The low down on down payments

The low down on down payments
contractor and homeowner signing contract

contractor and homeowner signing contract

Handing money to a contractor who hasn’t even started a job yet can make some homeowners anxious. However, down payments for home improvement are not uncommon and shouldn't be considered a red flag. That doesn't mean consumers have to hand over the originally requested amount, though.

More than half the contractors who responded to a recent nationwide Angie’s List poll said they require down payments, but most of them said they are willing to negotiate on down payment terms. Many also said they are willing to work with homeowners to establish payment schedules based on targeted completion dates.

A good rule of thumb is to never put down a large down payment (more than 20 percent of the project’s total cost) until the contractor arrives with the materials ready to do the job; and to hold back the final payment until you have inspected the completed project and are satisfied with the quality of the work.

“We’ve heard the horror stories where (someone) gave XYZ Construction a $5,000 payment and never heard from them again,” said Jared Kennard with CMH Builders in Indianapolis. “We want to actually show up and start the work before we accept any payment from our customers. We’ll break the payments up into sections, so they actually see milestones being completed before they release any more money to us. We’ll leave the final payment to the very end of the project so they can see a 100 percent completed project.”

Here are some other scenarios that could merit a down payment:

• If the contractor has to invest in costly materials or other expenses up front. Dave Monroe of D and C Electric in Brownsburg, Ind., charges a modest down payment — usually no more than 10 percent — on jobs that cost more than $500, or require him to pull a permit. 

“Anytime I have to pull a permit, which means I’m spending money that can’t be recovered if the customer backs out, I want to make sure we’re both on the hook for the job,” Monroe said. “This way, we’re both financially obligated to the job. Most of my customers seem to understand, when I ask for one.”

• If the project involves unique, challenging or custom materials. Ed Kikendall Jr. of E & E Garage Doors in Indianapolis doesn’t require a down payment unless the job is a large one that involves, for example, custom-made doors. 

“The only reason we require a deposit on custom jobs is because the manufacturers require a deposit upfront. Those doors usually cost more than $4,000 a piece,” Kikendall Jr. said. “The deposit can be anywhere from 10 to 50 percent.”

• To secure your spot on the contractor’s schedule. Troy Rhoten with Troy-Built Wood Decks in Fishers, Ind., said he started asking for a $100 down payment at the contract signing about 10 years ago as a way to establish a commitment from the customer. Too often, Rhoten said, he would get last-minute cancellations from customers who had nothing invested in the job but had scheduled work to be done in advance. 

“I’ve got my whole calendar based (around that appointment),” Rhoten said. “I’ve purposely kept (the deposit) very, very low. I think it makes them comfortable because I’m not asking for $1,500 or $5,000.”

Rhoten requests 50 percent of the project costs once it gets underway, with the balance due upon completion.

“I would be leery as a homeowner of companies that want a big down payment,” Rhoten said. “It’s fine if they want a down payment once the materials are in the yard and the contractors are out there, but contractors who ask for 50 percent and then say, ‘See you in 60 days,’ I think that is totally unethical and if I was the homeowner, I wouldn’t pay that. Too much can happen in the interim period of time.”

Editor’s note: This article was originally published on September 3, 2011.

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