When Should the First Payment Be Given to the Builder in a New Home Construction Project?

In a new home construction project, the timing of the first payment to the builder typically occurs at the signing of the contract or shortly thereafter. This initial payment is often referred to as a deposit or down payment and can range from 5 to 10 percent of the total contract price, depending on the agreement between the homeowner and the builder.

General Breakdown of Payment Milestones in a Construction Project

Initial Deposit

Paid upon signing the contract. This secures the builder's services and may cover initial planning and permitting costs.

Progress Payments

Subsequent payments are made at various stages of construction, often linked to specific milestones such as completion of the foundation, framing, roofing, etc. These payments ensure that the project stays on schedule and helps manage cash flow.

Final Payment

This is typically made upon completion of the project after a final walkthrough and resolution of any outstanding issues. It may include any remaining contract balance, warranties, and final inspections.

It's important to have a clear payment schedule outlined in the contract to avoid misunderstandings and ensure that the project progresses smoothly. Always consult with a legal or financial advisor to ensure the terms are favorable and protect your interests.

Key Considerations for Payment Terms in Construction Contracts

Many buyers focus on the final price when negotiating contracts but often overlook the terms of payment. Every item in the contract, including how and when payments are made, can be negotiated. It's crucial to understand the payment conditions and ensure they are advantageous to you as the homeowner.

According to a well-known real estate saying, 'you can name the price if I can name the terms.' This highlights the importance of negotiating not just the final amount but also the payment structure. A poorly structured payment plan can lead to financial strain and disputes, even after the home is completed.

Best Practices for Managing Construction Payments

Payments should be aligned with specific construction milestones defined in the contract. This ensures that each payment is linked to meaningful progress in the project.

Develop a detailed draw schedule based on completion benchmarks that are verified by both the builder and the buyer. This schedule should clearly define when payments are due and what conditions must be met.

Require that a copy of the project account statement accompany each draw request. This transparency helps ensure that the payments go toward the actual costs of materials and labor.

For cost plus contracts, thoroughly review subcontractor invoices to avoid inflated costs. Even a 25 percent increase can significantly impact your budget. It's wise to keep track of these costs and seek verification from the builder to ensure accuracy.

A clear and structured payment schedule is essential for a successful construction project. By understanding the typical payment milestones and best practices, homeowners can ensure that their project stays on track and within budget. Always consult with professionals to help navigate the complexities of the construction contract and protect your investment.