Deposits, draws, retainage and lien waivers decide when your money moves and what proof you get. Learn what each payment term means before you sign or hand over a check.
Licensing, permit, lien and tax rules vary by state and city and change over time. This guide is general information, not legal or tax advice; check with your local building department, state licensing board or a professional for your situation.
Checklist
- Pay no more than one third of the project price up front, and only to start work or order materials; some states cap down payments by law.
- Tie each payment to a completed milestone, and never make the final payment until the work is done and you are satisfied with it.
- Hold back part of the final payment, sometimes called retainage, until punch list items are corrected.
- Ask for a lien waiver with every payment, and pay by check or credit card so there is a paper trail.
- If you signed the contract in your home, the FTC says it should state your right to cancel within three business days.
The payment pages of a construction contract decide more outcomes than the project description does. Terms like deposit, draw, retainage and lien waiver set when your money moves and what proof you get at each step. Here is what each one means before you sign.
Why Payment Language Deserves a Close Read
Contract requirements vary by state, but the FTC recommends a written agreement even where your state does not require one. Before signing, make sure it lists the contractor’s name, address, phone number and license number, and estimated start and completion dates. NAHB and NARI guidance also says a detailed written contract should include a payment schedule, so ask for one if it is missing. If any term below is missing or vague, ask about it before you sign, not after.
Deposits and Down Payments
Down payment (deposit). Money you pay before work begins, usually to start the job or order materials. The FTC warns against paying the full amount up front, and some states cap down payments by law; check with your state or local consumer agency for the rule where you live.
One-third guideline. NAHB and NARI guidance says pay no more than one third up front, and only to start work or order materials. A contractor who wants most of the money before breaking ground may be showing signs of financial trouble.
Escrow. A neutral third party holds your money and releases it as work is completed. NAHB and NARI suggest escrow for large sums instead of paying the contractor directly.
Contractor-arranged financing. Some contractors offer to finance the project or connect you with a lender they know. Connecticut consumer officials advise having an attorney review any such agreement, because what looks like an installment plan can turn out to be a second mortgage on your home.
Tip
Never pay by cash, wire transfer, gift card, cryptocurrency or personal payment apps. Checks and credit cards create paper trails that help if a dispute turns into a complaint or claim.
Paying as Work Progresses
Payment schedule. The written plan for when each payment is due and for how much. Connecticut’s consumer guidance suggests a three or four part schedule tied to the progress of the work, with the last payment due only when the job is finished to your satisfaction.
Milestone payment. A payment triggered by completed stages of work, such as framing finished or an inspection passed, rather than calendar dates. Milestones keep your money matched to finished work.
Draw. A single payment taken from the total contract price as work proceeds. Draws should follow the schedule in your contract, not the contractor’s cash flow needs.
Allowance. A budget placeholder for items you have not chosen yet, such as tile or light fixtures. If your final picks cost more, a change order covers the difference.
Fixed-price contract. An agreement to do the described work for one predetermined price. Cost-plus contract. You pay the actual cost of construction plus the contractor’s profit, which makes detailed receipts even more important.
Retainage
Retainage. A portion of a payment, often the final one, held back until the job is finished correctly. NAHB publishes an optional clause that lets a homeowner retain part of the final payment until punch list items are corrected.
Punch List and Substantial Completion
Punch list. Small items left unfinished or done incorrectly, usually written during a walkthrough near the end of the job. The final payment should wait until a final walkthrough confirms those items are corrected.
Substantial completion. The point when work is finished well enough to use as intended, even if minor items remain. Many contracts set different payment terms before and after this point, so read the definition closely.
Lien Waivers and Proof of Payment
Lien waiver. A signed document in which a contractor or supplier gives up the right to file a mechanic’s lien on your home for the amount you paid. Ask for one with every payment.
Lien waiver forms. Waivers come in different forms, and the wording matters. Read any waiver before you sign it, and make sure it covers the payment you just made rather than the whole project.
Mechanic’s lien. A legal claim against your property by an unpaid contractor, subcontractor or supplier. If your contractor fails to pay the crew or suppliers, a lien can leave you facing the same bill twice.
Certificate of Completion. A bank arrangement for projects funded by an insurance claim: instead of signing the check over to the contractor, your bank pays the contractor for each stage after you approve the work.
Warranty and the Final Payment
Warranty. The contractor’s written promise to fix defects in materials or workmanship after the job ends. NAHB guidance says warranties belong in the contract, not in a handshake promise.
Right to cancel. If you signed the contract in your home or somewhere other than the contractor’s permanent place of business, the FTC says it should state your right to cancel within three business days.
Final payment. The last installment, due only after the punch list is cleared and you have walked the finished work. The FTC advises never making the final payment until the job is done and you are satisfied with it.
Keep reading
- What a Home Improvement Contract Should Say: the full list of terms to check before you sign.
- Mechanic’s Liens: How to Avoid Paying Twice: how lien waivers and payment records protect your property.
- What to Do If a Contractor Asks for Cash Upfront: when a payment demand is a red flag and how to respond.
Homeowners ask
How much of a down payment is too much for a contractor?
Industry guidance from NAHB and NARI says pay no more than one third up front. Some states limit down payments by law, so check with your state or local consumer agency for the rule where you live.
What is retainage in a home improvement contract?
Retainage is money you hold back from a payment until the job is finished correctly. It gives you a way to make sure punch list items get fixed before the final check goes out.
What paperwork should I get with each contractor payment?
Ask for a lien waiver matched to the amount you paid, plus a receipt. Read the waiver before you sign it, and make sure its language matches the work that payment covers.
When should I make the final payment?
After a final walkthrough confirms the work is done, the punch list is cleared and you are satisfied. The FTC advises never making the final payment before that point.