Homeowners rarely get burned by ADU projects because they picked the wrong finish materials. They get burned because they handed over too much money too early, with no leverage left to make sure the work actually got finished. Getting the construction payment schedule for ADU work right — before you sign anything — is one of the highest-value financial decisions in the entire project.
This guide breaks down what your state legally allows as an upfront deposit, how to build a milestone-based draw schedule that actually protects you, why a retention fund matters more than most homeowners realize, and how bank-controlled construction loan disbursements add a second layer of protection.
Use the FindADUPros ADU Loan Calculator to model your project’s financing structure before finalizing a payment schedule with any contractor.
How Much Down Payment for a Contractor Is Actually Legal?
California caps contractor deposits at $1,000 or 10% of the contract price, whichever is less — not whichever is greater. This lives in Business and Professions Code Section 7159.5, enforced by the Contractors State License Board. The math trips people up: it’s not “10%, unless that’s under $1,000.” It’s the lesser figure. On a $200,000 ADU project, the legal cap is $1,000 — not $20,000. A contractor demanding 25% or 50% down on that project isn’t negotiating. They’re violating state law.
One narrow exception exists: a contractor providing a performance and payment bond, or a CSLB-approved lien and completion bond, is exempt from the cap — uncommon on residential ADU projects but worth asking about if a contractor resists the standard limit.
Legal Limits for Contractor Deposit by State
- California: $1,000 or 10% of contract price, whichever is less
- Maryland: Capped at 33% of the contract price
- Nevada: 10% or the actual cost of special-order materials
- Arizona, Texas, and New York: No statutory cap — the written contract governs
If your state has no statutory cap, default to treating 10% or less as the reasonable standard, and push back on anything higher. A financially stable, licensed contractor doesn’t need a large upfront check to mobilize — legitimate businesses have working capital and supplier credit that doesn’t depend on your deposit.
Why the Deposit Cap Exists — and What It Doesn’t Cover
The deposit limit exists because the amount collected upfront determines who holds leverage for the rest of the project. Pay too much before work begins, and the contractor’s incentive to finish on time, on spec, or at all drops with every dollar already in their account. A well-structured ADU build draw schedule keeps both parties aligned by tying every dollar to verified, visible progress.
The deposit cap only covers what’s collected before work begins. Every payment after that — a progress payment — is governed separately: it cannot exceed the value of work actually performed or materials actually delivered at the time it’s requested. A contractor cannot legally invoice for framing that hasn’t started, however confident they are it’ll be finished by the time the check clears.
For your schedule to comply and actually protect you, it needs to be in writing with each payment stated in exact dollars and cents, carry the heading “Schedule of Progress Payments,” and describe precisely what work triggers each payment. “Phase 2 — $15,000” tells you nothing verifiable. “Framing inspection passed — $15,000” does.
Designing a Milestone-Based Draw Schedule
The standard general contractor milestone payments structure for an ADU should tie every disbursement to a physical, inspectable phase — never a calendar date. If a contractor stalls for six weeks, a calendar-based schedule still obligates you to pay on the stated date regardless of what’s actually built.
A realistic schedule for a typical ADU project:
| Milestone | Typical % of Contract | What Triggers It |
|---|---|---|
| Deposit | 10% or $1,000, whichever is less | Contract signing |
| Foundation pour complete | 15–20% | Poured and passed city inspection |
| Framing inspection passed | 20–25% | Framing complete, rough MEP inspected |
| Drywall hang complete | 15–20% | Interior walls closed, insulation and drywall installed |
| Interior finishes substantially complete | 15–20% | Flooring, cabinets, fixtures installed |
| Final sign-off / Certificate of Occupancy | 10% retention | Final inspection passed, CO issued |
Each milestone should represent proportional value relative to work actually completed — not an arbitrary split. If a schedule asks for 50% or more before framing is even finished, that’s a front-loaded structure designed to extract money ahead of the work, and it’s a serious warning sign regardless of how reasonable the contractor sounds.
At every milestone, request a conditional lien release from the general contractor and major subcontractors — signed confirmation they’ve been paid for their portion. A contractor who won’t provide lien releases as payments are made is one of the clearest indicators of a structure designed to protect them, not you.
Why the Retention Fund Keeps Your Builder Incentivized
Holding back a final retention amount until the building fully passes inspection is one of the most effective, most underused tools available to homeowners. A contractor with real money still on the table has a direct financial reason to fix punch-list items and show up for the final inspection promptly. A contractor already paid in full has no such incentive.
Historically, 10% retention was the informal standard on private residential projects. That’s shifting: starting January 1, 2026, California’s SB 61 caps retention at 5% for most private construction contracts signed on or after that date — owners cannot withhold more than 5%, and contractors cannot withhold more than that from subcontractors. This cap generally doesn’t apply to typical single-family residential projects unless part of a mixed-use development taller than four stories, so most ADU builds fall outside SB 61’s limit and can still use 10% retention if the contract specifies it — but confirm the current rule with your contractor.
Whichever percentage applies, the principle matters more than the number: never release the final payment until the Certificate of Occupancy is in hand and every punch-list item is resolved. A contractor pushing hard for full payment before final inspection is asking you to give up the one lever that guarantees the job gets finished correctly.
How Construction Loans Add Bank-Controlled Protection
If you’re financing through a construction loan rather than cash, the bank’s disbursement process adds a second layer of protection alongside your contract’s payment schedule. Construction loans release funds in draws, each tied to a documented, often third-party-verified stage of completion. Before releasing a draw, most banks require a draw inspection — a bank-contracted inspector or appraiser physically confirms the claimed work is actually done — a title update or lien search confirming no new liens have been recorded, and signed lien waivers from the contractor and key subcontractors.
This inspection process functions as an independent check on your contractor’s claims — the lender isn’t releasing funds based solely on the contractor’s word. For homeowners whose private payment schedule mirrors the bank’s draw schedule, the two systems reinforce each other: the bank’s inspector effectively double-checks the same milestones your contract already uses to trigger payment. This is one of the most underrated arguments for financing through a proper construction loan rather than large informal HELOC draws — the built-in verification protects you even when you’re not personally on-site every day. Use the FindADUPros ADU Cost Calculator to build a budget aligned with how your lender structures draws.
Red Flags That Signal a Predatory Payment Structure
- Calendar-date triggers instead of milestone triggers
- Vague milestone descriptions — “Phase 2 complete” without a specific, inspectable definition
- Front-loaded schedules — 40% or more collected before framing is finished
- No payment schedule at all — “pay as invoiced” gives you zero protection
- Resistance to providing lien releases at each payment stage
Before signing with any contractor, verify their license status and complaint history through the FindADUPros Contractor License Lookup — a contractor with a clean license history is also far more likely to propose a schedule that actually complies with your state’s law.
The Bottom Line
A well-structured ADU payment schedule isn’t about distrust — it’s about aligning incentives so both you and your contractor are protected by the same document. Know your state’s legal deposit cap and don’t accept more without a clear legal exception. Insist on a written, milestone-based draw schedule with specific dollar amounts tied to inspectable phases, never calendar dates. Hold back a meaningful retention amount until final inspection and Certificate of Occupancy. And if using a construction loan, let the bank’s draw inspection process work alongside your own payment schedule rather than treating them as separate systems.
For vetted ADU contractors with transparent, compliant payment practices, visit FindADUPros.
Frequently Asked Questions
How much down payment can a contractor legally ask for?
It depends on your state. California caps deposits at $1,000 or 10% of the contract price, whichever is less. Maryland caps at 33%. Nevada caps at 10% or the cost of special-order materials. Arizona, Texas, and New York have no statutory cap, meaning the written contract governs — treat 10% or less as the reasonable standard in those states.
What should a standard ADU milestone payment schedule look like?
A compliant schedule ties each payment to a specific, inspectable phase — deposit at signing, then progressive payments at foundation completion, framing inspection, drywall installation, interior finishes, and a final retention amount released only after Certificate of Occupancy. Each milestone should be stated in exact dollars, never vague percentages or calendar dates.
Why should I hold back a retention fund until the final inspection?
A contractor with meaningful payment still outstanding has direct financial incentive to complete punch-list items and pass final inspection promptly. A contractor paid in full has little reason to prioritize remaining concerns. Historically 10% has been standard, though California’s SB 61 caps retention at 5% for most private contracts signed starting January 1, 2026 — confirm which rule applies to your project type.
How do construction loan draws work with my contractor’s payment schedule?
Banks release construction loan funds in draws tied to verified completion stages, requiring a physical inspection, a lien search, and signed lien waivers before releasing each draw. When your contract’s payment schedule mirrors the bank’s draw milestones, the lender’s inspection functions as independent verification of your contractor’s progress claims.
What are the biggest red flags in a proposed payment schedule?
Calendar-date payment triggers, vague descriptions like “Phase 2” without specifics, front-loaded schedules demanding 40% or more before framing is finished, no written schedule at all, and resistance to providing lien releases at each stage are the most consistent warning signs of a predatory structure.
