite box if you’re taking ownership of delivered materials

Example clauses you can adapt

Deposit & Escrow: Owner shall deposit 10% of Contract Price into escrow. Funds released only upon delivery of specified materials to the project address, verified by receipts and photos. Title to delivered materials passes to Owner.

Milestones & Retainage: Payments shall be made upon completion of the following milestones and passing inspections where applicable. Owner shall retain 10% from each progress payment. Retainage payable only after punch list completion and receipt of unconditional final lien waivers.

Cure/Termination: If Contractor suspends work for more than 3 consecutive business days without cause, Owner may issue a 5-day written notice to cure. Failing cure, Owner may terminate for cause and recover unearned funds. Contractor shall refund any unused deposit and assign purchased materials to Owner.

Lien Waivers: As a condition of payment, Contractor shall furnish conditional progress lien waivers from itself, all subcontractors, and suppliers for amounts billed. Final payment conditioned on unconditional final waivers from all tiers.

Delay Credits: Contractor agrees to $150/day credit for contractor-caused delays beyond the substantial completion date, excluding force majeure events defined herein.

Safety and risk tips

• Avoid large cash payments. Use traceable methods (check/ACH) with clear invoice references.
• Keep a paper trail: dated photos, inspection sign-offs, delivery receipts.
• Store delivered materials securely; you own them once paid for.
• Don’t let payments outpace work in place.

Common mistakes to avoid

• Paying a big deposit before materials arrive.
• Tying payments to dates instead of completed, inspected work.
• Skipping lien waivers from subs and suppliers.
• Accepting a certificate of insurance without endorsements.
• Allowing verbal change orders.

When to call a pro

• Construction attorney: 1–2 hours of review ($250–$600/hr) to tailor clauses to your state and project size.
• Escrow/title company: to hold funds and release on milestones.
• Owner’s rep/inspector (for large remodels): to verify progress before payments.

These protections don’t scare off good contractors; they clarify expectations and cash flow. The result is a smoother build and far less risk of paying for work that stalls or never starts.