Standard retention on almost all contracts is 5%, this however may not fall under the realm of a standard contract.
A lot of extension type builders will want cash, most of them accept 50/50 split cash / draft.
A bit of trust is required on both parties behalf in arrangements like this.
If he's looking for 4 staged payments and has agreed to some retention my gut feeling would be to trust him.
Get some one you know with a bit of knowledge of construction to check your drawings for the dreaded extras, if he trots out the line " oh i have'nt priced for that" you could be looking at a budget over run.
Get him to give you a run down on what he has priced ie external finish footpaths etc, roof finish incl ridge caps to match existing or is it flat roof, windows and doors internal and external, skirtings and architraves, plastered skimed finish inside or boarded and taped joints ( go for the former) , is he fitting kitchen? is he providing plumbers and electricians and all attendant materials for those trades?
Beast of luck with the extension