Contractor Project Deposit Payment

Should I Collect a Down Payment?

Today, I want to talk to you about project payment terms. The number one question that I get asked is should I take a project deposit? And the answer to that question is, "Yes, Yes, Yes!" You should get a deposit on every job whether it's a $100, $1,000 or $10,000 job. You should definitely get a deposit on any job. The amount of the deposit is going to be somewhat dependent on a few different factors here. Anywhere from 10% to 50% down.  A lot of times you're going to be purchasing the materials upfront. A very common amount to take down would be a 10% deposit if the project is going to run longer than 30 days. If the first day of that job is longer than 30 days out, you might want to consider taking a 10% down payment or deposit. It's important that you don't spend it on anything except items related to that project. You should have an account at your bank strictly for deposits. Until that job starts to run, that money is not an asset.  That money is to be used for their project, so in order to keep your cash flow taking a 10% deposit is going to limit the temptation that you have to take a 50% deposit spend all the money. Then the day comes when the job supposed to start.  You're kind of robbing Peter to pay Paul to start this job. However, if the job is set to run within the next 30 days and you plan to order materials up front, do you have some lead time on your materials? Are going to be using that money to purchase materials? By all means, consider taking up to a 50% deposit.

Buying Materials

How you structure that is going to matter more on how you're ordering those materials and lining up the job in the in the time frame. But in all cases, you should never schedule a job without a project deposit. Any type of a deposit, even a 10% deposit, is going to represent more a level of commitment for the homeowner to do that job. You don't want to be surprised that you move forward with a job or you set aside time in your schedule 2 weeks from now only to find out that they've changed their mind. They've had a change of heart or got buyer's remorse. Having a deposit commits them to the project and it allows you the opportunity to move forward with your plans and your scheduling without that being interrupted. That being said, I want to talk to you specifically about jobs that are over $20,000 in revenue. If you have a job that's over $20,000 in revenue, you're going to want to consider progress payments. You're not going to want to do 50% down and 50% on completion. A lot of time, these jobs can take a while to complete.

50% Down

Maybe 2-3 weeks, sometimes even more if the job is substantially larger than that. If you're taking 50% down and 50% on completion, chances are your cost on the job could be upwards of 70% or 80% once you factor in overhead maybe 85%. Maybe you have a 15%-20% margin on that job. So, you don't want to get into that job have 80% of your cost out there on the table, money out of your pocket and waiting, waiting, waiting, until the very end of the job to capture that last 15% or 20% payment. You really want to do progress payments and those progress payments are going to be outlined by several factors. A lot of our proposals will read 50% down, 25% at the halfway point (you want to go a step further in defining what the halfway point is).  So you identify where that progress payment will be made and make sure that that's written into your proposal. The customer understands that they were going to look for another 25% progress being that you don't want to be. So, they're not out 80% of their money only completed 15% of the work. It's fair all the way around. Projects that are going to be larger are going to take longer in time. If there's a stopping point of this project is substantially large put in a progress payment.

Get Your Money

That said, last thing I'll say is on these down payments. If you are taking 10% down to hold the project for a date that's more than 30days into the future, I would encourage that 5 or 7days before the project is set to begin, you collect the remaining 40% of the deposit. That generally is the time that you're going to want to use that money to purchase materials. Again I'll caution you to say that make sure that you have a minimum of two accounts at your bank.