Deposits and Payment Schedules for Building Work: What's Fair and How to Protect Yourself

**What a deposit is for**:

A deposit in a building contract is a payment made before works start to secure the contractor's time, to allow them to purchase materials in advance, and to demonstrate the client's commitment to the project. A deposit is different from a payment at the start of works on a stage-payment schedule — though in practice the two are often combined.

**What percentage is fair for a London residential building project?**

For residential projects in London:

| Project value | Typical deposit range | |---|---| | Under £10,000 (small job) | 10–25% | | £10,000–£50,000 (extension, refurbishment) | 10–20% | | £50,000–£150,000 (major extension, whole house) | 5–15% | | Over £150,000 (large projects) | 5–10% or no deposit, stage payments from day 1 |

For a standard £80,000 rear extension in London, a deposit of £5,000–£16,000 (6–20%) is within normal commercial range. The deposit is typically timed to coincide with materials procurement (ordering long-lead items like steelwork, roof lanterns, or kitchen units) — so it has a clear commercial rationale.

**What a deposit protects**:

For the client, a deposit commitment ensures the contractor has blocked time in their programme for your project. For the contractor, the deposit covers early procurement and secures the client's financial commitment.

**Red flags on deposits**:

• •*A demand for more than 30% before work starts*: Legitimate contractors do not need 30–50% of the project value upfront. A contractor demanding a very large upfront payment is either in cash flow difficulty (a high-risk sign) or is positioning to do a poor job or disappear.
• •*No written contract before the deposit is requested*: Never pay a deposit without a signed contract (or at minimum a signed letter of intent) in place. A deposit paid on the basis of a verbal agreement has very limited legal protection.
• •*A request to pay the deposit in cash*: A reputable contractor operates a legitimate business with bank accounts. Requests for cash payment have no legitimate justification from a professional contractor.
• •*Deposit demanded before a site visit or scope review*: A contractor who wants money before understanding the scope and confirming the price is not operating professionally.

**What a stage payment schedule is**:

For projects over approximately £10,000, a stage payment schedule replaces single lump-sum payment. The project is broken into stages (typically 4–8 stages for a standard extension or refurbishment), and a payment is due at the completion of each stage. This is better for both parties:

• •*For the client*: Each payment is made in exchange for completed, visible progress on site — you are not paying in advance of work done, but in arrears for completed stages
• •*For the contractor*: Regular cash flow allows them to pay their subcontractors and materials suppliers; they are not funding the whole project from their own working capital

**What stages should look like**:

For a standard single-storey rear extension:

| Stage | Works included | Approximate % of total | |---|---| | Deposit (mobilisation) | Programme confirmed, materials ordered (steelwork, roof lantern, windows) | 10–15% | | Foundation | Foundation excavation, concrete, ground beam or raft complete | 15–20% | | Structure | Walls to roof plate level, structural steelwork installed, padstones complete | 20–25% | | Roof | Roof structure, roof covering, weathertight | 15–20% | | First fix | First-fix carpentry, plumbing, and electrics; drainage connections | 10–15% | | Second fix and completion | Second-fix carpentry, plumbing, and electrics; plastering, painting, floor coverings | 10–15% | | Retention release | After defects liability period (typically 6 months after completion) | 5% |

The final 5% (retention) is held back until after the defects liability period — see below.

**Milestone-based vs time-based payments**:

Milestone-based payments (as above — each payment is triggered by achieving a specific stage) are preferable to time-based payments (paying X% per month regardless of progress). A contractor who receives monthly payments regardless of progress has less incentive to maintain pace. Milestone payments ensure that each payment is in exchange for completed, inspectable work.

**The valuation issue — who certifies progress?**:

For large projects (over £100,000), consider appointing an architect or project manager who certifies the value of works completed before each stage payment is made. This is standard practice in commercial construction — the architect issues an 'interim certificate' confirming that the stage has been completed satisfactorily. For smaller domestic projects, the client typically inspects and certifies completion themselves — which is adequate for most standard milestones.

**What retention is**:

Retention is a percentage of each payment that is withheld until specific milestones after completion. It is the client's financial mechanism for ensuring the contractor completes the project and returns to address defects. Retention is standard practice in construction contracts.

**How retention typically works in residential contracts**:

• •A retention percentage (typically 5%) is deducted from each payment during the works — so if a stage payment is £10,000, the client pays £9,500 and holds £500 as retention
• •At practical completion (when the works are substantially finished and the building is ready to be occupied), 50% of the total retention is released (in the example above, 2.5% of total contract value)
• •The remaining 50% of retention (2.5% of total contract value) is released at the end of the defects liability period — typically 6–12 months after practical completion

**Why retention matters**:

Retention serves two purposes: 1. It motivates the contractor to complete — releasing the first half of retention at practical completion is a financial incentive to close out the snagging list and achieve a satisfactory completion 2. It provides a fund to pay for defect remediation if the contractor fails to return — if defects emerge within the defects liability period and the contractor does not respond, the retained sum can be used to appoint another contractor to carry out the repairs

**The most common problems with retention**:

• •*No retention clause in the contract*: Without a retention mechanism, the client has no practical financial leverage over the contractor after the final milestone payment is made. All payment is made upfront of the defects period.
• •*Retention too low*: 2–3% retention is barely adequate to cover the cost of minor defects remediation by a second contractor; 5% is standard and effective.
• •*Client releases retention early*: Sometimes clients agree to release retention early at the contractor's request (e.g., 'we need the retention to cover a cash flow problem'). This is very rarely appropriate — retention is held for good reason, and releasing it early removes the client's primary defects incentive.

**Minimum contractual protections for payment**:

• A written contract (even a one-page letter of instruction confirming scope, price, programme, and payment terms) provides vastly more protection than a verbal agreement. The minimum a contract for residential building work should confirm:
• •Total contract price or basis of pricing (if not fixed price)
• •The payment schedule (stages, amounts or percentages, milestones for each)
• •The retention percentage and the conditions for its release
• •The mechanism for variations (agreed in writing before work starts, at an agreed additional price)
• •The completion date and the mechanism for delay