How To Pay Your Contractor

By Kambiz Kamdar

Once you’ve selected and signed with a contractor, the next critical step is setting up your payment structure correctly and making sure that the money you pay aligns with the actual progress on your rebuild. This newsletter outlines the essential steps every homeowner should follow to stay protected and ensure fair, transparent payments throughout construction.

Understand the Legal Limits on Deposits

Under California law, once a contract is signed, a contractor may only collect:

10% of the contract value or $1,000 — whichever is lower

Some contractors attempt to get around this rule by charging for “pre-construction services.” But by the time you sign your contract, you’ve already paid your architect enough that additional pre-construction fees should rarely be necessary.

While it’s understandable that contractors want commitment—many of us spend time reviewing plans, obtaining subcontractor bids, and helping homeowners understand budgets before a contract is signed—that does not justify large upfront payments.

Clarifying What You Should and Should Not Be Paying For

You should not pay a percentage of the contractor’s profit on top of their general liability insurance or course of construction insurance. These should be fixed, set fees — not profit centers.

Unfortunately, you will have to pay the contractor’s percentage on the sales tax for materials, because sales tax is part of the material cost. While you could theoretically purchase materials outside of the contract to avoid these markups, doing so typically voids any warranty or responsibility the contractor would otherwise have for those items.

All invoices submitted for payment should reflect work completed only — never future work. Paying ahead creates unnecessary risk and removes your primary leverage to ensure the project remains on schedule and on budget.

Expect a 20-Day Preliminary Notice

Shortly after signing and paying the deposit, you will likely receive a 20-day preliminary notice from your contractor. This notice:

• Is sent to you, your bank, and anyone with a financial interest in the property
• States that the contractor has begun work
• Preserves their right to file a lien if they are not paid

This is normal and expected.

You should also receive preliminary notices throughout construction from subcontractors and material suppliers. These protect everyone involved — including you, the homeowner.

Track Notices & Use Joint Checks to Stay Protected

Keeping paperwork organized is key.

For every subcontractor and supplier who sends a preliminary notice:

• Track their involvement
• Ensure they are paid when you pay your contractor
• Always collect the appropriate releases

One effective way to make sure everyone gets paid is using joint checks.

Example:

There are three parties involved:

• Your general contractor
• A subcontractor
• A supplier

You can issue:

• A joint check to all three for the supplier’s amount
• A joint check to the contractor and subcontractor for that subcontractor’s portion
• Then subtract both amounts from the contractor’s monthly pay application and issue any remaining balance directly to the contractor

This process should repeat every month as part of your pay application cycle.

Some homeowners will also be working with insurance companies that have their own disbursement systems. Everyone’s situation is different — but there is always a solution, and we’re here to help guide you.

The Four Types of Lien Releases

To fully protect your property, you must collect the correct lien releases from the contractor, all subcontractors, and all suppliers. These releases prevent anyone from legally placing a lien on your home.

There are four required releases:

1. Conditional Progress Release

• Provided with each invoice
• States the amount owed through a specific date
• Becomes valid only once payment is made

2. Unconditional Progress Release

• Provided after payment is received
• States there is no outstanding balance through that date

3. Conditional Final Release

• Provided at the end of the project
• States the final amount owed
• Becomes valid once final payment is made

4. Unconditional Final Release

• Issued after all payments are complete
• Confirms the vendor is paid in full and has no further claims

Only when you have collected all four types — in the proper sequence — are you fully protected from a subcontractor or supplier filing a lien.

Why This Matters: Protecting Your Home

Too often, homeowners write large checks to the contractor alone, assuming the money is being passed down to the subs and suppliers. When that doesn’t happen, you are the one who suffers.

If a supplier or subcontractor goes unpaid, their recourse is to place a lien on your property — even if you already paid the contractor.

Proper payment procedures and lien releases protect you from this situation.

Final Reminder

A rebuild is stressful enough. Managing payments shouldn’t add more pressure — and with the right structure in place, it won’t.

If you want help reviewing a contract, setting up a payment schedule, or creating a release-tracking checklist, I’m happy to provide templates and guidance.