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“Why does a contractor need a deposit at all?”

"Perhaps the business owner is not managing the cash well enough. If the business can’t manage cash, will the contractor be able to manage the tasks, the timelines along with the sub trades?"


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April 13, 2015 by Steve Payne

Editor’s Note: We had quite a few comments on here after we quoted Mike Holmes, in a National Post column (and other syndicated papers), saying that no contractor needs more than a 10 per cent deposit.

Most of you disagreed, saying there are lots of cases where 10 per cent isn’t nearly enough. But Alex Beraskow, myreno411.com, emailed me to say that, in his opinion, NO DEPOSIT is really needed by a good contractor, whatsoever.

Read on…

(In your Sept/Oct. 2014 issue) Mike Draper, renowned columnist and expert on the business of home renovation, cautioned contractors about homeowners who refuse to give a deposit. His view was that it was a red flag and should give the business pause for further thought.

As a homeowner, and one that has hired well over 50 contractors, I do pause and wonder why a contractor, who is in business, would want or need a deposit. A deposit is a pre-payment and I don’t do it for any other purchase (Some lawyers insist on a retainer that they draw down on as the list of tasks is unknown, as is the scope of legal work).

Is it because the contractor – the business – is under capitalised? Fancy words for saying that there is insufficient cash for ongoing operations. If that is the case, and I will never know what that cash position is, I worry about that business as a going concern. Specifically will it be around to finish the job? And will it be around to honour the warranty period?

Perhaps, I wonder, that the business owner is not managing the cash well enough. If the business can’t manage cash, will the contractor be able to manage the tasks, the timelines along with the sub trades?

I know full well, that some businesses run into problems with GST and other tax filings. Is the deposit used for paying those taxes or possibly payroll? Or fixing past mistakes?

The usual reason given for a deposit is that it shows good faith on my part as a homeowner. But haven’t I signed a contract, one that binds me? Have I not shown good faith throughout the “buy” process? Given that I am spending my own hard earned cash, one that is after tax, isn’t that commitment? And I will let you into my house – often while I am still living in it – and often let you stay when I am not even there. Moreover you know where I live. I may know your address and it might be your truck.

As a contractor and business you have way more power in the commercial relationship. If I as the homeowner choose not to pay – legitimately or not – you can with little effort take out a lien on my house. If you as a contractor botch up the job my only recourse is to make noise and then take out an expensive lawsuit. And you may have no assets should a law suit be the only recourse.

On my part, if I am to deal with a business, I want it to be well managed and well-funded with the full knowledge that it will be around to complete the work as well as for the next 5 or so years for the warranty period. I don’t want my contractor to be bending rules or worrying about meeting payroll. I want him/her focused on my job.

The reality is that a deposit is a small percentage of the overall work. It should not be really necessary if you are well capitalised.

The other reality is that a deposit is a prepayment for services that have not been received. Your accountant will tell you that the deposit is called “deferred revenue” and isn’t a sale until services are performed. That deposit is in essence a loan that a homeowner has given you: you owe that homeowner services or the money back.

At one time a contractor asked me for a deposit so that he could buy materials. I then volunteered to buy those materials – on my credit card so that I got the points – and so that I would maintain title to them should things turn sour.

My own experience is with 5 jobs where a contractor insisted on a deposit. All 5 went sour. I liked the contractors that gave a written quote, and then delivered a quality product to a budget of time and money. I was happy and they continue to prosper.

Regards

Alex Beraskow, P.Eng., MBA, ICD.D
President & CEO

myreno411.com


Steve Payne

Steve Payne

Steve Payne is the editor of Canadian Contractor magazine
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26 Comments » for “Why does a contractor need a deposit at all?”
  1. Deposits should not be considered capital but rather sincere assurance the project will go well with special items ordered by the client ie:cabinets, roofing ,windows etc. not working capital. When in doubt don’t pout let a certified contractor help you OUT. A project should be a joint agreement NOT one sided with all the controls in the consumers . We must work as a TEAM.

  2. To be honest!
    Regarding the deposit

    As a contractor I offer a written contract with a terms of payment,
    stating the amount and timing of the amounts due.
    The first amount is a deposit due at signing. It provides me with the client’s intent to be our customer. The amount is held in trust until it is expensed against material and labour for that client’s job.
    I will not schedule or purchase materials for any client with out that surity.

    No exceptions

  3. I have been in the HVAC business for 40 years and we always ask for a deposit and do this to ensure the customer is serious and is not going to cancel the day before we start, where we have already purchased an expensive heat pump or other custom unit for the client plus other gear which is non returnable – and sometimes we can reuse the equipment elsewhere but a lot of times it sits in the shop for a long time and then is hard or imppossible to sell! Sure it is easy to file a lien on someones house but is only useful if the customer is trying to collect a mortgage draw or selling with the year. Liens expire in BC after one year, once that happens you have to go to court and spend many thousands of dollars in lawyers fees and the process can take 7 years. Small claims is the same thing takes years and even if you win there is no way to collect! Waste of time! Our policy is to ask for down payments up to 30% from commercial clients for the same reasons. In an ideal world we could trust everyone to pay their bills but in the real world that is not the case and folks who give deposits are usually the same folks who pay their bills. I would however make sure that the contractor that you are using has been in business for a few years, is a BBB member, is licensed, has actual insurance (ask for a copy of the policy), is WCB current (check the WCB web site they show all contractors). Also many of our customers come from referrals both commercial and residential so that gives an element of trust in both directions!

  4. We are a small company with an A+ BBB and 5 star Trusted Pros rating. We ask a 50% deposit from our clients upon signing. This is perfectly reasonable, we have large items to buy such as walk-in tubs, showers, cabinetry, counter tops, faucets etc costing thousands of dollars prior to starting work. In effect, we work and remain unpaid until the job is done to the satisfaction of the client.
    Your writer implied that any contractor asking for a deposit was a crook who had no business sense or intention of doing or completing a project.
    As a small company, if a client defaults on payment, we are out of pocket and to go through legal routes to regain that which is owed is is very costly. SMALL BUSINESSES GO OUT OF BUSINESS because clients default and suppliers are owed.
    The deposit limits our risk, that is GOOD BUSINESS practice, we can pay our creditors even if we end up working for free ourselves, we have not defaulted. The deposit also limits the clients risk of us going out of business due to unpaid suppliers before completing the job.
    Most business where orders are placed, a carpet store for example ask for a deposit and sometimes even full payment before the service is provided. Why is a contractor viewed as bad for doing the same?
    Agreed there are bad contractors and clients that have been ripped off, we find we are often viewed as guilty until we prove ourselves innocent, that is hard enough without the likes of the writer planting the idea that any contractor asking for a deposit is a crook!
    It is more important that the contractor does good paperwork. That the quote gives a full detailed breakdown as to what is to be done, what IS included and what is NOT included so the client has the full picture than whether the contractor asks a deposit or not.

  5. NICK says:

    HI ALL,
    IN MY 35 + YEARS NEVER ONCE DID I ASK FOR ANY DEPOSIT OR SIGNED CONTRACT, MY CLIENTS ARE ALL REFERRAL AND NEVER HAD A PROBLEM.
    WE ALSO GIVE THEM 30 DAYS TO PAY AFTER COMPLETION.
    NICK

    • mitchell says:

      Same here! I often wondered about this issue because I hear so many horror stories about bad contractors in large urban areas. You know how to weed them out….no down payment.
      Maybe I feel this way, like you Nick, because of the rural area I’m /we do most of our work? I don’t know?
      Anyways it works for us!

  6. Joseph says:

    Mr. Beraskow seems to write in a quite enlightened piece, but there are several holes in his argument.

    1) In most other businesses or industries you pay 100% FIRST, then you recieve the product. He pays 100% lunch at Taco Bell, KFC or Pizza Hut before he recieves his meal. He pays 100% on his door step for a home delivery before the item enters his house. He pays 100% for any item at Canadian Tire, Walmart or the Bay before it leaves the store. He cannot drive his new Ford, Lexus or Cadilliac off the lot until it is 100% paid, or the financing is 100% arranged. He cannot have the keys to his new house or cottage by the lake until the financing is 100% signed, sealed and delivered. Yet in home renos where he locks the door and has complete control, he thinks he doesn’t have to pay!!
    2) The deposit is not a picture of my financial failures, but a sign to me that this customer is going to pay his contract. It may be a deposit for material that I am putting on order and now have no option of sending them back if the customer changes his mind. It is an equal portion of good will that the contractor and customer will engage in throughout the process. Sometimes “he will owe me” and sometimes “I will owe him”. I WILL NOT do work for a customer that refuses to give a deposit. That is a huge red flag.
    3) The customer has the control, not the contractor. He goes on and on about how he has no recourse and the contractor has the “hammer”. The truth is when I leave at the end of the day and he locks the door, all the labour, material and tools are at his disposal. I cannot break into his house to get them back. That is a crime, but he can hold indefinately and it is I the contractor that must jump through legal hoops to try and recoup what he has “stolen”
    4) Lastly, he says that I should be ‘capitalized’ if I am going to do his reno. In essence what he is saying is that I should pay for his reno, then hope like hell that he will give my money back. That IS NOT business!! In my early years of renovation I spent way too much time “hoping” the customer would pay. My internal workings financially are my business. There are ways that the customer can be wise and determine if this is a fly-by-night outfit or a legal contractor. Beyond that, just pay your deposit and draws as they come due.

    PS Mr. Beraskow -don’t call me, I won’t work without a deposit.

    • Rob says:

      Jospeph,

      Thank you for your comment. You are so unbelievably accurate in every point you make. The gentleman who wrote this article is any contractors nightmare. You sir, are one smart man.

      Regards,

      Rob

    • tim says:

      Fair enough, and when you go to your suppliers you immediately pay cash on the barrel before you leave the store or are you charging it to your account?

      And you are issuing pay to your workers at the end of each day or are you paying them on a 2 week cycle plus a one week hold which is standard?

      Here is the reality most small residential contractors have no business but simply work out of the back of their trucks with little recourse for the homeowner if something goes wrong. Those are the contractors I will never give a deposit to. The ones with a business storefront never ask for a deposit

      Lastly, as a commercial contractor it is standard for me to work the entire month, invoice at the end of that month and then not expect payment for another 30-40 days after that. I am not worried, I AM PROPERLY FINANCED!

      • Steve Payne says:

        You’re a commercial contractor. That means you have clients who are businesses. Totally different kettle of fish working for Mr. and Mrs. Homeowner.

        • tim says:

          What is the difference? As a commercial contractor I verify they have financing in place before I start. The home contractors should be doing the same by requesting copies that bank financing is in place

          I then have to place a surety bond in most cases worth MILLIONS that I will complete the work properly and pay everyone involved.

          Do you think I am going to give someone thousands of dollars and all he has is a truck full of tools and likely rents his place. Give me a break! What am I going after if he runs off with my money???? Of course if I fail to pay he can easily drive down and slap a lien on my house as collateral for his money

          IF YOU DON’T HAVE AT LEAST $100,000 IN CASH YOU SHOULDN’T BE IN BUSINESS!!!!!!!!!

          • Steve Payne says:

            Hi Tim:
            So if you DO have $100,000 in cash as a contractor, you should be using it to go out on a limb buying custom kitchen cabinets, custom windows, custom doors, etc. for all and sundry clients? That’s what that money is best used for? Financing your client’s jobs until they feel like squaring up with you? I don’t know why it’s controversial that contractors should ask for deposits, according to you. I’m not seeing why this is so offensive to you.

          • tim says:

            for some reason Steve, I can’t reply to your comment of Sept 7 below yours so I will do so here.

            Yes you should. If you aren’t confirming the financing details and/or running a credit check with your customer before building well then you are asking for problems

            You have yet to address my earlier questions which I which I will repost below:

            and when you go to your suppliers you immediately pay cash on the barrel before you leave the store or are you charging it to your account?

            And you are issuing pay to your workers at the end of each day or are you paying them on a 2 week cycle plus a one week hold which is standard?
            ——–
            Its offensive to me mainly because people who are not properly financed are not real businesses. If they are running my job for basic wages sure that’s fine (say 30-35/hr), but I laugh when guys roll up with their pick ups and demand $50-60+/hr and/or give me their quotes. I love telling them the large contractor with a full overhead was cheaper than you, doesn’t want a deposit, and I know where to find them if there is a warranty issue down the road.

            I have heard lots of issues with pick up contractors disappearing when there is an issue and the homeowner is left stranded. I have never heard of issues with established contractors with offices

            Lastly, please tell me what the homeowner is supposed to do in a situation like this where they have paid the contractor and the contractor has disappeared to another province

            https://www.cheknews.ca/exclusive-sidney-senior-warns-others-condo-reno-nightmare-358238/

  7. mitchell says:

    I agree wholeheartedly with this column and Alex. What he has written out here I basically, had already written a reply to the original column months ago expressing the same exact sentiment.
    To the contractors here, do you not have a credit account at almost all places you do work with? Most likely yes so therefore they are constantly ordering materials and suplies for you without down payment, what’s the difference.
    If once the contract is signed and your still not trusting of that particular client, then don’t do the job.
    Cheers

  8. Fraser McConney says:

    My concern with Mr. Beraskow’s comments are simple. He has hired 50 or more contractors in his time, my question is why so many? Have these projects gone bad all on account of the contractor or has he influenced the
    outcome . Most of my customers have been with me for years but new ones all pay deposits until they earn my trust. Mr. Busey is right contracts are two sided all parties must earn each other’s trust.

  9. Jennifer says:

    Red flags are often waving whenever a customer does not want to put down a deposit on a job we are about to order custom materials for.
    Are they intending on still shopping around for a better price or not entirely committed in their mind?

    We ask for a 25% deposit on all our jobs.
    It’s a sign of good faith from the customer that they are serious about proceeding with the proposed project.

    If you don’t trust your contractor with your deposit, why did you hire him?

  10. NICK says:

    A BETTER IDEA WOULD BE TO ORDER THE SPECIALIZED PRODUCTS C.O.D. TO THE CLIENTS OR THE DEPOSIT IS PAYABLE UPON STARTING THE PROJECT WHEN MATERIAL IS DELIVERED. MOST CONTRACTORS HAVE WHOLESALE ACCOUNTS THAT ARE DUE WITHIN 30 DAYS OF DELIVERY AND SOMETIMES THE WHOLESALER WILL EXTEND THE DUE DATE. WE MUST HAVE FLEXIBILITY ON ITHER SIDE AND TRUST EACH OTHER CLIENTS AND CONTRACTORS. THIS MAKES IT EASIER TO DEAL WITH CLIENTS WITH UNFORESEEN PROBLEMS ONSITE AS YOU HAVE BUILT A TRUST WITH THEM . GETTING A DEPOSIT UPFRONT MAY ALSO WORK AGAINST YOU IF THE CLEINT IS NOT TRUSTING YOU. THIS IS WHY WE ONLY WORK THRU REFERRALS, AND THANK THE CLIENT THAT REFERRED US FOR THE PAST 34 YEARS. NO NEED FOR EXPENSIVE ADVERTISING OR DISCOUNTS.

  11. Kate says:

    I am the spouse of a small electrical contractor. I have worked in construction (admin side) for many years and have seen time and time again businesses phone for service, receive fantastic device and the job was done well. They do not pay because they themselves either do not have good cash flow, or that’s how they do business, by ripping anyone iff they can.

    My husband works full time in the Canadian military and is a licenced, insured, electrical contractor. He does NOT do ‘side jobs’… everything he does is above board.

    This means, as a legitimate contractor, thousands and thousands of dollars each year (each month in fact) he puts towards operating expenses. Yes, it’s not cheap to run a legitimate electrical contracting company. He pays as much as a one man, part time operation as the ‘big guys’ do, only he makes a lot less money. He dies it because not only does he enjoy it, he wants to have a trade to fall back in when he retires or releases early from the military.

    If one customer does not pay him, it can ruin him. We have money for cash flow, but as you I’m sure know, copper wire is very expensive, and a simple 50A breaker can be as much as $250 each.

    I insist my husband receives a 50% deposit if, for example, the parts are $1000 for an $1800 job. There is NO way I want some unscrupulous person to steal money from my family.

    So for you to say to not give a deposit, if I don’t have a working relationship established with you, there is no way I would tell anyone to do business with you. As a customer, if you are going for the lowest price only, hiring electricians to do side jobs without permits, that is your fault and you should expect anyone who performs work illegally to also be the type who may rip you off. If you are dealing with a small, legitimate contractor you have never worked with before, expect to pay a reasonable deposit.

  12. Sean says:

    What you have said about giving deposit I belive is your side of story and concern. There are two way to look at it if its only installation or there would be product involved. For installation only Im agree with you, as long as job devids to several portion and for every stage there would be a payment release But if there is product involved then I disagree. For a trade which is going to spend their time and material for you with only your signiture wont give any guarantee that cost being paid by you after job completion. Beeing said, in construction if homeowner or project manager for any reason like to give hard time or make fake issue to not pay Im afraid to say, they can. Since there are no sets of law for the details of the job. Since most of the job with product is handcrafted, therefore; there are many way of looking at details and design differences with many structural way of doing installation which easily any minor detail can become an issue. Second, if there is no deposit is given, contracter can award the job to some other company at any stage and obviously subcontracter has to take many several steps of legal action and pay fees to be able to cover the loss. Therefore if the job is going to be awarded to well known company or a reliable trades organization which has shown few of their previous jobs, they most ask for deposit and thats their right to guarantee them the job and cover the portion of their cost as well ask reducing their risk. The only reason I see your point is only if your going to award the job to someone asking below market value and one man show type of trade which will be scary to give them deposit. Which I recomnd for paying little extra it always guarantee you the quality and peace of mind which I would do it myself.

    Sean R

  13. Steve says:

    What a controversy! Everyone has their opinions (but), sign a contract! Have the customer pay for the materials (if your looking for your extra savings off your account, state it in your contract). Possession is 9/10 of the law correct (no but)? This eliminates any hard earned cash being utilized for other expenses, or liens against for non payment (unless you really suck at what you do, and try to f@#* around). Being said this is only the demo stage!). (A) The material is paid and delivered to the house, the customer is not out (neither are you!). (B) Your contract should state performance payments; so after demo your paid and your employees also, and so forth (once again showing they made the right decision by choosing you / you company), as well as covering yourself (the Contractor). This is the crucial point within your relationship, this could be days, weeks months, or even years! At this point the trust has built and let’s say it time for electrical or plumbing (are you pulling a permit? Do you pass inspection?), another payment please. I’m not going to tell you the order of operations but I think you get the point! One last thing! The customer is not always right, but has the final say! Do you or your company pass the test? Your final payment will tell (sometimes), a referral tells all!

  14. Ryan says:

    Is a small deposit not just for consideration on the contract to ensure it binding?

    • Steve Payne says:

      A “consideration.” It can be as small as a pencil. Often signatories to contracts will exchange pens. Little things like this keep civilization from collapsing. Haven’t you noticed?

  15. brasko says:

    It has nothing to do with not having money, it is assurance that the Client will pay when the job is done. If they do not want to pay the deposit, that means that they have no intention of paying you at all. It should not be a problem to prepay if you have full intentions of paying them.

  16. Leo oster says:

    We the contractors are not your ******* bank. Our suppliers want their money upfront. If big companies like Lafarge demand cash then why should small contractors have to put up money on behalf of their clients? McDonalds does not let you eat that Big Mac before you pay for it. You need to wake up and smell the coffee. I estimate that over 75 per cent of all contractors in Canada require a 50 per cent deposit!

    • tim says:

      It what world do any suppliers want money up front? I can’t think of a single supplier I have, and I have probably 80+ accounts, where they want money before I leave the store. Lafarge doesn’t demand cash upfront, they invoice me at the end of the month for concrete delivered and I have to pay by the middle of the following month.

      My suggestion for homeowners is have the materials delivered to the site and then only then do you issue payment for the invoiced amount. Sometimes I have even phoned the supplier directly with my credit card number and paid directly, because the reality is if you pay the contractor and they don’t pay the supplier, the supplier and lien your house!

      Now lets do the flip side, we talked about protecting the contractor with payment, now what is a homeowner to do when the contractor skips like this:
      https://www.cheknews.ca/exclusive-sidney-senior-warns-others-condo-reno-nightmare-358238/