You float $6,200 in cabinets and tile. The customer pays âwhen itâs done.â Three weeks later theyâre unhappy about a grout color and youâre the one financing the argument.
Thatâs the whole problem with weak payment terms. Itâs not that you donât get paid eventually â itâs that you become the bank, and banks get to charge interest and repossess things. You donât.
Hereâs how to structure deposits and draws so your money arrives before you spend it, and what to say when the customer pushes back.
The rule: never be ahead of the customer
One principle drives every schedule below. At any point in the job, the money youâve collected should be slightly ahead of the money and labor youâve put in.
If youâve spent $4,000 on materials and 30 hours of labor, you should have collected more than that. Not exactly that. More.
Why more? Because if the job dies tomorrow â customer fires you, loses financing, sells the house, gets divorced â you want to walk away whole, not chasing. A job youâve overfunded is a job youâll be writing off.
Run your own numbers on this. Take your last three jobs and plot, week by week, cash in versus cash out. Most contractors find at least one job where they were $5,000â$10,000 underwater for a month. Thatâs a month where a customerâs bad mood could have cost you real money.
Whatâs legally allowed: check your state
This is the part where you have to go look something up, because the answer is genuinely different everywhere.
Several states cap residential deposits by statute. A few common patterns:
- A hard dollar cap (for example, $1,000) regardless of job size
- A percentage cap (10% of the contract is a common number)
- âWhichever is lessâ â the lower of a flat dollar amount or a percentage
- No cap at all, which is the case in many states
- Special rules for home improvement contracts specifically, separate from new construction
Some states also require that deposits above a threshold be held in escrow or a separate account, or that you disclose the deposit terms in a specific font size in the contract.
Search your stateâs name plus âhome improvement contract deposit limitâ and read the actual statute, not a blog summary. Then confirm with your state licensing board. Violating a deposit cap can be grounds for license discipline, not just a civil dispute â which means itâs expensive in a way that a normal contract fight isnât.
If your state caps you at 10% and you need more than that to cover materials, the fix is a materials draw, not a bigger deposit. More on that below.
Three payment structures that work
Structure 1: Small jobs (under ~$2,500)
| Milestone | % | Example on $1,800 |
|---|---|---|
| Deposit | 0% | $0 |
| Completion | 100% | $1,800 |
For a one-day service call or a small repair, donât bother with a deposit. Collect in full on-site the day you finish, with a card reader or a payment link. The administrative friction of a deposit isnât worth it, and your material exposure is small.
The exception: special-order parts. If youâre buying a $900 custom glass panel that you canât return, collect that amount before you order it. Call it a materials deposit, not a job deposit, and say so on the invoice.
Structure 2: Mid-size jobs ($2,500â$25,000)
This covers most bathroom remodels, roof replacements, panel upgrades, and fence jobs.
| Milestone | % | Example on $12,000 |
|---|---|---|
| Deposit at signing | 10% | $1,200 |
| Materials delivered to site | 30% | $3,600 |
| Rough-in / midpoint complete | 30% | $3,600 |
| Substantial completion | 25% | $3,000 |
| Final (punch list done) | 5% | $600 |
Walk through the cash flow. Suppose materials cost $4,200 and you take delivery in week one. Youâve collected $4,800 by then. Youâre ahead by $600 with zero labor sunk. Good.
At midpoint youâve collected $8,400 and burned maybe $4,200 in materials plus 50 hours of labor at a $45 loaded cost â $6,450 out. Still ahead by about $1,950.
That gap is your safety margin. It should never close.
Note the small final payment. Keep the last draw under 10% of the contract. A 25% retainage at the end gives the customer enormous leverage over a $200 punch-list item. A 5% retainage gives them appropriate leverage â enough to make you come back and fix the doorstop, not enough to hold $3,000 hostage over it.
Structure 3: Large jobs ($25,000+)
Switch from percentage milestones to a schedule of values â a line-item breakdown of the contract where each line gets billed as itâs completed.
| Line item | Contract value | Billed when |
|---|---|---|
| Demo and disposal | $4,000 | Complete |
| Framing and structural | $9,500 | Inspection passed |
| Rough mechanical/electrical/plumbing | $11,000 | Inspection passed |
| Insulation and drywall | $7,500 | Complete |
| Finish carpentry | $8,000 | Complete |
| Flooring | $6,500 | Complete |
| Paint and final | $4,500 | Complete |
Bill twice monthly for whateverâs complete. This is how commercial GCs do it, and the reason is simple: it removes argument. Youâre not asking âare we halfway?â Youâre asking âis the drywall done?â That has a yes or no answer.
Tie draws to inspections wherever an inspection exists. A passed rough-in inspection is third-party proof that the work is real and correct. Itâs almost impossible to dispute.
Write it into the contract, specifically
Vague payment terms are worse than no terms, because they create the illusion that something was agreed to.
Bad: âPayment due in draws as work progresses.â
Good: âDraw 2 of $3,600 is due upon delivery of materials to the job site. Draw 3 of $3,600 is due upon completion of rough-in and passed inspection. Each draw is due within 3 calendar days of invoice. Work may be suspended if any draw is more than 7 days past due.â
Three things that clause does:
- Names the dollar amount, not just the percentage.
- Names the triggering event in a way thatâs observable.
- States the consequence of non-payment.
That last one matters most. A work-stoppage clause is the only real leverage you have mid-job, and it only works if itâs written down. Walking off a job without a contractual right to do so can put you in breach. The contract clauses that protect contractors article goes deeper on the exact language here.
Also: put the draw schedule in the estimate, not just the contract. If a customer is going to balk, you want them balking before youâve ordered anything.
Make paying easy, or your schedule is theory
A perfect draw schedule falls apart if collecting draw 3 requires the customer to find their checkbook.
- Invoice the same day the milestone hits. Not Friday. That day.
- Include a payment link. Card and ACH both.
- Eat the card fee on draws if you have to â 2.9% on a $3,600 draw is $104, which is cheaper than two weeks of float and a follow-up call.
- Send the photo with the invoice. âRough-in complete, inspection passed 3/14â plus three photos removes the âwait, is it actually done?â pause.
That last point is underrated. Documenting as you go is how you make draws uncontroversial â see jobsite photos for the habit. And if your invoicing is still manual, the invoicing and getting-paid workflow covers the setup.
When the customer balks
Four common objections and what actually works.
âIâve never paid a deposit before.â
âTotally fair to ask. The deposit covers materials and locks your spot in my schedule â Iâm ordering your [specific material] with it. Itâs listed on page 2 of the contract, and the final payment isnât due until youâve signed off on the punch list.â
Then show them the final draw is only 5%. People relax when they see theyâre holding something back at the end.
âHow do I know you wonât take my money and disappear?â
This is a reasonable question and you should answer it like it is. Give them:
- Your license number, and tell them where to verify it
- Your certificate of insurance
- Two recent references with addresses
- A deposit sized to the materials, not a round number you picked
If youâre not licensed and insured, this objection is going to keep costing you jobs â thatâs a separate problem, covered in contractor insurance basics.
âCan you just bill me at the end?â
âI canât float materials on a job this size â thatâs real money out of my account before I start. What I can do is move the second draw to after delivery, so you see the materials on your property before you pay for them.â
Offer a structure change, never a terms removal. Youâre negotiating when the money moves, not whether it moves.
âMy last contractor only wanted 10%.â
Maybe true. Maybe your state caps deposits at 10% and that contractor was following the law while also taking a materials draw a week later. Say so: âRight â my deposit is 10% too. The next payment is for materials, and thatâs a separate line.â
The one you should walk away from
A customer who wonât pay a deposit on a $15,000 job is telling you something. Usually one of three things: they donât have the money, theyâve been burned and havenât recovered, or they intend to use payment as a weapon when they decide they donât like the tile.
None of those are jobs you want. A customer who wonât fund the start of a job will not happily fund the end of one.
The cost of walking away is one job. The cost of taking it is one job plus 40 hours of unpaid labor plus a possible lien filing plus the months of sleep.
Your next step
Pull up your current contract template and find the payment section. If it doesnât name specific dollar amounts, specific triggering events, and a work-stoppage right, rewrite it this week using Structure 2 above as the starting point.
Then check your stateâs deposit cap before you send it to anyone.