Now flip the story and you are the contractor and hit the first milestone. The customer however refuses to acknowledge that milestone and holds on to the funds

Now flip the story and you are the contractor and hit the first milestone. The customer however refuses to acknowledge that milestone and holds on to the funds demanding some extra work not in the original contract. You are out the labor and materials with no payment and no recourse. It's not beautiful for the contractor why would he agree to this with no arbiter between the two of you. And as soon as you introduce an arbiter you are back to someone else enforcing the agreement not the blockchain. The blockchain adds nothing here that a standard court of arbitration doesn't.