So how much deposit should a contractor ask clients for? Well, there isn’t a standard answer to this question as there are several factors that play a key role. Most contractors’ deposits land between 10% and 50% of the job: around 50% for material-heavy work and 10-20% for big projects.
A good deposit can help contractors to buy materials, plan for a project, and save some time. But asking too much can make you lose the project.
There is no standard contractor deposit amount because it varies from project to project. A project could be something as small as a simple repair or as large as a roofing project or the construction of a new building. There are several factors that help determine the deposit amount, including the project materials, the duration of the project, what the state laws say, and the terms of the contract.
When determining the amount of a deposit to request from a client, you should first decide what that amount should be based on the scope of the project and the materials, and then check whether your state restricts the amount of a deposit that can be requested.
A contractor deposit is a sum of money a customer pays a contractor, usually before work begins. Typically, the client pays the deposit after approving the estimate or signing the contract. The deposit can help the contractor pay for early project costs, such as:
In addition, a deposit serves as both parties’ commitment to perform their obligations under the contract. However, it is not good practice to ask a customer for a large deposit. The contract must justify and specify the deposit amount.
For instance, if a contractor needs to spend $5,000 on project materials, and the deposit does not cover them, he will not be able to purchase the materials. The client, however, must be made aware of the nature of the advance payment and when the final payment will be made.
There isn’t any standard deposit percentage that fits all contractors and states. It is based on the project’s scope and materials required to complete the project. A small job with few materials may require only a small deposit to ensure the contractor doesn’t lose money on a canceled order. For larger projects requiring more expensive or customized materials, contractors require a higher payment before work begins.
The goal should be to set the deposit amount based on the project’s costs, not just picking some random numbers.
While a 50% contractor deposit justification exists for certain large- or complicated-scope projects, it’s inappropriate for the small- or routine-scope projects the great majority of contracts represent.
Requesting 50% of the total for a small scope project may appear excessive; however, for a large scope project, justifying the request may require a more in-depth analysis and/or justification (i.e., special order or expensive project materials may require significant project preparation and/or special coordination).
State law limitations may place a cap on how much a contractor can charge a client. Thus, a contractor should review state law before requesting a 50% deposit from a client. Rather than asking, “Is a 50% deposit customary?”, the more pertinent question should be, “How much input is required by this project, and based on the state law, how much can we charge?”
Different types of jobs come with different expenses. Painters may not need a big deposit because their material costs are usually low. Floorers may need a deposit to pay for the materials because they can’t afford to take on the expense of buying the materials and then wait to get paid for the labor. Roofers can incur a significant expense for materials and labor before the job is finished. Custom renovations can require the contractor to pay the supplier for the materials and then deliver them to the job site.
This is information the contractor can use too. Instead of quoting a percentage, explain what the next payment will cover.
Before collecting a deposit, contractors must ensure they have followed the laws of any state where the work will be done. In some states, down payments are prohibited if they exceed a certain percentage of the total contract price, a specific dollar amount, or a combination of both.
For example, one state may allow only a certain percentage of the contract price as an advance payment, while another sets a dollar limit. In addition, different payment rules may apply to contracts depending on their nature, size, and other factors.
These rules can and may change, and other requirements may apply to home improvement contracts. So it’s best to consult current state requirements in your area, rather than relying on numbers another contractor may be charging. A deposit that is common in your local market is not automatically legal.
Deposit limits aren’t just red tape. Establishing them properly can protect the customer by ensuring they don’t pay for work that hasn’t occurred or has proven inadequate.
Clear deposit guidelines can also help the contractor by setting payment expectations. By outlining to the customer what portion of the cost is due at each stage of the project, there is less room for misunderstanding or dispute.
If a contractor takes in more than is legal, there may be serious problems, and the contractor may suffer greater losses than losing a client. For a contractor, breaking the law may result in an array of problems from simple infractions to losing the contractor’s license. This is why it is very important to check the laws before signing a contract, especially a new client contract, and before taking the first payment.
A deposit should never sound unreasonable. The contract should specify the project’s total cost, the required deposit amount, what the deposit covers, and any additional payments due after the deposit.
The contract should also state when the balance or future payments are due. Use simple language to ensure both the contractor and client understand the terms and conditions without confusion or misinterpretation. For example, the contract can state that a person must pay a certain amount upon signing but will pay an additional fee depending on the billing schedule.
If the deposit is for materials, machinery, or anything else, the contract should specify that. The language should reflect the pertinent state laws regarding deposits, as well as the agreement of the contractor and the customer.
For larger projects, requesting a single upfront payment may not be the best option.
Instead, you can break the project up into smaller sub-projects. You’ll then get paid after each smaller sub-project is completed. Your client could pay a portion of the total when the contract is signed, a second upon delivery of the materials, and the last upon completion of the project.
This gives the contractor financial security for work completed and provides the client with the opportunity to see what work they are paying for. Renovations, for example, can be divided up into multiple payments. The first payment may be for an evaluation of the work to be done. Additional payments may be made after completion of distinct work sections of the project, with the final payment made after completion of the entire project.
The contract will state the total amount of the project, as well as the due dates and payment amounts for each section. The contract will also stipulate the total number of payments and the work to be done to warrant each payment.
A deposit and a draw schedule are not the same. A deposit, also known as an upfront payment, is money paid before or at the start of a project. A draw schedule divides the total amount due into several portions, which are paid to the payee depending on the stage or point of the work.
For a small job, the deposit and final payment will be sufficient. At the same time, for a big project, several draws during the work might be more appropriate.
A draw schedule may also help the contractor with cash flow, as he gets reimbursed for payments made throughout the project instead of financing the full cost at the beginning.
For the customer, it establishes a clear understanding of how payments relate to work progress and makes the billing process more transparent.
After agreeing on a payment amount, contractors have several options to collect a customer deposit. A contractor can accept a payment via credit/debit cards, checks, or ACH. Each of these methods has pros and cons for the contractor, including the time and cost to process the payment and the type of records the contractor is required to keep.
With cards, customers can pay instantly and usually have several card options to choose from. ACH can be a good option for larger amounts and usually has lower fees than cards. Lastly, checks can be a good option for customers who prefer to pay via checks.
The contractor should always provide a receipt or other statement to the client for any deposit made. Such a receipt should show the amount of the deposit, the date of the deposit and the purpose. Such notes should be retained by the contractor as they might be needed to explain certain payments to the client, and to show that no additional payments are required.
Payment schedules should be clear. In most situations, the deposit is collected when the customer signs the contract. This is to indicate that the customer has accepted the proposal and the contract. Contractors can not rely on a verbal agreement to take an advance payment and start a project. The contract should state when the deposit will be collected and state if the project will be delayed without the deposit.
This will reduce difficulties for both sides because the client will know exactly when to pay and how much to pay. The contractor will also know when the work can start.
Cancellation is a standard feature of a deposit contract for a good reason.
Customers, for various reasons including funding issues or loss of interest, may decide not to proceed with the contract. Meanwhile, a contractor may have already made some expenditure, planned his/her time and/or arranged other contracts. For these reasons, cancellation terms and conditions must be included in the contract.
Whether a deposit is partially or fully refundable depends on the terms of the deposit and on state law, which together determine when a deposit may be retained.
Special conditions, for example, the order of special materials, must be included in the contract to explain how the cost will be handled.
A clearly stated policy on cancellation and refunds will avoid disagreements between the parties on the terms governing the situation. It will also provide information on rights and obligations of the parties.
A deposit should be more than a payment to a contractor. It should help a contractor with start-up costs and act as a detailed acknowledgement to the customer as to what costs are being incurred.
There is no standard or correct percentage for a deposit. It will depend on several factors, including the state where the work is done, the contract’s terms, and the project itself.
You should understand your customer’s rights and obligations before requesting a deposit. You should write your terms in a way to explain to your customer what the next step in the project will be, and request payment for that step. You may wish to break the project up into smaller, milestone-based payments.
When explaining the deposit to a customer, make sure they understand when the next payment will be due and what happens to the project if the contract is terminated.
For more on contractor deposits and other contractor payment questions, see Contractor Payment Resources.
It may have use cases, but don’t standardize its use for every situation. Also, state laws may limit the use of upfront payments.
Several states restrict contractor deposits or down payments. These restrictions vary by state and depend on the type of project.
It depends on the contract, state law, and reason for cancellation. The refund terms should be clearly stated before payment.
Either can work. Cards are convenient, while checks may avoid processing fees. Choose a method that provides a clear payment record.
