First and obviously, your contractor shouldn't ask for an unreasonable sum of money up front. Yes, he needs money to get the project started, but asking for more than 15 percent raises a red flag, and most states allow contractors to ask for a maximum of 33 percent of the total cost up front [source: Chicago Tribune]. Your contractor should have enough credit to pay the rest of the up-front costs. If she doesn't, it might be because she's messed up a previous job and had her credit revoked. That's not a contractor you want.
After the up-front costs, additional monies should be tied to major milestones -- for example, the end of excavation and foundation work, framing, plumbing, electricity, siding, roofing and finish work. Similarly, a contractor who tries to tie money to dates rather than construction milestones is going to do you wrong.
A low bid should also raise warning flags. Beware the common scam in which the contractor assures the homeowner that the home will be used as an example for advertising purposes and that's why he's able to bid so much lower than the competition. In fact, it's almost never worth it to lowball a bid for the payoff of a portfolio piece. Instead, a low bid almost always equals poor work. It's just that simple.