The risks of paying upfront for construction work

What are the risks when your builder asks for a big deposit for renovating or building your home

Depending on the terms of your building contract, your building contractor may expect to be paid a deposit (an upfront payment) before they even start construction work. These deposits could vary from 6% to as high as 50% of the contract value and are often thousands and even tens of thousands of dollars. Ostensibly this deposit is for the contractor to purchase building materials for your home renovation project. Unfortunately, often the contractor uses the payment for their other building projects and you have no control over this. There’s also always the risk that your building contractor could become bankrupt before they've started work on your home, or simply disappear with your money, or take an extended period before they start work on your home construction project. Indeed it's all too common for dishonest building contractors to disappear with money they've received from clients, leaving disappointed home owners with a partly completed building project, or work that's of poor quality, or even leaving their clients with nothing at all.
In some jurisdictions the amount of deposit that the contractor can ask is limited by legislation, so ensure that you know your rights.
Paying a deposit is a risky business since there’s often limited recourse to claiming the money back should the project go wrong. Even when the money is used by the building contractor to purchase materials for your building project these materials don’t belong to you unless the contractor has agreed and signed that they belong to you (ceded the materials to you) but even then, you don’t have a guarantee that the building materials have been paid for in full by the contractor, so the supplier could in any case lay claim to the materials.
Large upfront payments will also negatively impact your cash-flow. Often bank loans are only released when the building work reaches certain stages so the money for the deposit the contractor wants must come from your pocket and not from the loan funds.
Preferably deposits should be limited to a small amount, it should only be paid to reputable contractors, and not before the contractor has provided a surety bond, or guarantee for the project.
Always try and negotiate a lower deposit or upfront payment with your contractor before signing the contract. Many contractors will be amenable to reducing the monetary deposit required if they know this is a deal breaker and could cause you to walk away. Especially when contractors are desperate for work they will be willing to negotiate. Always read your construction contract carefully before signing it so that you are aware of the contract payment terms and conditions. You don't want to be trapped into paying an unreasonably high deposit or upfront payment.
​Know your building contractor. Do they have a good reputation for being honest, reliable and financially sound? Most building contractors will require some form of deposit or upfront payment. Ensure this is a reasonable amount and that you can trust the contractor with your money.

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