What is a Fair Payment Schedule for a Home Renovation or New Build?

By Scott Simonsen, Owner, Old World Craftsmen, Greenwich

A fair payment schedule helps to protect both the client and the builder. Too much money up front means the client is at risk if things don’t go well, and too little money and the builder is laying out finances for the purchases of materials for the client’s project. The overall principle of a fair payment schedule is that the percentage of money paid should stay approximately current with the percentage of work done. The exception is custom materials that must be purchased far in advance such as windows and cabinetry – the client is expected to provide the deposit to cover these items, as with most custom orders.

Milestone Driven Installment Payments
A payment schedule should be provided in the builder’s proposal or contract. Each payment of a specific percentage of the whole job cost, should be attached to a specific milestone. For discussion in detail, here’s a sample milestone-based payment schedule, where a percentage payment is due based on a visible project milestone.

Sample Payment Terms:
10% Deposit with Signed Proposal To Book Time Slot & order window
30% Payment At Start of Job
20% “Rough in” (Ready for Sheetrock)
15% Completion of Tile Floors
10% Completion of Interior Trim
10% At Stone Counter Template
5% Balance Due Upon Completion of Above Work

Deposit
We typically use a 10% deposit to hold a time slot for a client and to pre-purchase long lead items such as windows and doors. A good builder should look ahead in his schedule and at the lead times on your product and building permit to set a target start date well in advance for you to prepare for. The builder needs a commitment from the client since if he is ethical, he is setting aside a time block and labor force sufficient to accomplish your project at that time. If a client changes their mind about starting the builder is truly left “high and dry” with a big hole in his schedule, so a financial commitment makes sense.
Thought Question: If he doesn’t collect a deposit, how committed do you think your builder is to starting on or right near the target start date agreed on?

Starting Payment
There is usually a substantive payment on the first day of the job, when construction commences. The builder will be providing a dumpster for disposal and bringing in loads of materials and providing the labor for the build.

Rough in Payment
This is an industry standard milestone in construction for valid reasons, but unfortunately the slang “rough in” is not helpful to the client. What does this mean? I summarize the “Rough in” milestone as when you are ready for sheetrock.

We call the framing of the structure and installation of the mechanical work inside walls and ceilings the “rough in” phase of the project – generally meaning all of the work done before the walls are closed. Usually, insulation is also considered to be included in the “rough in” phase. On jobs needing a building permit, there will be a framing, plumbing, electrical, insulation and sometimes an HVAC “rough in” inspection. So this is a big milestone and payments will be due to tradesmen, so the builder will have to collect at this phase.

Other Milestones
Each project is individual, so some of the milestones will be customized to be related to your specific project. Note that the milestones are clearly visible accomplishments. Builder and client will visually know when the tile floors are done, when the interior trim is done and when the stone fabricator met with the client for the template. I try to make sure the milestone description isn’t vague so as to cause an argument about whether the payment is due.
For example: let’s say your builder notes in the payment schedule: “10% flooring work.” As the builder, I might be ready to collect a payment after the installation of fairly expensive hardwood flooring, and I’ll owe my flooring subcontractor a payment. But the flooring work includes sanding and finishing the floors, so the client could say that the payment is not due until the polyurethane finish is applied. And contractually they’d be right. But floor finishing doesn’t happen until the very end, so the builder will be carrying this expense until the end of the project.
Who wants an argument – make sure the milestones are clear! In this case a better payment term will be: “10% upon completion of hardwood flooring installation.”

Final Payment
The larger the job, usually the larger the number of the installments – to keep the finances current. The job this payment schedule comes from is from a $220k job, so a 5% final payment is $11k. Substantive enough to give the client leverage to insist upon completion but not so enormous as to wreck the builder’s cash flow if there is a delay finishing some last detail – let’s say a light fixture that the client hasn’t purchased yet for example. On a job of $150k or less, a 10% final payment is more common.

A Note on Cashflow
Why is it in your best interests to use your money to build your project and not the builder’s? At first glance it may seem that the less you pay the builder, the more leverage you have over them. The more cash he lays out for your project, the longer you get to hold onto your money, right?

To answer this, we need to take a moment to look at things from the perspective of the builder’s business. Payments to subcontractors are due at specific milestones, and his payment schedule should be thoughtfully crafted to collect payments from the client at the right time so timely payments can be made to the tradesmen that have met their milestones and deadlines. Humor me on this slight divergence from the topic:

What are the top five ways a builder gets great service from his subcontractors:
1) Pay on Time. This is way 1 through 4! My subs will prioritize me over others because of a 25-year perfect payment history. They know if they go to Scott’s job, the money will be in their account the next day and they can meet payroll. Subcontractors talk to each other, and they will all soon know if you are a rock-solid payer. They will also put up with exacting quality standards if they know they will be paid immediately without having to solicit payment.
2) Have the job site and product ready for the tradesmen. Like way #1, this is a matter of respect.
As an example, it’s unfair to pressure a plumber to come complete a bathroom if the toilet hasn’t arrived yet!

The point of this indulgence in going off topic, is that an excellent and ethical builder pays on time and this is very much in your best interests as a client. Construction is generally not a very high margin business, and renovating builders often do not have enormous capital sitting around. A savvy builder has to build his payment schedule for the client around payments that will be due to subs, or he will be effectively lending you money. It’s good to stick to one’s business model, and most of us builders are not banks! We should stick to building- our expertise, and let the banks do the lending.

Frankly, it’s not very realistic to think that your builder will lend you money or that he is in a position to do so with large sums. What really happens is that the builder is slow to pay the subcontractors when his payments from the client are behind. Service from the tradesmen degrades immediately, and conflicts often result!

Homeowner Questions
Question: Why not have percentage payments due based on percentage of work done instead of milestones driven installment payments?
At first glance this might seem like a financially equable plan – the problem is in its application. When the builder comes to you and says he is 20% done, will you know if that is true? I’ve seen contracts from tradesmen and subcontractors presented to me with “50% when the work is 50% complete” – ugh! When is a painting job 50% complete? If it is an old home, 50% of the work (prep work) may be done before a single finish coat is applied. Will the customer think the job is 50% complete when there is no paint on their house? This is just plain a recipe for conflict, and the fact is that not even the builder knows the exact percentage of completion at any given moment.

The illusion of almost done: Several times over the years, I’ve been called in to look at jobs “mostly” done by sloppy builders that the client or the builder describes as 90% done – they just need me to do the last 10%, they tell me. A careful walk through of the site reveals a great deal of undone work (that should have been done in previous phases) and things that will likely have to be redone. A crafty or unscrupulous builder can make things appear further along than they are. Just skip the frustration: Use clear milestones for a comfortable and conflict free relationship with your builder.

Question: What happens if my builder comes to me asking to bend the payment schedule?
This is very much a matter of judgement. If it happens early in the project, before you know the builder well, generally I’d say stick to the payment schedule. If the builder has won your trust over the course of a well executed project, and he presents a solid reason for bending the payment schedule, you could entertain it.

Here’s two examples of legitimate reasons:

1) A product that you provide hasn’t arrived and it’s holding up a particular milestone. If your tile hasn’t come in, can you blame the builder if your tile floor isn’t in? If your sink didn’t arrive, how can he install your stone countertops?
If the builder has done a great job powering forward on the renovation, but a milestone payment is held up due to a client provided fixture not arriving in time, an early payment is entirely reasonable.

2) The project is done in a different order than originally planned. I’ve had large projects where I was sure I would build the patio and masonry first followed by a deck, porch and siding, for example. Then because of bad weather or the mason’s availability, we had to switch the order around. It might cause a cash flow problem if I had a large masonry milestone payment but only part of the masonry was done and the rest of the project marched ahead. I’ve had clients agree to bend the payment schedule and it made me appreciate them and drove me to go above and beyond. I’ve also had clients hold the letter of the law, and that’s their right and in the end the project gets done and the builder gets paid so it’s not worth getting too worked up.

Question: Should I issue final payment prior to completion?
Generally speaking, don’t. Why would the builder come to you asking for final payment when he is not done? Done means done and meeting quality standards. An unsightly defect in trim work or tile, etc. means not done! We’ve heard too many stories of unscrupulous builders disappearing once fully or nearly fully paid. We get called in to finish a project, and when I ask the client how much money remains in the contract to finish the work, they tell me that the contractor convinced them to pay everything! Yikes! And there I am talking to a client with an unfinished project with no money left.

Exception#1: As discussed above: You or things you provide are the reason the builder cannot finish. If there is one last light fixture you ordered that didn’t come in, it’s not fair to hold thousands of dollars as it comes over by slow boat from China. If you go on a 2 week vacation and require that no work be done at your home in that time, it’s also not reasonable to hold a large final payment. If the builder has won your trust, consider making final payment. If you don’t feel that comfortable, hold a reasonable amount to cover the cost of the outstanding work item and pay the rest.
Exception #2: Miniscule punch list items such as a defect in caulk around the tub or a painting touch up, a crooked outlet. Once I had a client hold a large final payment because we hadn’t programmed their nest thermostat. Nest thermostats are user programmable, and I would have been willing to help out whether they held payment or not. I didn’t appreciate being treated like I had to be compelled to help out.

Building is a two-way street
Keep the golden rule in mind. Uh oh, here’s a second divergence from topic! By the time you are near the end of your project, you should have a pretty good idea if your builder is an ethical, straight shooter who delivers what he says. Some people think that the more money they are holding, the more they can compel the builder to do whatever they want. But if you are working with a builder who is clearly proud of his work, his reputation and commitment, being sticky or unreasonable about holding money may have the opposite effect. If you were a dedicated, hard working builder, how would you want to be treated? If he’s won you over with meticulous work and uninterrupted progress, you’ll get the very best from him with reasonable and generous treatment. If on the other hand, he’s been cutting corners, slow to finish, using doubletalk, and has been leaving things unfinished, you’ll have to stick rigorously to your payment schedule, since it’s your only short term leverage and it’s finances you’ll need for someone else if they don’t deliver 100% completion.

If you’re reading this article, it’s likely you are contemplating working with a builder soon. Please be sure to read our article “How to select the best builder” so you have a good renovation experience!