4.2 Deposits and Payment Rules

The One-Third Deposit Cap

The single most-tested number in MHIC contract law is this: a contractor cannot accept more than one-third (1/3) of the contract price as a deposit. On a $15,000 bathroom remodel, the maximum lawful deposit is $5,000. On a $60,000 addition, it is $20,000. The cap protects homeowners from funding the entire job up front and then chasing a vanished contractor — precisely the harm the Guaranty Fund was created to address.

Two points about the cap are commonly misunderstood:

• It limits what is accepted, not what is requested. The statute speaks to what the contractor may accept. Asking for half down and taking it is the violation; the exam will phrase the fact pattern as money changing hands.
• It caps the deposit, not the job. There is no ceiling on the total contract price and no rule that payments after the deposit must come in any particular increments.

The deposit itself is the up-front payment made before or at the start of performance. Money collected later, as work progresses, is not a 'deposit' subject to the one-third test — it is a progress payment governed only by whatever the parties wrote into the contract.

The Signature-First Rule (Again)

Both rules live in §8-617: subsection (b) caps the deposit at one-third, and subsection (a) supplies the timing rule that a contractor may not demand or receive any payment — deposit or otherwise — before the contract is signed. So even a modest 10% deposit taken before both signatures is unlawful, while a full one-third deposit taken the minute after both parties sign is lawful. Sequence and amount are independent tests, and exam scenarios deliberately mix them.

Everything After the Deposit Is Negotiable

Beyond the deposit cap, the Home Improvement Law does not control the payment schedule. Whether the balance is due in two progress draws, five milestone payments, or one lump sum at substantial completion is entirely a matter of contract between the homeowner and the contractor. This is a classic exam trap: answer choices will invent statutory schedules — 'one-third at the midpoint,' 'final payment only after inspection' — that sound consumer-friendly but do not exist in the law.

That said, well-drafted contracts tie later payments to objectively verifiable milestones (framing complete, rough-ins passed inspection, substantial completion) because vague schedules generate disputes, and disputes generate Guaranty Fund claims and complaints. Contractors also protect themselves by keeping payments roughly ahead of costs incurred, so an abandoned job does not leave them unpaid for installed materials. But 'good practice' and 'required by law' are different answer choices, and the exam tests the latter.

Financing Disclosure

There is one payment-related disclosure requirement: if the home improvement is financed, the contract must state the number and amount of the monthly payments, including any finance charge. A homeowner paying $12,000 over 36 months with a finance charge must see the monthly figure and the count of payments in the contract itself. This lets the homeowner understand the true cost of credit before being committed, and it dovetails with the broader requirement that the contract state the agreed price.

Note what this rule does not do: it does not cap interest, require the contractor to offer financing, or regulate the lender's terms. It is purely a contract-content disclosure — the financing terms must be visible in the home improvement contract the homeowner signs.

Worked Examples and Traps

Example 1: Lawful structure

Contract price: $27,000. Deposit: $9,000 (exactly one-third) collected immediately after both parties sign. Balance: $12,000 at rough-in completion, $6,000 at substantial completion. This is fully compliant — the deposit is at (not over) the cap, money moved only after signatures, and the remaining schedule is the parties' own bargain.

Example 2: Two violations, one check

Contract price: $27,000. The contractor collects $12,000 at the first meeting before the homeowner has signed, calling it a 'materials deposit.' Violation one: payment accepted before each party signed. Violation two: the deposit exceeds one-third ($9,000). The label 'materials deposit' does not matter — the statute measures the money accepted, not its nickname.

Example 3: The financing trap

A contractor arranges financing for a $20,000 window replacement but the contract states only the cash price. Missing: the number and amount of monthly payments including the finance charge. Even though the price and deposit were proper, the financing disclosure omission is itself a contract violation.

Example 4: The midpoint math trap

Halfway through a $30,000 job the homeowner has paid exactly $10,000 — the $9,000 deposit (lawful, at the cap) plus a $1,000 progress payment. An exam question may ask whether the contractor 'exceeded the deposit limit.' The answer is no: the one-third cap applies to the deposit, not to cumulative payments over the life of the job. Cumulative payments naturally exceed one-third as work is completed; that is the whole point of progress billing.