Do you know how much deposit your builder should ask for?
And what is your deposit actually paying for as you start the construction of your new home or renovation?
This is STEP 1 in building your new home or renovation project: Paying your deposit.
If you’re starting construction on your renovation or new home soon, or negotiating with builders, the first step you’ll need to take to lock in your project is to sign a contract and pay your builder a deposit.
Signing a contract can seem very serious – and it is. A contract is a legally binding document, and as with any contract, it’s recommended that you seek legal advice to understand how the contract is structured, if it is fair and reasonable, and what it obligates both you and your builder to do.
The contract sets out the conditions under which your renovation or new build is to be executed. It also establishes the expectations for both you and the builder. It will refer to other contract documents, such as drawings and specifications for your new home or renovation.
Based on the type of contract it is (cost plus, lump sum, fixed price are some of the options), it will also identify the total contract sum. And this may then be split up into a series of ‘draws’ or ‘progress payments’ or ‘progress claims’. These will show the stages at which payments will be required during your building project, and the milestones that will be achieved for each payment.
Understanding how your draws are structured, and what to expect in the construction of your new home or renovation at each stage, is essential to you getting what you’re paying for.
The deposit is generally 5 – 10 % of your contract sum. If your builder is asking for more, this can be your first red flag in your construction stage.
Far too often, I see homeowners run into trouble because a builder is forward-claiming for work. That is, the builder is submitting draws, or progress claims, for work that is yet to occur. This can be due to the builder having difficulties with cash flow, and funding current work from future claims. This is how builders can go into liquidation, and homeowners end up paying for 80% of their contract sum, yet only have 40% of their home finished on site.
The first step in securing a contract with a builder is usually to pay their deposit. Once this is paid, this sets in train a few things for your project.
Firstly the builder will start creating a program for your project. This is a schedule which …
- outlines the time each stage of your project will take
- identifies what trades are required, and when
- confirms the projected draws or progress claims based on workflow
- provides firm dates about when materials and products need to be chosen, ordered and delivered to meet construction deadlines
- gives you a finish date for your project!
From this, the builder is then able to start booking tradespeople, and other requirements for your project.
In addition, there’ll be a series of permits and approvals required to legally commence construction. The builder will need to confirm these are in place.
And the builder will also start setting up your building site ready for construction. This can include temporary fencing, a temporary toilet, temporary power and any silt barriers or site management measures.
Site is no longer your home, but now the builder’s jurisdiction. You will require formal permission from the builder to legally access it.
DID YOU KNOW?
If you don’t show your bank your contract at this stage, you can run into huge problems later and not get your bills paid.
For more information check out Season 7 in the “Get it Right” podcast and learn more about the construction of your new home or renovation.
Worried about building your new home or reno?
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“The deposit is generally 5 – 10 % of your contract sum. If your builder is asking for more, this can be your first red flag in your construction stage.”
Maryland law permits contractors to ask for up to 1/3 of the contract as deposit for home improvement projects, but perhaps it is different for new homes. Far from using the deposit to fuel up the 40-foot sport fisherman for the weekend, contractors need a deposit up front to buy the materials that are required to complete the project, which can easily exceed 1/3 of the contractor’s project budget.
Hey Chris,
Thanks for your comment.
Building contracts in Australia differ to US-based contracts, and most will actually limit the deposit to 10% as a maximum. There is the opportunity to put in another progress claim soon after the deposit that is for initial purchases etc, if the builder includes that stage in their contract. Renovations and new builds will vary, of course, in the structure of required payments. However, in most cases, builders here are not permitted to charge for materials etc until they’ve ordered them – and then it’s up to the builder to navigate the payment terms with their suppliers to juggle the cashflow / financing of those purchases until they’re paid by their client via their progress claim.
– Amelia, UA
Thanks for information . Found a contractor I thought I could trust til he asked for half price of job up front,where it should be 5-10 percent .
Hey Keith
It will be dependent on the actual contract you sign. In Australia, many of the contracts for renovations or new builds will limit the amount of deposit claimed. However, in the USA, that’s not always the case, and many contractors there will charge 50% upfront (especially for smaller projects). Here in Australia, builders will only charge the allowed deposit, but can then have another progress claim scheduled shortly after to get paid for initial orders needed to commence the job. As long as you can see the money you’re paying is being used to fund your project and immediate work and purchases, then I believe it’s ok. The challenge is when a builder or contractor is charging a big amount of money upfront, because they’re struggling with cashflow, and need to balance invoices from a previous project. You should always be able to see invoices and orders for what the builder is going to be using your funds for.
Hope that helps,
Amelia, UA
Had my land Cdc approval done looking for a builder with a minimum deposit to build?
Hi James, Amelia usually doesn’t give recommendations for professionals, builders, or consultants. She believes that finding the perfect match for your needs is a personal journey, and she’s found that it’s more effective to empower homeowners like you with the skills to search and research, so you can make informed decisions on your own. In the meantime, you can listen to our podcast episode: “Lifting the Lid on Builders’ Margins”. It might offer some valuable insights! Transcript is also available to download here >>>>> https://undercoverarchitect.com/podcast-builders-margin