The Dish on Downpayments for Home Improvement Projects

As most contractors know, several years back, the California Legislature exercised its infinite wisdom and limited the amount of money that a contractor may receive as a deposit or down payment on a home improvement project. The same statutes also limit the amount of progress payments received during the course of the home improvement project.

First, the limitations apply to "home improvement projects" that the Legislature has defined to include virtually any type of work performed to residential property. The definition includes work performed for a tenant of a multi-unit building, too.

Business and Professions Code section 7159(d) sets forth the rules for payments on any home improvement contract greater than $500 in value. The subsection provides that if a down payment is to be paid to the contractor by the owner or tenant before the commencement of work, "the down payment may not exceed two hundred dollars ($200) or 2 percent of the contract price for swimming pools or one thousand dollars ($1000) or 10 percent of the contract price for other home improvements, excluding finance charges, whichever is less." As examples, a contractor on a remodeling project can received a $500 deposit on an $5,000 project, or a $1,000 deposit on a $500,000 project; if the work includes a swimming pool, the deposit cannot exceed $200.

The down payment is the only time on the remodeling project that the contractor can collect money in excess of the value of the work that has been actually performed. Section 7159(e) goes on to state that the contractor may not receive payments in excess of 100 percent of the of the value of the work performed on the project, except for the down payment mentioned in subsection (d). In plain language, that means that you must estimate the value of the work actually performed and collect no more than that value from the owner.

We are continually asked what a contractor can do when it must order expensive custom materials, such as cabinets that cannot be returned? The law makes the contractor the credit provider of the owner until the work is in place. In light of the law, the only "safe" option is to not bill for those kinds of things until the work is actually in place. However, one could argue that "commencement of work" means more than just breaking ground or installing the cabinetry. Commencement of work could mean the design and layout, and the preparation of plans and specifications. Even under that stretch of the law, the contractor still could only receive payment for the value of the design work performed through the period covered by the progress payment.

A second option that is often used is that the contractor can have the supplier of the custom-ordered materials bill the owner directly. A material supplier has no limitation on the amount of down payment that is received. However, this will still violate the law if the "supplier" is also going to perform the installation of the materials; that is to say, a cabinet subcontractor is not a mere material supplier.

The last option would be to have two separate invoices. One being for construction and the other one being for the cabinets that are special ordered. This is not the safest option. However, it would seem that even our Legislature might agree that this would be sufficient.

Despite the fact that the law has been around for a substantial period of time, we know of no reported cases discussing compliance with these requirements. We do not know how a judge or jury would decide in the face of a legal challenge to the collection of the progress or down payments. Thus, if receipt of a payment for specially ordered materials is essential to you, the safest of the three options would be to have the material supplier bill the owner directly. However, in reality the only safe option is that the contractor takes the risk of financing that work or material until it is delivered to the jobsite.

Abdulaziz and Rudman are attorneys with North Hollywood-based Abdulaziz & Grossbart.