Some Rules Are Made To Be Broken - Why advance payment rules for general contractors don't work

Summary

  • The current rule of thumb for advancing a contractor funds is the "lesser of 10% or $1,000".

  • This rule is ignored by the vast majority of remodelers. It's also impractical.

  • Contractors on average request 34% upfront.

  • Professionals in similar industries on average request 49% upfront.

 

Introduction

There are many industries where businesses ask their customers to pay money upfront. Tailors do it, lawyers do it, designers do it, wedding planners do it, software developers do it. The list goes on.

All have their own reasons for doing so, but none have laws in place curtailing the amount of advance payment that can be paid, nor are they as replete with so much conflicting advice on the subject, as the home remodeling industry. 

The lesser of 10% or $1,000 rule fails on most projects. Good contractors don't accept it either.

The lesser of 10% or $1,000 rule fails on most projects. Good contractors don't accept it either.

 

California says what?

In California, the state limits the amount a homeowner can advance a contractor to the lesser of 10% or $1,000. Other state licensing boards have similar hard and fast "the lesser of fixed percentage OR fixed sum" rules. Various consumer protection sites, industry bloggers and the majority of commentators on consumer-facing industry websites, champion and support these rules, with many even going so far as to say "$0 money upfront without exception" with justifications like "contractors are NOT professionals" and "good contractors have credit [and so can fund the project]".

I typically ask for 25% to guarantee the start date plus the cost of special purchase items.
— Michael Daryani of S.M.Zako.

These fixed percentage OR fixed sum rules are expected to work for all projects: big and small, simple and complex, $2,000 and $200,000.

The truth is however, they typically don't work and are rather impractical - no "fixed percentage OR fixed sum" rule can work for something as unique as a home remodeling project. More importantly, reputable contractors en masse pay no attention to them.

 

What others charge

To help create a better rule, one we believe could give contractors the funds they need to start any project while protecting consumers from the fear and risk of loss, we wanted to understand what other industries do regarding upfront payments.

So we asked a group of professionals from several "manufactured product" industries (and many of our own contractors) "how much of an advance payment do you typically require from a client before starting their project?"

Here are the results:

They surprised us too. Here is a quick overview:

  • The average answer was 46.6 % (the lowest we received was 20% and the highest was 100% - from a structural engineer).
  • The lowest answer was from contractors at 34%.
  • Excluding the contractor, the average answer given was 49.75% - a full 39.75% more than a contractor in California is permitted by law to ask for (even though the project may necessitate it).

Clearly if the current expectation of professional remodelers is 34%, but the expectation of homeowners and state licensing boards is "no greater than 10%", then a better rule for handling upfront payments is sorely needed. 

Send us your comments, we'd love to hear from you on this.