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Question DetailsAsked on 1/29/2018

How much should a contractor building a new house charge up front?

We are just about to start building a house. Our contractor said he wants 10% up front which is around $60,000,
He plans on returning it to us after our last payment when the project is done. Does that seem reasonable because it seems like a lot to ask of us? We are about to break ground so any guidance on this would be helpful! Thank you!

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My advice - since it sounds like you already are into a contract for a $600,000 project - is find an Attorney ASAP who is experienced in residential construction contracts and liens and such, because if you are asking this sort of question at this stage (as opposed to before signing a contract) I wonder what else is in there which you are not aware of or did not realize the impact of.


And it is not clear from what you said if the CONTRACT states you owe a 10% initialpayment and that he will return that money to you upon completion of the job (meaning he gets its use, presumably interest free, till he finishes the job - hopefully there is a firm completion date in the contract), or if the contract maybe calls for a 10% deposit (or maybe does not even spell out a deposit or initial down-payment amount) and he SAYS that he wants 10% and will return it after the job is done, but that is not what the contract actually requires.


Generally, if it calls for a 10% initial deposit at a particular time (at site prep or foundation excavation groundbreaking say for instance) that money would normally be applied to the amounts you owe to him (more on that below) - not be held for the duration of the job. Or at worst, and even this would be a red flag to me, apply to the last monies owed under the contract - so the last $60,000 would come from the deposit rather than out of pocket or from a construction loan. Though that arrangement would stink - because it would mean for the last $60,000 worth of work (unless the contraxt stipulated you had to sign off on applying it to the work) you would have zero holdover him because he would already have the oney in hand - so could just slough off and not complete the work, or at leat not in a timely manner, because he is already paid.


Anyway, letting him hold $60K of your money (in addition to the $600,000 or so he is getting as progress payments along the way, presumably) does not make any sense to me, and definitely is not "usual". A 5-10% initial payment, commonly due at actual start of site prep if at the 10% level for this big a job, o maybe more like $10,000 or so up-front and then 5-10% once site prep and foundation is well along is not unusual - but it would normally apply to the initial charges on the job, and be credited to his billings as the job goes along.


Actually, commonly not only would it be credited to the billings (which should be subject to your approval first even if being paid partly or totally credited against the deposit), but commonly something like 5-10% would be "retained" by you from each payment to him until the punchlist of items needing correction or completion is complete. Sometimes that is a one-time thing at job completion, on larger jobs like yours sometimes done milestone by milestone - so say if completion of foundation and framing is scheduled for say a 25 or 30% completion progress payment, once the punchlist is complete for those items he might get the retention percentage on that 25-30%, but would not get the last part till final completion. Of course, your position and hold over him to get the job done correctly and in a timely fashion is greater if the total 5-10% retention is under your control until the final punchlist signoff and receipt of lien releases and warranties and such.


Anyway, you (and your attorney, as you should have on board for this large a job anyway unless you are QUITE construction savvy and have been through this process before) should read the contract in detail with regard to plans and specs completeness, performance requirements, progress payments, retention, punchlists, change order procedures etc before you get too deep into this, because I fear you may be heading for a surprise or two more. If you are using an architect working for you (as opposed to a designer working for the contractor as part of his scope) and his/her scope includes any involvement in contracting or measurement and payment or inspection or such, he/she should be involved in this review of the contract too.


Another thing - if he is proposing holding the $60K till completion and then returning it, screwy though that be, that basically makes it a "security deposit" rather than a "down payment" or "advance deposit on account" - which I would therefore (since it is just going to sit there for presumably a year or so) require that it be put into an interest-bearing (accruing or paying out the intererest in YOUR favor, not his) escrow account, so he cannot just tap it whenever he feels like a vacation in Bermuda. Having that kind of $ just sitting in his account is unduly risky - because even if he is totally honest, without it being in a dedicated escrow account held by an escrow department at a bank or title company or such, if his firm goes belly up or has an involuntary bankruptcy filed against it or such, that money will be attachable as part of HIS comapany's assets, not yours. In most states, that sort of deposit does NOT legally have to be set aside exclusively for your benefit (and would not be unless put in a dedicated escrow account for your job only) so he can use it to fund work on another client's project, buy materials for someone else's job, etc without your knowledge or approval. Leaving it in his control just makes no sense. And if he is less honest - say on the far extreme an out and out scammer, as soon as he does a touch of site prep - literally maybe just renting a backhoe or dozer for a few hours and scratching around and doing a bit of digging for your foundation or leach field say, once he gets the $60K check he might be gone like a flash. Not a good situation to be in, and unfortunately since this is such an odd situation I feel I have to raise at least a yellow flag, if not a red flag until you get this situation looked at by an attorney and "normalized" to standard practice.


This might all be a bit much for you - and might not make total sense at this point, but if you read through it and talk to an attorney, perhaps showing him this as a starting checklist for conversation, that might get you off on a better footing, because right not while this guy may be perfectly legit, you have no way of confirming that, and it could just be you are about to step into quicksand and you find the $60K vanishes in a flash.


One other thought - part of my opinion that one a job this size you should have an attorney on board working for YOUR interest, having one involved (ideally from the initial proposal request stage on, reviewing all the legal adspects from day one) lets the contractor know you are protected and not a total sucker.


One other thought - where is the money coming from for this house - if out of pocket you need to be considering construction escrow or at least scheduled maturity money market or CD accounts to have the money available when needed but not sitting not earning interest (even though you can only get about 1% and a bit on money markets right now, but that is $6000+ a year in interest). If you are getting (actually, if a contract is signed and you are about to break ground you should have approved and in hand) a constructon bridge loan and mortgage committment - and the payment schedule should have been discussed with the bank or lender BEFORE signing the contract, because they will not let the money go until thay know each progress payment represents actual comparable progress on the job - and they usually count (sometimes with an occasio0nal site visit) on YOU to certify to that progress - do so falsely, intentionally or innocently, and you can be in a heap o trouble, boy !


And of course - have you checked his references, Angies List rating and reviews, licensing and bonding and insurance, etc ? See this link on those latter items:


https://www.angieslist.com/research/c...


One other thought - bear in mind, if planning on selling your existing place or ending a rental/lease agreement to move into the new home, that delays are the norm in new builds - commonly several to many months and sometimes a year or more, so be careful about committments you make to move out of your current place before this one isw actually ready to move into. A lot of people getthemselvesinto a bind and end up having to rent a place or live out of a motel for sometimes quite a period of time because they have burned their residence bridges behind them already.


Here is a related similar question with answer FYI:


http://answers.angieslist.com/What-re...


Good Luck

Answered 9 months ago by LCD




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