Deposits. How much should you ask for?
"The majority of fixed-price contractors, when dealing with a project over $40,000, require a 10 per cent down payment."
By Robert Koci
How much should you ask for a deposit?
We get the question a lot from young contractors starting out. Through the years, we’ve heard everything from no deposit to 50 per cent deposit to 100 per cent on jobs under $5,000.
But we have also heard the horror stories of contractors demanding big deposits and walking away from homeowners, leaving behind not only a destitute homeowner, but another reason for the home renovation business to be battling the auto industry for the most distrusted industry in North America.
It’s time to settle the question once and for all, and what better way than to ask the Canadian Contractor RenoFocus ’15 and ’16 alum? (See Canadian Contractor Jan/Feb 2017 and Jan/Feb 2016) This group of 50+ contractors were chosen from hundreds of applicants to come to Toronto to participate in a series of focus groups with Canadian Contractor sponsors and they continue to be a source of inspiration and ideas for us. They represent well over $100 million of renovation and custom homebuilding revenue across Canada. If they don’t know, who will?
21 got back to us with their answers and the results were pretty conclusive: All things being equal; get 10 per cent.
There was some variation within that group, however. A Calgary contractor says he takes a 10 per cent deposit, but requires also that the customer provide what he calls a “lien fund payable” that goes to a third party in trust. Also, if there is cabinetry or windows and doors involved for which long lead times are required, he will get 50 per cent of the cost of the order before he places it.
One Ottawa contractor said he scales his deposit requirement. Mostly, he collects 10 per cent, but more than that, he says, “if shorter lead times and earlier commitments from us to suppliers are required.”
The “no deposit required” crowd
The outliers—those who did not require a deposit— were almost exclusively cost-plus contractors. “We do not take a deposit and work on a hand shake,” says a cost-plus custom homebuilder in Ontario, “but we are probably stupid!” We are no so sure of that. Stupid? As in “40 years of very successful custom homebuilding company now building by referral only stupid?” Would that we were all that stupid!
Good—no—excellent customer relationships seem to be the difference where deposits are concerned for fixed price contractors. A fixed-price Ontario contractor, says he never used to take deposits but, “For a new client who’s coming to us not closely connected to a previous client or mutual friend or family, we try to get around 10-15 per cent before foundation begins. With that being said around 75 per cent of our work is repeat customers and if that’s the case we normally do not receive first payment (33 per cent) until the exterior framing is completed and roof is watertight.”
Where does the deposit go?
Here’s another question: when you receive a deposit, what do you do with it? We heard from a cost-plus Edmonton renovator who picks up a 50 per cent deposit for all his renos, and, he says, that money is not credited to the job until completion. “This way we are usually receiving payments along the way to cover costs and invoices and then on the closing invoice we can and would apply this deposit to the outstanding amount.”
A B.C. builder explains that the key to managing deposits is to credit them back slowly throughout the job. “We do not credit the whole amount on the first invoice,” he says. “We would break it into small chunks and give a bit of back on to each invoice. For example: For a $300,000 job we would take a $30,000 deposit and would guess at the length of job or number of biweekly invoices and divide the deposit into equal parts so that we still have some deposit left right down to the last invoice.
So, here is what we take from our survey: Your default is a 10 per cent deposit. Then adjust the amount for:
- – Smaller jobs: More
- – Non-referred customers: More
- – Referral customers: Same or Less
- – Cost-plus work: Less
- – Bigger up-front commitment from suppliers: More
- – More complicated job: More
- – Tougher timeline: More
If you would like to share your deposit plan, please feel free to have your say in the coments below, or you can email me at email@example.com