Client deposit: How much should a contractor ask for?
By Mike Draper
You’re about to sign a contract with a homeowner to do a renovation project for them. How much money do you require for a deposit? This is a frequent topic of conversation among contractors.
Although there’s no one formula, there is a rule of thumb you can apply: The contractor should be renovating with the homeowner’s money. In other words, the contractor should make sure the payment stays ahead of the work to do.
If there aren’t a lot of costs at the start of a project, the initial deposit can be lower. But if the beginning of a project requires the contractor to order, say, $30,000 worth of cabinetry and the cabinet manufacturer requires a 50 per cent deposit, the contractor should demand a minimum deposit of $15,000 so he’s not paying for that order with his own money.
Apart from ordering materials, deposits can also serve to hold a spot in the contractor’s schedule. For a $100,000 renovation, if work isn’t starting immediately, a deposit could be in the range of $5,000. That’s assuming the contractor doesn’t have upfront costs. On the first working day of the project start – and possibly a week or two earlier – the homeowner should provide a larger deposit. This second deposit should reflect the upfront costs the contractor will incur immediately.
Do some analysis on the type of deposit required. On a $50,000 kitchen renovation, you’ve got the upfront demolition and disposal costs, as well as the purchase of cabinetry and other supplies. Upfront costs on this type of project could represent 50 per cent of the value of the project.ge. But try not to hold a large deposit too early – ie: a spring booking for a fall project.
The homeowner also needs protection. This is where the balancing effect is important. Deposits are supposed to protect both sides. Just as the contractor can’t be paying for work they haven’t been paid for, out of their own funds, the homeowner shouldn’t pay a large deposit at the beginning of a project – say, tens of thousands of dollars – for simple demolition work.
No two renovation projects are the same. Apply fair principles to protect the contractor and the homeowner and make regular collections throughout the project to ensure you’re following the number one rule: Make sure the homeowner is paying for the project and not you.
Mike Draper is vice-president, coaching, at Renovantage.com.