Statutory Caps on Down Payments and Progress Payments

Why this matters

"A third down, a third at start, balance at completion" is the payment schedule a lot of shops learned from whoever trained them. In some states it is fine. In California it breaks the law twice before the first nail goes in: once at signing, because the down payment is capped far below a third, and again on day one, because a progress payment may not run ahead of the work. The customer who signs that schedule rarely complains until the job goes sideways, and then the schedule itself becomes the strongest exhibit in their complaint. This card is about the statutory ceiling on what you may collect and when, which is a different question from what your contract should say about deposits; for that, see related: Deposit and Payment Terms That Belong in the Contract.

Two separate rules, often in one statute

States that regulate payment timing on residential work tend to use two different tools, and a shop needs to know which its state uses:

• A cap on the down payment. A ceiling on what may be collected before work begins, stated as a percentage of the contract price, a fixed amount, or the lesser of the two.
• A ban on payments ahead of performance. A rule that, after the down payment, each payment may not exceed the value of the work actually performed and the materials actually delivered to the site.

The first rule limits the size of one payment. The second limits the shape of the whole schedule. A shop can satisfy the cap and still violate the second rule with a large payment due "at start".

This is a state layer. There is no general federal cap on down payments for home improvement work, though the FTC's Cooling-Off Rule can delay when a door-to-door sale becomes binding, which affects when collecting anything makes sense. See related: How to Handle an Emergency Repair Under the Cooling-Off Rule.

The range across states

California, at the strict end. Business and Professions Code 7159.5 caps the down payment on a home improvement contract at the lesser of ten percent of the contract price or a fixed dollar cap the statute sets, and it bars the contractor from demanding or accepting any payment, other than that down payment, for work not yet performed or materials not yet delivered. Section 7159 requires the contract to set out the schedule of progress payments with each payment tied to the work it pays for. Swimming pool contracts have their own, lower cap under 7167. The same statute exempts a contractor holding a bond, letter of credit or deposit approved by the registrar, under the conditions it lists; that exemption is not available to a shop that has not set it up. California also distinguishes service and repair contracts (7159.10), which have their own payment rules, so a small repair is not automatically governed by the home improvement numbers. Violations are a licensing matter, and the statute itself also makes them prosecutable as a misdemeanor.

Because the California cap is "the lesser of", there is a crossover point: ten percent of the price equals the fixed cap on a contract priced at ten times the cap. Below that price the ten percent binds; above it the fixed cap binds, and the allowed down payment becomes a shrinking share of the job. On most replacement and remodel jobs the fixed cap is the number that matters.

Middle of the range. Several states cap the deposit at around a third of the price. Maryland's Home Improvement Law and Massachusetts's home improvement contractor statute (Chapter 142A) both use a one-third figure, and Massachusetts allows more where special-order materials must be bought in advance, under the conditions its statute describes. Read each for whether it also restricts payments ahead of work; a deposit cap alone does not.

A trigger instead of a cap. Florida sets no cap, but Florida Statutes 489.126 attaches duties to an initial payment of more than ten percent of the contract price: the contractor must apply for the permits within a set number of days and start work within a set time after they issue, unless there is just cause or the buyer agrees otherwise in writing. Taking a large deposit is lawful there; sitting on it is not.

No cap. Many states set no statutory limit on deposits at all. Texas, which has no general residential contractor licensing statute, is one. In those states, the only limits are the contract, the state's unfair and deceptive practices act, and, where you take money and do not perform, the theft-by-contractor statutes several states have.

Read your own state's home improvement statute before you rely on any of this. This is not legal advice.

Worked example: one roof, two schedules

A California roofing shop sells a residential reroof. The contract price is about 25 times the statutory fixed cap, so ten percent of the price would be 2.5 times the cap, and the cap binds. The allowed down payment is therefore the fixed cap, which on this job is 4 percent of the contract price (one twenty-fifth). Materials for the job are valued at 35 percent of the price; tear-off and dry-in labor bring the work in place to 60 percent; the rest is completion through final inspection.

The shop's habit schedule and a compliant schedule, side by side, measured against work in place:

MILESTONE             WORK+MATERIALS  PAID TO DATE  OK?
-- habit schedule --
Signing                     0%            33%       no
Start, day 1                0%            67%       no
Completion                100%           100%       yes
-- compliant schedule --
Signing (down payment)      0%             4%       cap
Materials delivered        35%            35%       yes
Dry-in complete            60%            60%       yes
Final inspection          100%           100%       yes

Reading the habit schedule. At signing it collects 33 percent against a cap of 4 percent, so it is 29 points over before anything happens. On day one it reaches 67 percent with nothing in place, which is 67 points ahead of work under the second rule, minus only the 4 percent the down payment exception allows: 63 points of payment the statute does not permit. It is compliant only at the very end.

Building the compliant one. Each payment is set so that paid-to-date never exceeds work in place plus the down payment. Signing: 4 percent. Materials on site: the payment is 35 percent of the price minus the 4 percent already received, so 31 percent, which brings paid-to-date to 35 percent, equal to work in place. Dry-in: 60 minus 35, so 25 percent. Final: 100 minus 60, so 40 percent. The four payments are 4 + 31 + 25 + 40 = 100 percent of the price. Each payment in the contract names the milestone it pays for, which is what 7159 asks the schedule to do.

Why the shop resists it, and why that is the wrong lesson. The habit schedule exists because the shop pays its supplier before the materials show up and does not want to float that cost. The compliant schedule handles it with timing rather than with a larger deposit: the shop has the supplier drop the materials early, invoices the delivery payment the day they land, and pays the supplier on its normal terms. If the supplier demands payment before delivery, that is a supplier-terms problem the shop solves with its supplier or its line of credit, not by moving the customer's money ahead of the work.

What changes the answer. The same roof in Maryland or Massachusetts could take a down payment of up to about a third, so the habit schedule's signing payment fits those caps (a third, not more), though its day-one payment still needs checking against whatever each state says about payments ahead of work. In Florida the 33 percent signing payment is lawful, and because it is more than ten percent of the price it starts the 489.126 clocks on permits and start of work, so the shop needs its permit application in on time. In Texas, nothing at the state level caps either payment, and the schedule is a business decision bounded by the contract and the deceptive-practices act. And in California, a shop that had set up the registrar-approved bond the statute describes would be outside the 7159.5 limits for that reason, not because the schedule changed.

The failure modes this rule is built to catch

• "Mobilization" payments. A payment labeled mobilization or scheduling, due before anything is in place, is a payment ahead of work under a rule like California's whatever it is called. The label does not change what it is.
• Special-order materials. Custom cabinets, a specific window package or a made-to-order door are the case where shops most want a large early payment. Where the state allows it (Massachusetts, by its terms), use that allowance as written. Where it does not, the timing tool above is the answer: pay at delivery, or order and invoice only once delivered.
• Change orders that front-load. A change order adding scope sometimes asks for its full price on signature. Under a no-payment-ahead rule, the added scope gets its own milestone like everything else. See related: Change Orders and the Written Consent Consumer Law Expects.
• Financing. When a third-party lender pays the shop, the lender's funding schedule can collide with the state's payment rule. The state rule is about what the contractor demands or accepts; check whether a lender's lump-sum funding on signature fits it before the arrangement is set up. See related: Arranging Customer Financing and the Truth in Lending Act.

How to verify your schedule

• For your three most common job types, write the schedule as percentages and add a work-in-place column, as in the worked example. Any row where paid-to-date exceeds work in place plus the allowed down payment is a problem in a no-payment-ahead state.
• Confirm the down payment against your state's cap, including the "lesser of" or "greater of" wording, at your largest typical contract price, which is where a fixed cap bites.
• Confirm each payment in your contract template names the milestone it pays for, not a date.
• Read one recent signed contract against the template; schedules drift when a salesperson edits them to close.

References

• California Business and Professions Code 7159 (home improvement contract contents), 7159.5 (down payment and progress payments), 7159.10 (service and repair contracts), 7167 (swimming pool contracts)
• Florida Statutes 489.126 (moneys received by contractors)
• Massachusetts General Laws Chapter 142A; Maryland Home Improvement Law (Business Regulation Article, Title 8)
• See related: Deposit and Payment Terms That Belong in the Contract
• See related: Home Improvement Contractor Laws and What They Usually Require