Customer Deposits and Payment Schedules

      A heartfelt and sometimes heated discussion about setting payment terms, including initial deposits, for a cabinet job. February 27, 2013

Question
What is a usual deposit before starting job? I have a job and when I ask for a deposit, the contractor (owner) refuses. What is the normal procedure to start job with custom cabinets (job is worth $8500)?

Forum Responses
(Business and Management Forum)
From contributor S:
No deposit = no job. You can bet your life he won't start building without collecting a sizeable deposit from his customer. If he won't pay you now, he probably won't pay you later.



From contributor I:
Contributor S is absolutely correct! It is a slap in the face to be expected to work for free for the duration of the project and assume 100% of the risk. I'm sure the homeowner and/or contractor gets paid weekly! Too many selfish idiots out there with a builder's license.


From contributor E:
This brings up the thing that aggravates me the most! We are commercial installers and I will not say we are the best, but we are in the running and have a proven track record to stand behind. When I don't know something, I say so! But I will find someone to teach me, and pay them for their expertise. I refuse to finance the builder! My very good installers command good pay on time or they are gone. I cannot afford to run a 30-30 payroll on the road, with proper insurance and expenses. Who can? Work two weeks, bill, get paid two weeks later. You can't do that? I can't do your job period. People say you won't get work. Bull! Our work stands on its own. I don't always win bids as installers are now bidding so low and figure nickel and dime on change orders! That's crap too. I bid off prints and stand by it. Scribing and sanding, etc. are part of installing. Don't like it? Get a shop job and stop hurting us that understand what it is to install. That said if more millwork companies and installers would stand up to the builders we would all be better off.


From contributor K:
Just ask him if he is the bank for the whole project for the customers. If not, he should understand why you are not for your customer either. No deposit = 100% risk.


From contributor J:
He would need to stroke me one of his checks for 50%. My longtime, non-problematic repeat customers can and have placed an order for 50k over the phone. I may or may not, at my discretion, turn in a draw before or after the project is complete. Newbies, tire kickers and jerks get the 50% deposit/40 or 50% due at delivery. Who was doing his work before? Were they a problem or was he? Most tradesmen that are okay with having their terms dictated to them have other problems going on (job and non-job related) that impact the job. If you're not that guy, do your business on your terms.


From contributor L:
New client gets to pay a nice down payment. A GC that wants me to finance the whole job myself and then probably wait to be paid gets to look at my tail lights.


From contributor F:
Always get at least 30% up front, which will at least cover most of your materials. 50% is obviously better with 30/20 or 40/10 on the delivery and completion of the job.

The most important part of this I've learned is to be consistent with all your customers on these terms, no matter who they are, even those who you know well or would consider a good friend. I've learned this the hard way and still have a couple of pieces in my shop as a result.



From contributor O:
Too bad you were not ready with your reply right then. Now you are coming back days later with your decision. You may have this job because your price is low in the first place. Hope you don't need the work, and you can go back with a request for a reasonable deposit - I'm thinking 40%, 40%, 20%, especially if you are installing. This way you have 80% of your money before the cabinets leave your shop, and the customer thinks you are asking for less than 50% deposit up front. Works for me. Put a smile on your face like you are on their side, but keep your dialogue short and sweet.


From contributor M:
I agree - keep it short and sweet. He knows exactly why you need a deposit. As soon as you start trying to rationalize it, that just opens it up for debate. "Payment terms are 50% down - thank you."


From contributor T:
Looking at it from the contractor's view: This guy has no experience, no track record, so why should I give him any consideration? Well, he is real cheap - maybe too cheap - and has forgotten several key things in his pricing. But worth a chance if I can squeeze some boxes out of him. Even if I don't pay him a thing, he won't know how to move to try to collect. This is the best thing about starving woodworkers, they are all in business to cut each other's - or their own - throats.


From contributor B:
That is a really crappy other side. That other side is exactly why we can't work without a deposit. That other side has put a lot of good, honest, hardworking people into bankruptcy, both personal and business. If it's his first job, so what. Fact is he's doing the right thing and reaching out for the advice he needs to be successful. For all we know, he's an outstanding cabinetmaker who wants to get off the employee train and start doing this for himself. If you can't get a deposit, don't take the job.


From contributor Y:
Not sure of the exact intentions of the other side, but why condemn a pretty logical post? It was a pretty decent post on the real dangers for the op, written from another perspective. Those of you admonishing the poster might want to re-read.


From contributor T:
Respect, credibility and access to work is not - or should not be - given freely. It must be earned. It is not automatic. Just because there is no visible threshold to enter this profession (if that is what it is) doesn't mean anyone should be allowed to stumble in and announce their presence and be given credence - and work.

I am sure that each and every one of us here has worked hard to earn respect and credibility, and continues to do so today. Yes, we had humble beginnings, big deal. So did my cardiologist.

Consider the fact that there are any number of competitors that are only competitors by coincidence, not in skill or craft; certainly not by design. These same people are willing to cut your throat for next to nothing. Not that they are so treacherous; the nature of their errors is ignorance born of innocence - like a 3 year old with a hammer. Their sins blow back on us all in the profession, so that every day we have to establish ourselves as the guy that will not walk away with a deposit, or leave a job undone. So what if they cut their own throat at the same time - you are still undercut everyday by shops that have no business in this business.

Yes, the road is full of treacherous customers - as it should be. The questioner has apparently done nothing to establish credibility or respect to earn the easy path. I mean him no true disrespect, but let him earn his way into the profession. Either we need to treat each other as professionals or stop calling it a profession if everyone that shows up is our new best friend.



From contributor A:
If you want a deposit to minimize risk or manage cash flow, it's two different things. I think if a shop is constantly busy, they shouldn't need a deposit to cover materials or labor. What is happening to the profits that should be sticking around the business?

If you require a deposit to reduce risk, that's one thing, but to tell a customer or if you actually need it to finance the job, that says you can't get materials on 30 day terms and don't have enough working capital to cover payroll.

That's a red flag to a customer. We are building one of a kind items that we can't sell to someone else most of the time, so you can either enter into contracts with reputable companies or take deposits.

On the other hand, if we aren't able to express what the customer needs in clear documents and language, then if we need deposits so we have their money in case, we screw up. How is that in the best interest of the market?



From contributor R:
I will not do a job without a deposit, regardless of how much capital I have, or profit I have accumulated. Get burned once, and you'll think the same way. I get 50/40/10. If the job is more than two months out I'll get 10/40/40/10. Cash flow is important.


From contributor J:
Why should we extend respect, credibility, or access to the GC? What track record do you have? Come to think of it, general contracting is the only profession that readily comes to mind with a lower barrier to entry, than woodworking.

I do realize you have your own overhead to deal with - Powerstroke and cell phone payments. Give me a break. Most people with the minimal equipment have more investment in their profession than any builder I know of, and I know a few good ones. Discussing a project with the average builder, I often assume from what details they know of the project, that they've not yet unrolled the plans. Whatever works for you, I guess.



From contributor U:
Obviously getting no deposit is putting too great a financial risk on the tradesman for producing a custom product. He has to do the entire job on his dime and then wait until the end to see if the customer is happy enough with the final product to pay him.

On the other hand, a lot of guys here don't seem to be able to see it from the viewpoint of the honest customer. That guy shouldn't have to take all the risk either, which seems to be what is implied by those here who take a 40%-50% down payment upfront with another 40% at least on delivery. That leaves the customer with only 10% or so retention when the job is finally installed, which is the only point which really means anything. (What do a bunch of boxes sitting in the customer's floor, delivered, mean as far as showing a good final product? Final product is a product installed as the customer ordered it.)

I get 33% down, 33% at the point where the cabinet boxes are installed (I don't even make or order the doors and trim until I have gotten the second 33%), and a final 33% at completion when all the doors and trim are installed. This has always worked well for me and the customer. In theory, no customer will ever try to screw me out of my final 33% since that just isn't enough money out of the total to make screwing me worth it. Likewise, 33% is all he is ever out in cash risk before he has a concrete result to show for it.



From contributor L:
Order a kitchen from one of the big box stores. Guess what you pay upfront? 100% and then you have to wait for weeks to see anything and when it finally comes in, there is usually something amiss. Getting a down payment means that you are getting a commitment from the party you are planning on building it for.


From contributor H:
Do you have a contract? Do a background check on this guy, call the lumber yards, contact the client the cabinets are being sold to. Ask him who he used to buy cabinets from. Even if he gives you a deposit you may never see a final payment. Without a deposit your chances of being paid are slim to none. You're lucky to find 1 in 3 contractors that are honest. The ones that are already have loyal subs who enjoy getting paid, so your chances of finding an honest one is slim to none.


From contributor J:
How about getting off your butt, expending a few minutes, possibly an hour of your time, and actually viewing, firsthand, work representative of someone's offerings. If, after that, you aren't confident enough to put some skin (deposit) in the game, you should look elsewhere.


From contributor V:
50%.


From contributor K:
"I think if a shop is constantly busy then they shouldn't need a deposit to cover materials or labor. What is happening to the profits that should be sticking around the business?"

Following that reasoning, then I guess the box stores shouldn't charge upfront either... They have a lot more volume than the average custom shop... yet they charge 100% upfront. Go figure.

One of the reasons you need to charge a deposit is builders are notorious for delays. How many projects can the profit from a job support? The profit from a job is seldom enough to cover the materials for another job, never mind more than one. In the interim, there is payroll, and all the other associated expenses.

A fool and his money are soon parted, and it's usually the one without a deposit.



From contributor G:
I'm sorry but if anyone thinks there is no need for a deposit to cover materials and labor to start a job, they are crazy in this economy. For 31 years we have required a 50% deposit and we will never take an order or do a drawing without one. Why would I loan some wealthy client 50% or more and hope they are honest and will pay me for the job? Cash flow is king and it always has been. We won't give up our cash flow to make someone else's better.


From contributor W:
Getting a deposit shows commitment on your client's part. Heck, what would prevent the client from changing their mind? 50% standard. Some states have different rules and limits on deposits - check yours. Having a signed contract with total cost and scope including deposit is basically all the reference we have. Do it right. In 30 years I never had a problem getting paid after completion. No way will clients bank roll our home improvements. Why should we finance any ones?


From contributor A:
Contributor K, I guess my point isn't clear. If a shop wants a deposit to minimize risk, it's a completely different situation than from some of the comments that they need the money to pay for materials or labor. My point is if a shop is busy and can't do a job financially if they don't get a deposit then they are either
A) growing too fast and not managing cash flow,
B) spending their profits on toys or non-business items, or
C) losing money.

I am not saying don't get a deposit. I'm saying the justification to the customer should be policy. But if as a business owner you can't open the doors without deposits, then where are all the earnings going? In 30 years we have been stiffed for about 25k on 5 stores we liened where the GC got paid and went bankrupt and we delivered all the product to one store and GC moved it to other stores in an out of state job. The rest of our liens (4-5) have resulted in payment, so either we are lucky or we are able to qualify customers or both. And we do get deposits on retail and direct work and custom materials on some commercial jobs.



From contributor P:
I get two things - the customer's commitment, and cash flow. Do not kid yourself, it is about the money. If you are doing a job with no customer commitment, then he knows he is in the driver's seat, and he has control over you, and if any little (or big) thing happens he uses this to withhold cash to control the outcome of the situation. If he has a substantial cash investment in the project, he will work with you because he does not want to lose his money. And second, every accountant, business consultant, financial person will tell you that cash flow is king in a business.


From contributor C:
There is nothing wrong with asking for money for materials. You should make it a policy. Any time I don't ask, we run into a crunch, because I spend too much on toys.


From contributor A:
A binding contract that details what happens when both parties don't perform is a commitment from a customer. The ability to secure and lien their property is what they risk so it's not as though the owner doesn't have an investment of a greater value than the cabinets. A deposit eliminates the need to litigate and reduces risk, but the customer has made a binding commitment.


From contributor W:
So which is it, contributor A? Respectfully, you seem to talk from both sides of your mouth. Your list of reasons a shop may want or need a deposit was a tad short. Should every shop whose volume and cash flow is not normal close up and go on welfare?


From contributor G:
In 31 years we have never lost a nickel on an order because we get 50% up front and the balance before our furniture can be picked up. No exceptions and they all know the drill. I don't have to worry about a designer or GC kiting our money so they can pay others.


From contributor C:
No need for that - contributor A is pointing out client's perspective. Contributor G, good to hear! I'm going into 2012 not wavering from our policy, but looking at it as material draw request and/or shop drawing and submittals fee. I hope that all of us do better this year and can help others see the writing on the wall.

To the original questioner: Just take the refusal with a grain of salt and move on.



From contributor K:
A binding contract may be a commitment, but it is not a guarantee of payment. A deposit is. Possession is 9/10 of the law.

We have reserves, emergency fund, etc., but we are not a bank.

You are stating that a business that is run correctly shouldn't need a deposit and that they should rely on profit and trade lines, and if a job goes longer than expected or you are not paid for whatever reason, or payment is delayed, or the builder can't take possession because he is waiting on another company (and in your scenario, he's not going to pay until he takes possession and even then it may be 30, 60, 90 days out or never), you are put in the position of being the bank, with all the risk. That's a recipe for disorder and stress.

A deposit should always be required especially if you do custom work. That is called a financial commitment, and it is one you can take to the bank now.



From contributor Q:
Our terms are 100% up front (which a lot of them do) and they can negotiate down to: 50% dep - 50% before it leaves the shop.


From contributor A:
All I am saying is if a business can't meet their obligations and are busy all the time regardless of their policy on deposits, then they need to look at their selling prices because it seems like money isn't sticking. If a shop needs deposits to survive, then the deposit puts the customer at risk and isn’t fair to the customer. Requiring a deposit as a policy based on risk is completely different than requiring a deposit to be able to pay for lumber and next week’s payroll.

I am sure every general can tell you stories of deposits given and work not completed. I don't have to go any farther than my accountant who paid a local shop for a bunch of office stuff he never got (before we were his customer).

So not all shops are equal and the shops that can't make money and complete jobs with deposits and screw the customers and the GC ruin the marketplace and could be lowering prices to levels that no one can compete with.

If a shop requires a deposit, the answer to the customer should be these are custom goods and our policy requires this deposit schedule, but if the answer to the customer is we need to pay for materials, then the customer has a legitimate reason to be concerned about how the shop is handling their money.

Require an irrevocable letter of credit, require a 100% payment bond, both are instruments that protect both parties.

Needing a deposit and requiring a deposit are two completely different things - one is policy, and one may be the sign of a shop's financial difficulties.



From contributor Z:
You're being taken for a ride, so walk while you still have money in your pocket. Money that you haven't spent buying materials building this guy cabinets.

But to answer your question: it depends who is the client and what kind or relationship you have with him. Most have to pay 50% before you buy anything and some may get net 30 from invoice date.



From contributor K:
"Require an irrevocable letter of credit, require a 100% payment bond, both are instruments that protect both parties."

You can imagine doing this but not asking for a deposit? These instruments are tools to get paid at a future date while you put out resources to furnish them with a product. A deposit eliminates the need for these tools, and maximizes your resources at the same time and minimizes paperwork on the back end to collect outstanding monies due. Simply more efficient.

Not providing a deposit may be a sign of a builder's financial difficulties, especially when along with everything else, the builder has more of chance of delays because of their reliance on multiple companies.

With a deposit, if a builder goes south, the most you are out is some labor costs while trying to collect against a lien. Without a deposit, you are out all of it, including materials that were custom made for that client. Only one of those policies provides for more order and less stress.



From contributor H:
Tell him $4,250 and have him sign a contract. If he won't, give him the name and phone number of the competitor that you don't like in your area (the guy who low balls you to get work). You don't get the job, but if you're really lucky the other dope gets it.


From contributor W:
Contributor A, I pretty much agree with your last post, however a down payment or deposit actually is part ours. We can spend what's ours the way we see fit if we want to.

In the not so long ago old days, I put the customer deposit in an account and never touch it until I was done. Speaking for myself, those days are gone. More power to you if you do custom design work and projects without asking for a deposit before you begin and it works well. Then by all means continue being successful.

For me an important part of the equation is who, not so much what, you are dealing with. All the paperwork in the world won't help when you are working for a worm.



From contributor Z:
50% deposit on contract approval, 40% when parts go to finishing and remaining 10% on installation (no terms, have a check ready). Should have had something along that line in your initial quote.

I don't want the deposit because I need the money. I want it to confirm a commitment from the client, otherwise they can just walk away with no cost and leave you holding the bag. Never start a job without a deposit. If the GC won't go that route, look elsewhere, because there's a reason he doesn't want to commit cash to you and it probably isn't a good reason.



From contributor X:
Without a deposit, you don't have a job yet. If I will be starting a job later, I take a few hundred for a deposit which gives me a job and also allows me to put them in the schedule. Then when we start I get 50%. Then at 50% completion I get the next 25% and then 25 at completion. Been working fine for us.

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