Managing a Customer Cancellation

      When a customer wants to cancel after paying a 50% deposit, and after you've purchased materials, what's the fair and equitable solution? Do you give all the money back, part of it, none of it, or what? April 21, 2011

Question
I had a customer order a kitchen a couple of weeks ago for approximately $20,000. We produced all the cut sheets and took delivery of all the materials required to complete the job. Just received a call - the customer found the house of her dreams and wants out of the agreement. Our agreement says there are "No Refunds." The customer is an attorney. What to do?

Forum Responses
(Business and Management Forum)
From contributor L:
Signed contract? Deposit taken? Ironclad contract? At best he should get a refund minus the materials purchased and the profit you would have made on the job. At best for you, you do what the contract stipulates and get paid in full.



From the original questioner:
The customer made a 50% deposit. I would not say there is an ironclad contract, but yes, there is a signed contract. There is verbiage in the contract that states that there are no refunds on custom orders.


From contributor S:
First, there is no such thing as an ironclad contract unless you are willing to front the money to first defend it in court, and since you have an attorney as a client, you have to realize that she can cause you great legal expense for virtually no cost to herself.

I would offer to refund any unspent funds, plus you retain a fee for time spent on drawings. A $20K kitchen would have less that $5K in material. Offer something like $4K as a refund in exchange for a full legal release from her. Don't give any refund without the release; she could still sue you even after agreeing to the partial refund.

Sometimes it's more profitable to cut your losses and move on. There is no guarantee that the "house of her dreams" isn't her current house with a cheaper cabinetmaker included!



From contributor J:
We have had people pass away, divorce, and a host of reasons why a job will not be completed. At contract we charge deposits, yet offer to refund (on approved circumstances) deposit less materials purchased, and can be absorbed into inventory or restocked less restocking fees (this does not include custom ordered and non-returnable material), cost related to site visits, cost for design and consultation time, and any legitimate expense related to the project to date. Any material cut or fabricated is paid from deposits and becomes the property of the client, yet transport or delivery costs are the responsibility of the client.

We have had to refund 6 times in 25 years. Twice a client has tested this for a full refund, and both times the magistrate has found this policy to be fair and not ruled for the client.



From contributor B:
I would point out the policy in the signed contract of no refunds, then be the nice guy and say, "Well, I normally don't do this, but here's what I can do. I have already ordered and paid for all the materials to do this job. If I send the material back, they will charge me a 30% (or more) restocking fee. So it's only fair that I retain that amount of money from your deposit, and I will refund you the rest." You can decide if you would keep the material for inventory, or actually send it back. Either way, I would pad the hypothetical restocking percentage so you make a little money for your time and efforts, without coming right out and charging her for them. This will make you look like a very understanding person. Who knows, maybe the house of her dreams will need some new cabinetry in the future. I would not pick a fight with a lawyer. If I gave someone a $10k deposit I would sure as hell do everything in my power to get some of it back, especially if you have not started construction yet, and the bought materials are still usable on someone else's project. Policy is policy, but to keep the whole $10k is ridiculous.


From contributor L:
I would think that if I was a lawyer, I would realize the ramifications of signing a custom contract and handing over a 50% deposit, and actually be serious about doing the job. If I was a judge, I would expect a lawyer to realize what a signed contract actually means.

Did you wait the required 3 days before you got started? If you did, then the contract is binding. Any lawyer passing the bar would know this.

I wouldn't keep all the money. But I sure wouldn't give it all back. By the time you are signing a contract, at least 20 hours worth of work has been accomplished. It is not like buying something out of a store where all you are doing is taking it off the shelf.

Plus the company has a signed contract that was put in their work cue. Now things will need to be shuffled around, inconveniencing other clients that may have had firm plans. It is not as simple as, "Oh, I changed my mind. Give me my money back."

This is a huge ramification on a business and these things cost the business owner plenty of money. I wouldn't tell them about restock fees and then pad them. Just tell them if you want out of the contract, it will cost you this much.



From contributor M:
I'm with contributor B on this one. If the tables where reversed, say you had ordered custom doors from BigBox, you would be stuck. But as the owner, you have the chance to make the world a better place. Lead by example.

Sometimes it seems that we cabinet guys always take it on the chin. Be firm, but fair. Suggest the circumstance of the lawyer who receives a retainer and starts some research into a case. What would the lawyer do? Every single action we take will have an effect upon this world. Even in business it is not all about money, not all the time.



From contributor D:
I agree with contributor L's take for the most part. When you have a signed contract and several weeks later the client decides to cancel the contract on a whim, not death or hurricane, she still will be spending money, but not with you.

It is my understanding that when a client backs out of a contract, it is then broken. Once broken, the original terms may no longer be effective. If we miss a payment on a car we bought by contract, or decide we no longer want to pay for it, then we are in default just like your client.

Do not be swayed by the fact the guy is a lawyer. He is not also the judge. Your contract says no refund on custom work. If you don't produce the work, then what?



From contributor N:
If I didn't have a huge booked schedule, that kitchen would be 1/2 to 3/4 done in 2 weeks. What would happen then? There was a post a couple months ago about a customer who was a lawyer and wanted more money back at final payment than he gave. Don't let this person run over you for any reason.


From contributor J:
Unless you are sued by the lawyer to whom tort reform is aimed at, judges don't like them either. Do all you can to get an amicable settlement, and get away (with a legal release, and do not let the opposing lawyer write it).


From contributor U:
First off, I'd have to say that contributor S has got it right. Being reasonable on refunding as much money as makes sense is just a good business policy - but do nothing without the release. And don't forget to factor in the cost of having to revise your production schedule. There may even be an opportunity here for you to pick up some business. Knowing that they have already got money into you, they may decide that the "house of their dreams" could use a few new vanities, a bookshelf or something along those lines. In any case, to my mind a full refund at this point in the project should be out of the question.


From contributor A:
Did you say you cut the sheets, or just processed the paper required to cut the sheets?

Been there (once in 20 years, luckily) and researched it thoroughly. In short, "No Refunds" is not an acceptable defense. Generally, when this type of thing goes to court, they will find that the customer is entitled to a refund and the vendor is entitled to be reimbursed for costs incurred. The customer should be aware that the materials purchased, received and processed are technically their property. You can deliver their property with an invoice for time, overhead, materials, etc. and be prepared to refund the balance.

You will do yourself no harm offering to accept the material you can use and return unspoiled materials to suppliers for their restock charge.

The battle will be changing the customer's perception that:
A) Your time is worthless.
B) You are pulling this stuff out of your own stock and there is no cost to mitigate.



From contributor I:
In the real world, there really is no such thing as "no refunds" or "ironclad contracts." Next time, do yourself and your customers a big favor by always including within the contract (standard and legal) your cancellation terms.

As a licensed contractor, I think you are entitled to no more than $500.00 cancellation fee plus reimbursement on all work in progress. This may sound bleak, but it really means that you get paid for every stick you've stacked plus $500.00. If the work in progress is 30% complete, then you are entitled to 30% of the total contract plus $500.00. The customer is then entitled to 30% of their order. Anyway, this is the way it is in my neck of the woods.



From contributor K:
In reality, being that you only ordered and had the materials delivered and you haven't cut into them yet, unless it is one-of-a-kind exotic that you can use for something else, and you can't return it, you won't be able to show you have a claim. If you don't have a line-item for design and admin in your contract, you also would not likely be able to claim that.

Schedule a sit-down, show the time you have in it (i.e. - design, cut-lists, ordering, return fees for materials, etc.), what your shop rate is, and charge her accordingly, plus 25% of this settlement amount to make up for what it will cost to fill your schedule. Show her in the contract that there are no refunds for custom work, but you don't want to turn her good news into a nightmare situation of losing her deposit, and that you are willing to waive the "no refund" in return for compensation for work and fees already put in, and a waiver for future claim. Tell her that alternately, you can also apply the deposit towards another project (i.e. - custom bookcase for her new home, bedroom set, whatever).

Doing so shows you were trying to be reasonable and equitable should this end up in court. Use terms like "let's find a way to make this a win-win situation," and "I want to help and at the same time be fair to both of us" and (in the beginning) "on the one hand, I am happy for you that you found your dream home, but I am sick to my stomach as to what this does to my schedule..."

This is not a fight I would be looking to pick. Fighting with a lawyer is one thing, fighting with a lawyer as a customer with the potential of it becoming a "cause" after feeling jilted is another... Hell hath no fury... x 2 being a lawyer.



From contributor O:
To sell a 20k kitchen in the first place, you have spent some time with these people. How does your gut feel? Are they trying to get out and go somewhere else or did they actually find the house of their dreams?

We have worked for many lawyers and influential customers and have found they are just normal people in the end. Talk to them about retaining the money for future work on the new house. Be open about your expenses to date on this job and offer the balance back. Just be honest and up front. If the claws come out on their end, get ready for a cat fight. Do not assume it is coming just because they are lawyers.



From contributor G:
Screw the contract. Just treat the customer the way you would want to be treated if you were him.


From the original questioner:
Thanks for all your responses! Very informative. Now there is a new curve ball. The customer lives in a condo and found a great deal on another condo in her building. She still wants to do the kitchen, but not until next year. But she doesn't want to tie up the money for 8 or so months, so she wants the majority of the deposit back.


From contributor A:
In general, I don't think any of the advice you have seen here will change. Treat her fair, be as much help as you can, and it may pay out in the end.


From contributor J:
Comes down to your gut feeling, and how you feed your kids sometimes!


From contributor K:
It is possible that you are being thrown a pretend bone. Telling you they want to use you in the future may just be a ploy to try and get their money back now.


From contributor L:
Take your cut, give the rest back, get it signed off. Why would you consider having these people as future clients? They are already playing games with you. Sever your ties.


From contributor H:
Any time a customer says they will use you in the future is the clue they are a liar. Once in a great while they're being honest, but it's a dumb ploy to get something out of you.


From contributor J:
I love the client who says "give me a discount on this one and I will get you ten more." My response is, "Better idea! Let's pay full price for this one, and I will give you ten discounts." They are usually on their way out quick after that.

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