We cannot tell you anything definitive after hearing from only one side. However, we will advise you how to proceed under the circumstances and why. In addition, since we do not know more details or have authority to deal with such questions, we will address only the considerations between you and your worker, not the legal issues between you and various authorities.
The gemara[1] tells of one who hired a worker to irrigate a field using a local river but the river dried up in the middle of the work. The gemara says that if the worker is from the town, he is paid only for what he did and not what he was hired to do but was prevented from doing. Since the worker should have known as well as the owner about the state of the local river, he should have anticipated the problem; he cannot shift the blame on the owner, and he therefore does not deserve to be paid for what he did not do. The worker is also not entitled to receive pay in a case in which neither he nor the owner should have known of the situation that made the work undoable.[2] If, however, the worker did not know of the potential problem but the owner did, the worker is entitled to be reimbursed.
Let us analyze your case. Although you informed the contractor that there might be problems, you did not warn him about the police; if you were surprised, he certainly was. If the oness (extenuating circumstance) that actually occurred was unknown to the worker, it does not make a difference that other dangers were known. It does not make sense to argue that the police are just another example of a disturbance, which the contractor was aware could occur, because (regardless of one’s political views) this “disturbance” is different with regard to its origin and its implications (i.e., it can prevent further work, as opposed to merely delaying or complicating).
The main remaining question seems to be about your ability to have been aware of the threat of police involvement. You indicated that you were surprised that the police intervened. However, since your background information indicates that you do this type of work often, and we know nothing about the contractor, you have to ask yourself the following question: Did you have more reason to be aware of the possibility of the police stopping the work than the contractor did? If so, based on the aforementioned rules, you should have to pay.
Assuming there are grounds for payment, there are a couple of factors to be considered. First, the contractor is correct in deducting the savings of material. Second, there is a machloket regarding the reason for payment in the case of aborted work. Is payment rendered because the owner is considered to have damaged the worker in the form of the lost wages, or must the owner pay because once a worker begins the job, the owner is obligated based on the agreement to pay for the job that was agreed to?[3] There should be a practical difference between these opinions in a case in which the worker would not have had a different job to do anyway. According to the former opinion, since there was no loss incurred due to the aborted work, there is no payment. According to the latter view, a deal is a deal, and the worker must be paid regardless of whether he would have had other work if not for this job.
As there are a few elements of the question that are not clear to us and are probably not conclusive, we recommend that you offer a real compromise. In the context of a compromise, the following question is very pertinent. How did the price you agreed upon compare to that for the same job in a less “challenging” work setting? If it is similar, then if you do not pay a very significant portion of the fee, it turns out that you gave him a bad deal, which is improper.[4] If you offered him a high price, however, that could indicate that you were both aware of the risks involved with the job. Under certain circumstances, the price agreed upon can even be an indication of what we can assume the tacit understanding was for conditions that were not explicitly discussed.[5]
Finally, we urge you to set clear guidelines with future workers, especially in similarly complex jobs, to cover a wide variety of possible surprises.