Saturday, October 23, 2010

Down Payments on Residential Jobs

Nine states place limits or impose restrictions on advance payments for some types of residential construction. If you have jobs in any of these nine states, you walk a fine line when asking for a down payment: Arizona, California, Indiana, Maine, Maryland, Massachusetts, Nevada (pools only) Pennsylvania and Tennessee.

I agree that states have an interest in limiting how much a contractor can collect in advance. But I feel there are legitimate reasons to ask for more cash up front on some jobs. For example, suppose you have to order (and pay for) custom windows for a job. And suppose those windows aren't returnable. I think it’s reasonable to ask for a hefty payment up front on that job. The same is true for nearly any job with special order materials, especially if those materials come with a long order-to-ship time.

Some of these nine states cut contractors a little slack when special order materials are required for a job. Massachusetts and Pennsylvania limit the down payment to one-third of the contract price but make an exception if materials have to be special ordered. In Maine, the initial payment on home improvement jobs can’t exceed one-third of the contract price. But the owner and contractor can waive the one-third limit by mutual agreement.

Tennessee limits the initial payment on home improvement contracts to one-third of the contract price but allows two exceptions: (1) if the contractor provides performance and payment bonds or other security guaranteeing performance, or (2) if the contract discloses the right of the owner to withhold payment until work is done and the owner volunteers to make a larger initial payment.

Maryland and California are a different story.
Maryland limits the initial payment on home improvement work to one-third of the contract price. California is even more restrictive. The initial payment can’t exceed $1,000 or 10% of the contract price, whichever is less. And there are no exceptions! I think that’s going to be unreasonable on some jobs. For example, a while ago I had a call from a contractor re-doing the interior of a luxury home in Malibu. Bare material cost for the marble flooring on this job was well over $10,000. And the flooring order required a 60-day lead time with full payment up front. I think that job required an advance payment when the flooring went on order.

If you agree and do home improvement work in either Maryland or California, I’m going to suggest a better way to handle advance payments. The law in Maryland and California limit only down payments. Fine. Don’t even mention a down payment in your contract. Instead, make the scheduled start of construction the day non-returnable materials are placed on order. Identify that in the contract as the first job phase. Then make payment due on job phase 1 when you order those materials. That can be the third day after the contract is signed. I believe that set of conditions complies with both the letter and spirit of the law.

To try this yourself, have a look at Construction Contract Writer. The trial version is free.