Contractor Deposits: How Much Is Too Much Upfront?

A contractor slides a contract across the kitchen table and points to the payment line: 50% due at signing. On a $60,000 project, that is $30,000 wired to someone you met two weeks ago, before a single tool comes out of a truck. You might hesitate. You probably should. Because that check is the single biggest financial risk in the entire project — bigger than the change orders, bigger than the material upgrades, bigger than the timeline overruns.

The deposit amount determines who holds leverage for the next three months. Pay too much upfront and the contractor's incentive to finish on time, on spec, or at all drops with every dollar already in their account. Structure payments around milestones and both parties stay aligned through the final punch list.

State-by-state deposit caps

Some states have drawn a hard line on how much a contractor can collect before starting work. Others leave it entirely to the contract — which means the contract is the only thing standing between you and a front-loaded payment that benefits nobody but the contractor.

• California — Business and Professions Code Section 7159 caps home improvement deposits at 10% of the contract price or $1,000, whichever is less. A $50,000 kitchen remodel means the maximum legal deposit is $1,000, not $5,000. Contractors who ask for more are violating state law.
• Maryland — Caps deposits at 33% of the contract price for home improvement contracts. On a $45,000 bathroom remodel, the maximum deposit is $14,850.
• Nevada — Caps at 10% of the total contract or the cost of any special-order materials, whichever is greater.
• Arizona — No statutory cap, but the Registrar of Contractors can investigate complaints about excessive deposits as potential fraud.
• Texas — No statutory cap. The contract governs. This makes the payment schedule clause the most important paragraph in any Texas home improvement contract.
• New York — No statutory cap for general contractors, but NYC has specific rules for home improvement contractors requiring a license and limiting deposits on contracts under certain thresholds.

Why large deposits are risky

A deposit is not a fee for service. It is a transfer of risk. Every dollar you pay before work is performed is a dollar you may never recover if things go sideways. And "things go sideways" takes three distinct forms:

• Contractor insolvency — The contractor takes your $25,000 deposit and three other deposits the same week. Payroll, supplier debts, and the previous project's overruns consume the cash before your project starts. You are now an unsecured creditor. Recovery rate in contractor bankruptcy: typically 5-15 cents on the dollar, if anything.
• Abandonment — The contractor starts work, completes 30% of the project, and stops showing up. If you paid 50% upfront, you have overpaid for the work completed by 20 percentage points. Hiring a replacement contractor to finish costs 20-40% more than the original per-unit rate because the new contractor inherits someone else's half-done work and has to assess, correct, and continue.
• Leverage loss — Week six of a twelve-week project. The tile work is sloppy. The cabinet installation is behind schedule. The drywall finish is visibly uneven. If you have paid 80% of the contract, your leverage to demand corrections is close to zero. The contractor has your money. Your only recourse is litigation — $5,000-$15,000 in legal fees for a construction dispute that takes 12-24 months to resolve.

The 50% upfront trap

The most common dangerous payment structure looks elegant on paper: 50% at signing, 50% at completion. Balanced, right? Not even close.

Here is why. Demolition and rough-in — the first 50% of the timeline — typically represent only 25-35% of the total project cost. The expensive work has not happened yet. Finish work (cabinetry, countertops, tile, fixtures, paint) accounts for 50-60% of the cost. The remaining 10-15% is punch list, final connections, and cleanup. So at the chronological halfway point, you have already overpaid by a wide margin.

The milestone-based payment schedule

The industry standard ties payments to verified completion of work phases, not calendar dates. Each check you write should correspond to something you can see, touch, and confirm. Here is what a well-structured schedule looks like on a $50,000 project:

• 10% at contract signing — The deposit. Covers administrative costs, initial material ordering, and scheduling. Amount: $5,000.
• 25% at rough-in complete — Paid after demolition is done, framing is complete, and plumbing/electrical rough-in passes inspection. Amount: $12,500. Running total: $17,500 (35%).
• 25% at substantial completion — Paid after cabinets are installed, countertops are templated and set, tile is grouted, and the space is functionally usable. Amount: $12,500. Running total: $30,000 (60%).
• 30% at final walkthrough — Paid after all finish work is complete, fixtures are installed and functional, paint is done, and the final inspection passes. Amount: $15,000. Running total: $45,000 (90%).
• 10% retention for punch list — Held back until every punch-list item is resolved — the paint drip, the cabinet door that does not close flush, the uneven grout line, the missing outlet cover. Amount: $5,000. This retention is your enforcement mechanism.

Materials-only deposits: when they are legitimate

Sometimes a contractor asks for a deposit specifically to order materials. In narrow circumstances, this is reasonable — but "narrow" is doing real work in that sentence:

• Custom cabinetry — Semi-custom and custom cabinet orders require a 50% deposit to the manufacturer, with the balance due before shipping. Lead time: 6-12 weeks. A $15,000 cabinet order may require $7,500 upfront. Reasonable — but the deposit should go directly to the cabinet supplier, not to the contractor's operating account.
• Imported or specialty tile — Tile from European or artisan manufacturers often ships on prepayment terms. A $4,000 tile order may require full payment before production begins.
• Custom windows or doors — Specialty sizes, finishes, or configurations are made to order. Lead time: 8-16 weeks. Deposits of 50-100% to the manufacturer are standard.

For legitimate custom material deposits, protect yourself with four steps:

• Ask for the supplier's name and order confirmation number.
• Write the deposit check directly to the supplier, not to the contractor.
• Get a copy of the purchase order showing the product specifications you agreed to.
• Confirm the supplier's cancellation and refund policy in writing.

Red flags in payment schedule language

The deposit amount is only part of the story. The language around it can be just as dangerous. Watch for these structural problems buried in the payment schedule:

• Payments tied to dates instead of milestones — "Second payment due March 15" regardless of whether any work is complete. If the contractor is two weeks behind on March 15, you still owe the payment. Milestone-based payments ("due upon completion of rough-in inspection") protect you from paying for work not done.
• No written payment schedule at all — A handshake agreement on payment terms is unenforceable. If the schedule is not in the signed contract, it does not exist.
• Acceleration clauses — "Contractor may accelerate the payment schedule if material costs increase." This lets the contractor demand payment ahead of milestone completion by claiming a price increase. Material costs are the contractor's risk to manage within the quoted price, not yours.
• No retention clause — If there is no retention holdback, add one. Write in 10% retention held for 30 days after final walkthrough and punch-list completion. If the contractor refuses, that tells you everything about how they handle punch lists.

The bottom line on deposits

Check your state's deposit cap. Restructure your payment schedule around milestones, not dates. Hold 10% retention until every punch-list item is complete. And never write a materials deposit check to the contractor when it should go directly to the supplier.

The pattern is always the same: the contractor who pushes hardest for money upfront is the one most likely to underdeliver once they have it. A payment schedule that keeps both parties honest is not adversarial — it is the foundation of a project that actually finishes well.