Home renovations made simple
Hiring a contractor is a major financial commitment on your part. Your home renovation contract should protect your money and your property. Making contractor payments in a secure and timely fashion is crucial for successful completion of your project. Below we explain how holdbacks work and share tips for developing an effective payment plan.
Asking for a small initial payment to secure a home contractor’s services is common practice. According to celebrity contractor Mike Holmes, this down payment usually acts as a security measure for the contractor—a sign of good faith on your part—versus compensation for project completion. Down payments are also used by contractors to purchase materials or secure subcontractors at the start of your home renovation contract.
How much should a contractor charge for a down payment?
The province of Ontario recommends a down payment of no more than 10 per cent. In other provinces, guidelines differ. The CAA recommends an initial instalment of no more than 10 to 15 per cen of the total project value.
Why is my contractor asking for a large down payment?
If your contractor asks for a large down payment, you might want to treat this as a red flag. A reputable contractor should have charge accounts set up with their suppliers. Relying on your money to purchase products could mean that they mismanaged their funds or lack experience. It can also be a sign that they intend to take the down payment and abandon the contract.
Setting payment milestones
Talk to your contractor about their expectations for the payment timeline. Will your contractor require payments by date, or would they be willing to tie payments to project milestones? Paying for contractor work according to progress rather than calendar dates means if there are any unforeseeable delays you won’t get stuck paying 50 per cent of the project price when only 10 per cent has been completed in full.
By project stage
One way of tying payments to project milestones is by assigning a fixed proportion of the total quote — 10 per cent, for example — to each stage of the project. How this might look is 10 per cent of the payment goes to your contractor when framing is complete, another 10 per cent for plumbing, 10 per cent for electrical, and so on. Linking your final payment to clean up is a good way to ensure that your contractor won’t leave a mess behind.
Use the Smart Reno Cost Estimate Tool to get an idea of the total price of your home renovation and some starting figures for the instalment payments.
Your quote should show how much the work in each room is expected to cost. Making payments to your contractor by room is a concrete way to measure progress. When marking payment milestones this way, remember to explicitly state in your renovation contract what constitutes completion of work within a room.
You made a reasonable down payment and wrote payment milestones into your renovation contract. Now you’ve received your first contractor invoice. What’s the best way to pay?
We suggest being wary of a contractor who asks for payment in cash. The contractor may look for underground work to avoid taxes, which is illegal and means that you cannot claim homeowner rebates from the CRA. There’s also the risk of not having your project completed at all: if your contractor asks for a large cash deposit in return for lower overall pricing, they can take the money and run with no consequences. Paying in cash means no guarantees and the possibility of shady dealings.
Writing a one time cheque to a contractor for a few hours of work is a common practice. However, using cheques for recurring payments can cause problems. Cheques take time to process and are not as secure as other payment methods. Lost cheques or a bank holiday can create delays in your home renovation.
Credit card payments are quick, easy, and come with security measures that keep your personal information safe and protect you from fraudulent charges. When you pay with a credit card, you can resolve unauthorized charges without touching your bank account. You won’t be paying your contractor as an individual—credit card payments will be processed through their merchant account.
Be cautious when making wire transfers to contractors. This payment method is fast, but essentially irreversible unless you can prove you sent the money to the wrong account.
Online payment systems
Paying through an online system like PayPal keeps your bank account information out of your transaction. Note that your contractor will also need an account with the same online payment system to receive your payment.
An e-Transfer like Interac is fast and secure. You can often transfer to a phone number or email address. Make sure your contractor issues you an invoice for the payment, as no record is generated beyond the money transferred out of your account and the contact information of the recipient.
Holding back 10 per cent of the total price of your contract protects you from liens against your property. Whether your province refers to it as a Construction Lien, Mechanics Lien, Builders Lien, or a Legal Hypothec of Construction, the result is the same: a contractor or subcontractor files a legal interest against your property for unpaid labour and materials.
For instance, if a general contractor runs into trouble and doesn’t have money to pay the plumber, the plumber can claim a lien against your property to the value of the improvements they made on your home. You paid your general contractor a lump sum that was supposed to include paying the plumber—do you have to pay twice because someone else misused your money?
Because you held back the 10 per cent, you may be able to pay the plumber a proportion of the holdback to discharge your obligations. The plumber can pursue the general contractor for the remainder of what is owed. Note that each province has a different regulatory act for holdbacks and liens. We cover the basics of holdbacks by each province or territory below.
The Builders’ Lien Act of Alberta states that homeowners must retain 10 per cent of the actual services provided and materials used in a lien fund for 45 days after contract completion. If a lien is registered, the owner should place into the lien fund an additional sum to the value of the provided but unpaid work and materials.
In B.C., the Builders Lien Act requires the property owner to establish a holdback account at a financial institution for each contract where a lien may arise. Ten per cent of the value of work and materials provided under the contract are deposited into this account, and the funds are used to discharge liens. The holdback period expires 55 days after a certificate of completion is issued, at which time the contractor is paid from the account unless a lien has been claimed.
The Manitoba Builders’ Liens Act requires a holdback of 7.5 per cent. As the work is completed, 7.5 per cent is deducted from each payment and set aside in a holdback account. This holdback must be retained for 40 days following the completion of a contract or the issuing of a certificate of substantial performance.
Homeowners are required to keep a 20 per cent holdback in New Brunswick. If the work to be completed and materials used exceed $15,000, only 15 per cent of the project cost should be set aside. The New Brunswick Mechanics’ Lien Act calls for a 60-day holdback period, at the end of which the contractor is to be paid the amount of the holdback if no liens have been registered against the property.
Newfoundland and Labrador
Holdbacks are required by the Newfoundland and Labrador Mechanics’ Lien Act. The amount retained is 10 per cent and the holdback period is 30 days after completion of the contract.
The Mechanics Lien Act in the Northwest Territories states that the property owner is entitled to a holdback of 10 per cent for a period of 45 days after the completion of the contract. This holdback is not required.
The Nova Scotia Builders’ Lien Act makes an important distinction between completion and substantial completion of a contract. Holdbacks of 10 per cent of the total project value are to be retained for 60 days after substantial completion of a contract. If unfinished work remains, the homeowner can retain 2.5 per cent of the renovation cost until the project is completed.
The Nunavut Consolidation of Mechanics Lien Act does not require the property owner to retain a holdback. However, it states that the owner is entitled to retain 10 per cent of the total project costs for 45 days after the completion of a contract.
Part IV of the Ontario Construction Act specifies that all payers in a contract must hold back 10 per cent of the total construction costs until all liens have expired or been satisfied. These liens are automatically created for anyone supplying materials and labour to a property owner, contractor, or subcontractor. Only the property owner is liable for the lien, which expires 60 days after the contract is completed, terminated, or abandoned.
Prince Edward Island
A 20 per cent holdback is required by the Mechanics’ Lien Act of Prince Edward Island. This amount is reduced to 15 per cent for projects over $15,000. The holdback period is 60 days after the completion or abandonment of a contract.
The Civil Code of Québec provides a legal construction hypothecs against unpaid work or materials. There are no holdback requirements in the Code itself, only in individual contracts. However, every supplier, contractor, and subcontractor is required to notify property owners directly of their expenses and involvement in a project. This way, the owner can pay the subcontractor directly if a problem arises. If you don’t receive receipts from every subcontractor and supplier, CAA Québec recommends you retain 10 to 15 per cent of the total amount of your contract for 30 days. As with holdbacks in other provinces, this can be used to satisfy a construction hypothec registered against your property during that time.
The property owner must place a holdback equal to 10 per cent of the contract price into a holdback trust account, administered with the contractor and subcontractors, under The Builders’ Lien Act of Saskatchewan. If a lien is not registered against the property within 40 days after substantial completion of the contract, the owner pays the contractor the amount of the holdback.
Holdbacks are not required under the Builders Lien Act of the Yukon. The Act does state that the owner is entitled to retain 10 per cent of the project price for 30 days after completion of the contract.
Holdback Requirements and Recommendations by Province
|Province||Holdbacks Required?||Holdback Percentage||Holdback Period|
|British Columbia||Yes||10%||55 days|
|New Brunswick||Yes||15-20%||60 days|
|Newfoundland and Labrador||Yes||10%||30 days|
|Northwest Territories||No||10%||45 days|
|Nova Scotia||Yes||10%||60 days|
|Prince Edward Island||Yes||15-20%||60 days|
How to avoid payment disputes
Clear communication and thorough planning are essential for avoiding payment disputes. We go over the three main steps you can take to avoid a payment dispute below. For more detail, read how to handle a dispute with your contractor.
Read and understand your contract
Understanding the scope of your contract is key to avoiding payment disputes. Your contract should specify whether you or your home contractor is responsible for obtaining permits and materials, and who is handling the clean-up.
Detail payment methods and timelines
We discussed tying payments to project milestones above. Your renovation contract should state when and how you will pay your contractor. It’s also important to write what triggers a payment into your contract. Satisfaction and sign-off of the homeowner or completion of a measurable step, like wall demolition, are common payment triggers.
What happens if something changes?
Home improvement projects evolve over time, and a good renovation contract will contain clauses that cover possible changes. You may wish to include a clause in your contract about how a sudden and unexpected spike in materials costs or an unforeseen delay will affect your payment plan. If the scope of the project changes—for instance, if you realize midway through your kitchen remodel that you need to rewire the electrical system—your contract should state how this can be accommodated and how the document should be updated.
What’s your payment plan?
Home renovations are a major investment. For greater peace of mind, understand when, how, and how much to pay your contractor. Developing a solid payment plan is important for safeguarding your finances throughout the remodelling process.
Hiring a trustworthy contractor protects your investment from the start.
Calculate the cost of your home renovation project with our cost estimator
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.