Re: Down Payment on New Construction
Remote Name: 18.104.22.168
Date: 07 Nov 2005
Time: 07:54 PM
Question: Does anyone know if the 10% max down payment law applies to
new construction and where I may get the CA code on the subject? Thanks.
Builders Websource® Answer: California state law caps the amount of
payment due upon signing of a construction contract to 10% or $1,000, whichever
is less. Many contractors ask for large down payments before work begins.
This is illegal and you should report egregious violations to the California
Contractor's State License Board immediately. The contractor may try to
intimidate you into believing that it's normal practice to pay thousands of
dollars up front, upon signing of the contract. In fact, many consumers
unwittingly do whatever their contractor asks without understanding their rights
under the law.
However, most larger contracts and even many smaller ones include a phased
payment schedule, with a significant amount due upon completion of an initial
phase (such as demolition, for example). Never allow your payments to get ahead
of actual work performed or materials delivered, otherwise you have no leverage
in the event of a dispute or if the contractor fails to perform the work
required. Unfortunately, many contractors may try to front-load your contract
with larger-than-reasonable payments which improves their cash flow and
liquidity in the early stages of your project. The problem is that some
contractors poorly manage their finances and may struggle to complete your
project if they commingle your funds to subsidize other projects or find that
they have underbid your project.
Be sure that you also ask for a lien release from each and every supplier and
subcontractor that provides goods to your contractor. Without this, if the
contractor doesn't pay his subs or suppliers, you could be held liable for any
back-payments and you could end up paying twice for your materials.
According to the California Contractor's State License Board:
"For a large remodeling job that involves many subcontractors and a
substantial financial commitment, you should protect yourself from liens
against your home in the event the contractor does not pay subcontractors or
suppliers. Depending on local laws, you may be able to add a release-of-lien
clause to your contract, requiring the contractor or subcontractors and
suppliers to furnish a certificate of a waiver of lien. Another solution is to
pay your contractor by joint checks. When the contractor presents you with a
bill for materials or labor, make the check to both the contractor and the
supplier or subcontractor."
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