“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?"
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.
(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.
Alex Beraskow, P.Eng., MBA, ICD.D
President & CEO