Deposits, Payment Schedules and Lien Waivers for Homeowners

Why this matters

On a small repair you pay when the work is done and that is the end of it. On a larger job, money changes hands in stages, and two things can go wrong that have nothing to do with the quality of the work. You can pay far ahead of what has been built, and be left exposed if the job stalls. Or you can pay your contractor in full and still find that an unpaid electrician or cabinet supplier has a legal claim against your house.

Both are preventable with a payment schedule that tracks the work and a small stack of signed papers called lien waivers. This card explains what a reasonable schedule looks like, why some states cap deposits, what a mechanics lien is, and how waivers keep you from paying twice. Laws on all of this differ by state, sometimes sharply, and this is not legal advice; for a large job, a short consultation with your own attorney is worth it.

What a reasonable schedule looks like

The governing idea is simple: at every point in the job, what you have paid should be close to the value of the work actually done, and not far ahead of it. The size of the job decides how many stages that takes.

• A service repair (a visit, a diagnosis, a part replaced): usually no deposit. You pay on completion. A shop may ask for payment up front on a special-order part it cannot return.
• A single replacement done in a day or two (a water heater, a furnace, a panel): sometimes a deposit to cover ordering the equipment, with the balance on completion.
• A project running weeks (a remodel, a roof, an addition): a modest deposit, then progress payments tied to milestones you can see, with a final payment held until the work is finished and walked.

Milestones beat dates. "When the rough-in inspection passes" is something you can verify; "on the 15th" happens whether or not anything was built.

Why some states limit deposits

A deposit pays for things that have not happened yet. If the contractor never starts, the deposit is what you stand to lose, so several states put a ceiling on it for home improvement work:

• California (Business and Professions Code section 7159.5) limits a home improvement down payment to 10 percent of the contract price or a fixed dollar cap set in the statute, whichever is less.
• Massachusetts (General Laws chapter 142A) and Maryland each cap a home improvement deposit at one-third of the contract price; Massachusetts allows more where the contract calls for special-order materials, to cover their cost.
• Many other states set no cap at all, and leave it to the contract.

Each of these rules has its own conditions (what counts as home improvement, which contractors it covers, what exceptions apply), so check your own state's consumer protection or contractor licensing office rather than assuming any of these applies to you. Where there is no cap, a deposit much larger than the cost of the materials being ordered is still worth questioning. A reasonable request is to tie any large deposit to a written order confirmation from the supplier.

What a mechanics lien is

A mechanics lien (also called a construction lien) is a legal claim against your property, filed by someone who supplied labor or materials to improve it and was not paid. It attaches to the house, not to a person. Until it is released it can block a sale or a refinance, and in the worst case the claimant can ask a court to force a sale to collect.

The part that surprises homeowners is who can file one. In most states it is not only your contractor. Depending on the state, a subcontractor hired by your contractor, a supplier who delivered materials to your job, and sometimes an equipment rental company or a design professional can claim a lien on your house, even though you never signed anything with them and even if you paid your contractor every dollar on time. If your contractor took your money and did not pay them, they can come to the property.

Two details vary by state and matter a great deal:

• Preliminary notices. Many states require subcontractors and suppliers to send you a notice early in the job to keep their lien rights (California calls it a preliminary notice, Florida a notice to owner). Treat every notice you receive as a list of people who can file against your house, and keep it.
• How much you can owe. Some states limit your exposure to what you still owe the general contractor, so paying on schedule protects you. Others do not, and a homeowner who paid in full can still face a valid lien. Deadlines to file also vary widely. Ask your attorney or your state's licensing board which kind of state you are in.

How lien waivers protect you

A lien waiver (or lien release) is a signed document in which a contractor, subcontractor or supplier gives up its right to file a lien for a stated amount or for work through a stated date. Collecting them as you pay is how you know the money reached the people who could otherwise come after the house.

Waivers come in four combinations:

Conditional waivers protect the person signing: they only take effect if your check or transfer goes through. Unconditional waivers protect you: they are effective as soon as they are signed. The usual rhythm is a conditional waiver handed over with each payment, and an unconditional waiver for that same payment collected with the next one, once the money has cleared. Some states require specific statutory waiver forms, and a waiver that does not use the required form may not be effective; use your state's form where one exists.

Worked example: a kitchen remodel

A general contractor (GC) is remodeling a kitchen. Treat the contract price as 100 percent. The GC uses an electrician as a subcontractor, worth 9 percent of the contract, and orders cabinets from a supplier, worth 14 percent. You received preliminary notices from both, so you know their names. The schedule and the papers collected look like this:

PAYMENT AND WAIVER LOG   kitchen, contract = 100%
Pay Milestone           Pct  Cum  Waivers collected
1   Signing              10   10  none yet
2   Rough-in passed      25   35  GC + Elec: cond., pay 2
3   Cabinets set         30   65  GC + Elec: uncond., pay 2
                                  GC+Elec+Cab: cond., pay 3
4   Substantially done   25   90  all three: uncond., pay 3
                                  all three: cond., pay 4
5   Final, punch done    10  100  all three: uncond., pay 4
                                  all three: FINAL uncond.

Check the schedule: 10 + 25 + 30 + 25 + 10 = 100. The deposit is 10 percent, under the one-third caps named above. In California the statute's fixed dollar cap would usually be the lower limit on a kitchen, so the deposit there would be smaller than 10 percent.

Why each stage is built that way. The deposit is small because nothing exists yet. The cabinet payment is the largest single payment because it falls right after the most expensive material is installed and visible. The final 10 percent waits for the punch list (the short list of small fixes found at the walk-through), which gives the GC a reason to come back and finish them. See related: How to Walk Through a Finished Job Before Final Payment.

What the log catches. At payment 3 you ask for the electrician's unconditional waiver for payment 2. The GC says the electrician "hasn't gotten around to it". You hold payment 3 for a day and call the electrician directly, who tells you the GC still owes for the rough-in work: about 6 percent of the contract. You have now found, before paying another 30 percent, the exact problem a lien would have told you about months later.

Your options at that point, with the electrician and GC both agreeing: pay that portion of payment 3 with a joint check made out to both the GC and the electrician, so neither can cash it alone, or have the GC pay the electrician from payment 3 and hand you the unconditional waiver before the balance is released. Either way the 6 percent reaches the person with lien rights.

What would change this. If you had not received a preliminary notice from the cabinet supplier, you might not know it existed. Ask the GC at signing for a list of every subcontractor and supplier over a modest size on the job, and add anyone who sends you a notice later. And in a state that caps your exposure at the unpaid contract balance, the same discovery is less dangerous but still worth making, because a recorded lien still has to be cleared before you can sell, and clearing it takes time even when you are not liable for it.

Things that should make you slow down

• A deposit request well above the cost of the materials being ordered, especially with no order confirmation behind it.
• A schedule where cumulative payments run well ahead of visible progress. In the example, after payment 3 you have paid 65 percent; the kitchen should look roughly two-thirds done, not one-third.
• Pressure to pay in cash, or to pay a final amount before the punch list is complete.
• A contractor who will not provide waivers, or provides them only from itself and never from the subcontractors and suppliers who sent you notices.

What to keep

Keep the signed contract, the schedule, every preliminary notice, every waiver, and proof of every payment (cancelled check, transfer confirmation) together, in order. If a dispute or a lien appears years later, during a sale for instance, this is the file that answers it. See related: Your House Records File and What Goes In It.

References

• Your state's contractor licensing board or consumer protection office (deposit limits, lien rules and any required waiver forms)
• California Business and Professions Code section 7159.5 (home improvement down payment limit)
• Massachusetts General Laws chapter 142A (home improvement contractors, including deposit limits)
• See related: How to Read a Contractor's Estimate
• See related: How to Walk Through a Finished Job Before Final Payment