Contractor Deposits and Payment Schedules: What's Legal in 2026

Ask ten contractors what deposit to collect and nine will say “a third up front.” In California that answer is a misdemeanor.

Deposit limits are one of the few areas where the trades run on folklore while the statute says something very different — and the penalties aren’t theoretical. This guide covers what’s actually on the books, how progress payments should be structured, and what to do when you don’t get paid.

The four deposit regimes

Rather than memorizing fifty states, understand that deposit rules fall into four patterns.

1. Hard cap, whichever is less

California is the strictest in the country. Business & Professions Code § 7159.5: “The downpayment shall not exceed one thousand dollars ($1,000) or 10 percent of the contract amount, whichever amount is less.”

Source: Cal. Bus. & Prof. Code § 7159.5 — subd. (a)(3) — the downpayment cap

Read that carefully, because it’s the opposite of what most contractors assume. On a $25,000 remodel, your maximum deposit is $1,000 — not $2,500. The 10% only governs on jobs under $10,000.

Violation is a misdemeanor carrying a $100–$5,000 fine and up to a year in county jail. For disaster-repair work the fine runs $500–$25,000 plus restitution. The contract must also carry the cap in 12-point boldface.

Nevada copied the formula in NRS 624.970 — $1,000 or 10%, whichever is less — but added a useful escape: the cap doesn’t apply if you furnish a performance bond covering the full project. On larger residential jobs, that bond can be worth more than it costs.

2. Proportional cap — the “one third” states

Maryland (Bus. Reg. § 8-617): no more than one-third of the contract price before or at signing. And a hard rule worth tattooing somewhere: “A person may not demand or receive any payment for a home improvement before the home improvement contract is signed.”

Source: Md. Code, Business Regulation § 8-617

Massachusetts (M.G.L. c. 142A § 2): one-third of the total contract price, or the cost of special-order materials, whichever is greater. No dollar ceiling. Applies to contracts over $1,000 on 1–4 family homes. Violations are Chapter 93A unfair practices, which exposes you to multiple damages and the homeowner’s attorney fees — the real risk here isn’t the fine, it’s the fee-shifting.

Pennsylvania (HICPA, 73 P.S. § 517.7): for contracts over $5,000, one-third of the price plus the cost of special-order materials designated in the written contract. “Special order” means non-stock items produced specifically for that job.

3. No cap, but the money isn’t yours

New York doesn’t limit the deposit. It does something more demanding. Lien Law § 71-a(4) requires that payments received before substantial completion be deposited within five business days into an escrow account, and those funds “shall remain the property of such owner” until the work is substantially complete.

Source: N.Y. Lien Law § 71-a — subd. 4 is the home improvement escrow provision

You can substitute a bond, contract of indemnity, or irrevocable letter of credit. But absent that, spending a deposit on another job is conversion, not cash flow. GBL § 771 requires you to disclose this escrow obligation in the contract — note that the disclosure language in § 771 itself points at Lien Law § 71(4), while § 71-a(4) is the operative escrow provision for home improvement work.

Source: N.Y. General Business Law § 771 — Article 36-A, “Contract provisions”

Texas has a parallel duty. Property Code Chapter 162 makes construction payments trust funds. Under § 162.006, a written contract to improve a residential homestead for more than $5,000 requires you to deposit funds into an account the bank statement actually identifies as a “construction account,” with records of every deposit and disbursement. Misapplying trust funds carries personal liability and criminal exposure for whoever controls the money.

Source: Tex. Property Code ch. 162 — Construction Trust Fund Act; § 162.006 covers the construction account

4. No cap, but a clock

Florida (Fla. Stat. § 489.126) takes yet another approach. Take more than 10% of the contract price as initial payment and you must apply for permits within 30 days and start work within 90 days after permits issue.

Source: Fla. Stat. § 489.126 — “Moneys received by contractors”

Miss it and the statute is blunt: “Any person who violates any provision of this section is guilty of theft.” Taking money exceeding work performed creates an inference of fraudulent intent if you fail to perform. Florida doesn’t care how much you collect — it cares how long you sit on it.

Two things you’ll read elsewhere that are wrong

Virginia does not cap deposits. The DPOR consumer guide says to “consider an initial deposit of no more than 10% down or $1,000, whichever is less.” That’s advice to homeowners, not a limit on contractors. Several sites present it as law. It isn’t.

Arizona and Connecticut: we couldn’t verify a statutory deposit cap in either state, despite both being widely cited. Connecticut’s § 20-429 does contain something more important — “No home improvement contract shall be valid or enforceable against an owner unless it is in writing and is signed by the owner and the contractor,” and it must contain the entire agreement. In Connecticut, an unwritten change can be unenforceable outright.

If you work in a state not listed here, check with your licensing board directly rather than trusting a blog — including this one.

Progress payments: never bill ahead of the work

California’s language is the cleanest statement of a principle that applies almost everywhere: you may “neither request nor accept payment that exceeds the value of the work performed or material delivered.”

This is the rule contractors break without noticing. Front-loading a draw schedule so the first payment covers mobilization plus a chunk of future labor feels like prudent cash management. In a capped state it’s a violation, and in a trust-fund state it’s worse.

A defensible residential draw structure ties each payment to a verifiable milestone:

Draw	Trigger	Typical share
Deposit	Contract signing (within your state’s cap)	Per statute
Draw 1	Demo complete, materials delivered	20–25%
Draw 2	Rough-in complete and inspected	25%
Draw 3	Substrate/drywall/finishes started	25%
Final	Substantial completion, punch list closed	10–15%

The percentages are negotiable — Maryland’s MHIC explicitly confirms that beyond the initial deposit the payment schedule is up to the parties. What isn’t negotiable is the principle: every draw should correspond to work a third party could walk in and verify.

Retainage, and California’s 2026 change

Retainage is the portion held back until completion. Roughly thirty states regulate it; 5–10% is the common range.

California SB 61, signed July 2025 and effective for contracts executed on or after January 1, 2026, caps retention on most private projects at 5%, down from the 10% norm. The cap applies at every tier, so a GC can’t withhold more from subs than the owner withholds from it. Courts must award attorney’s fees to the prevailing party in compliance disputes.

Source: California SB 61 (2025), Chapter 49 — adds Civil Code § 8811; not to be confused with SB 440, which governs change order disputes under Civil Code § 8850

The residential carve-out matters: residential and mixed-use projects four stories and under are excluded. Most remodelers and home builders in California are therefore not covered by the new cap.

New York, Washington, and Iowa have also moved on retainage in recent years. Verify the current figure in your state before relying on it.

Prompt payment and late fees

California (Civ. Code § 8800 et seq., private works): owners must pay the direct contractor within 30 days of a demand for payment on undisputed progress payments. The penalty is 2% per month on wrongfully withheld amounts, in place of other interest, plus reasonable attorney’s fees. An owner may withhold up to 150% of a genuinely disputed amount, no more. Retention releases in 45 days.

Texas: owner to prime within 35 days of invoice; prime to sub within 7 days of receiving payment, and 7 days at each tier below. Interest runs 1.5% per month on private work. As of September 1, 2025, an audit continuing more than 60 days past substantial completion no longer counts as a good-faith dispute — a delay loophole that’s now closed.

Across states, 7 days after the GC is paid is the most common statutory deadline for paying subs on private work.

On late fees, be careful. The 1.5% per month (18% annually) figure is the common contractual norm, and it must be stated in your contract to be collectible. But residential work is consumer work, and state usury and consumer-credit rules may apply to the number you choose. The state-by-state “late fee cap” tables circulating online conflate consumer usury caps, late-fee limits, and judgment interest, and they contradict each other. Pick your number with a local attorney rather than from a blog table.

Liens are the actual leverage

Payment terms are a promise. A mechanics lien is a lever, because it clouds title — which blocks sale and refinancing and gets the lender’s attention immediately. Unlike a lawsuit, it attaches to the asset.

The catch: lien rights are forfeited by calendar, not by merit. The strongest claim in the world dies on a missed deadline.

California’s sequence, as an example:

• Preliminary notice: 20 days from first furnishing labor or materials, served on owner, prime, and lender. Subs and suppliers who miss it generally forfeit lien rights.
• Direct contractors: file within 90 days after completion, or 60 days after a recorded Notice of Completion, whichever is earlier.
• Subs and suppliers: 90 days after completion, or 30 days after a recorded Notice of Completion, whichever is earlier.
• Foreclose: within 90 days of recording the lien.

Note the step everyone skips: the preliminary notice goes out at the start of the job, when nothing is wrong. It isn’t an accusation, it’s paperwork — and it’s the difference between having leverage and having a grievance. Deadlines vary substantially by state, so confirm yours.

How bad is slow payment, really

Some genuine data, with its limitations stated.

Rabbet’s 2025 Construction Payments Report estimates slow payments cost the US construction market $299 billion in 2025, framed as a hidden 14% tax on project costs. GCs reported spending 65 hours a month managing payments. 88% declined to bid a job in the past year over an owner’s slow-pay reputation. Caveat: that’s a September 2025 survey of 125 contractors — 97 GCs and 28 subs. A 28-sub sample is thin, and Rabbet sells payment software.

Billd’s 2025 National Subcontractor Market Report found subs wait an average of 56 days after submitting a pay application, while GCs believed it took about 30 — a perception gap worth knowing about when you negotiate. 81% of subs have supplier terms shorter than their time to get paid, and one in three has pulled from personal or retirement savings to bridge it.

CreditPulse’s 2025 benchmarks put average construction DSO at 83 days, against roughly 60 across all US industries. Building finishing contractors run 77 days; electrical, plumbing, and HVAC around 57.

The most useful finding in the Rabbet data isn’t a dollar figure: the root cause both GCs and subs named most often was “lack of organized process.” Not bad faith. Paperwork.

Card fees and surcharges

Card processing runs roughly 1.5%–3.5% per transaction. Network rules cap surcharges at your actual processing cost, 4% maximum.

Before you add a card fee, check your state. Surcharging is prohibited in California, Connecticut, Maine, and Massachusetts. Colorado, Minnesota, New Jersey, Nevada, South Dakota, Oklahoma, and New York impose stricter conditions. Minnesota, since January 2025, requires surcharges to be built into the advertised price. Virginia, since July 2025, requires clear disclosure in the total.

And the mistake that gets contractors fined: never surcharge a debit or prepaid card, even when it’s run as credit. That violates card-brand rules and some state laws regardless of where you operate.

FAQ

How much deposit can a contractor legally ask for?

It depends entirely on your state. California and Nevada cap it at $1,000 or 10% of the contract, whichever is less. Maryland, Massachusetts, and Pennsylvania cap it around one-third. New York and Texas impose no cap but require the money be held in escrow or a trust account. Florida sets no cap but starts a 30-day permit clock and 90-day start clock above 10%.

Can a contractor ask for 50% up front?

In several states, no. California caps deposits at $1,000 or 10%, whichever is less, and violating it is a misdemeanor. Maryland, Massachusetts, and Pennsylvania cap deposits near one-third. Even where no cap exists, collecting payment far ahead of work performed can violate progress-payment rules or trust-fund duties.

What is a normal contractor payment schedule?

A deposit within your state’s legal limit, then progress draws tied to verifiable milestones — demo and material delivery, rough-in inspection, finishes — with 10–15% held to substantial completion and punch list. The governing principle is that no payment should exceed the value of work performed or materials delivered.

What is retainage and how much can be withheld?

Retainage is money held back until completion, commonly 5–10%. California’s SB 61 caps retention at 5% on most private projects for contracts signed on or after January 1, 2026, though residential and mixed-use buildings four stories and under are excluded. Roughly thirty states regulate retainage.

How long does a client legally have to pay a contractor?

Under California’s private-works prompt payment law, 30 days after a demand for payment on undisputed amounts, with a 2% monthly penalty and attorney’s fees for violations. Texas gives owners 35 days from invoice, and requires GCs to pay subs within 7 days of being paid. Most states set a 7-day deadline for GC-to-sub payment on private work.

Can I charge late fees on unpaid invoices?

Only if your contract says so, and the rate has to be lawful in your state. Around 1.5% per month is the common contractual norm. Because residential work is consumer work, state usury and consumer-credit rules may constrain the rate — set the number with a local attorney rather than copying a figure off a table online.

The short version

Learn which of the four regimes your state uses before you quote another deposit, because “a third up front” is a misdemeanor in California and conversion in New York. Tie every draw to work someone could walk in and verify. Send the preliminary lien notice at the start of the job, when nothing is wrong — it’s the only step that preserves your leverage later.

And if you’re waiting 56 days to get paid while your supplier wants 30, the fix usually isn’t chasing harder. It’s a payment schedule that was structured properly on the estimate.

SnapScope turns job site photos into a complete estimate with payment terms and schedule built in.

Next: what to include in a construction estimate covers the rest of the document, and construction change orders covers getting paid for work nobody bid.