Spelling Out the Payment Schedule

      A good contract should spell out deposit and payment terms in correct legal language and the amounts should provide for adequate cash flow. August 22, 2007

Question
We are a small, mostly residential, custom cabinet shop that has been in business for several years. All of our work has come from referrals and that will likely continue to be the case. We have never up to this point had a formal contract, but feel it is necessary at this time. I am looking for some suggestions or examples of what others have in their contract and what your terms and conditions are. What about deposits, when payment is due, etc. Is there a good source to get a template for making a contract?

Forum Responses
(Business and Management Forum)
From contributor T:
In regard to terms, we are recommending the following to all of our clients:
50% down with order.
40-45% on delivery.
Remainder upon completion.



From contributor D:
We had a contract, about 2-3 pages, with terms and conditions. Last year we went to a much longer contract - the "terms and conditions" portion also talks about what their responsibilities are, what ours are, additional samples, change orders, and other stuff that people don't think about until it's a problem.

What we've been doing is splitting out an installation fee in the contract, which is not subject to sales tax. That portion gets paid when installation is substantially complete. The rest (usually about 90% of the total price) is split into two payments - one to start, the rest when we deliver. If it's a very big project, like a $65,000 job we had last fall, I split it into three payments. That way they feel it's less money up front, but we end up getting 2/3 of the payments before we deliver - it's helped spread our cash flow better.



From contributor J:
Our system is 30% on commencement, 30% when half the cabinets have been made and inspected by the client, 30% when everything is completed and ready to go, and final 10% after satisfactory installation


From contributor A:
I've taken 30% on signing, 60% on delivery, and 10% on completion for years. On large jobs or jobs that get split up, we divide the 60% into two payments. I haven't had any problems but I'm thinking we may be able to go to 40%, 50%, 10%. When I talk to others I always seem to be the guy with the smallest deposit.


From contributor D:
One of the things I've considered, especially on the larger types of jobs that we'll be working on pretty much exclusively for that time period, is what all of my expenses are for the time I'll be working on it - what money's going to be marching out the door for materials, payroll, rent, electric, gas, phone, insurance, payroll taxes, garbage service, internet, web site, etc. I think only getting 30% until you're actually done with building is risking too much of your own capital/cash flow.

One of the things that flashes in my mind when I flirt with guilt over asking for a decent price or deposit - for some reason, my work is expensive but $3000 to $5000 for a television (what many of my clients spend) is not?!



From the original questioner:
Thanks for the input. I have thought for some time that we were lower than most on our deposits. We have always taken 30% deposit, balance on delivery. With some of the larger jobs we have had lately, that really strings us out. Seems to me that most of your thoughts are in the same ballpark. I think the key is spelling those payment terms out in a signed contract.


From contributor C:
Our terms are similar to contributor T's with a minor exception. Also, having the terms in a written contract is a must. It prevents misunderstandings and is, in our opinion, more professional.

Here is a cut and paste from our contract. This section is included right after the description of work to be done. The other "terms and conditions" (such as warranties, etc.) are included later in the contract.

==============================
TOTAL PRICE: $5,000.00
We propose to hereby furnish material and labor, complete in accordance with the above specifications, for the sum of Five Thousand dollars and no cents.
Payment to be made as follows:
(50%) $2,500.00 Production Deposit
(40%) $2,000.00 Before delivery of cabinetry to the jobsite.
PLEASE NOTE: Cabinetry will not be released until payment has been received. You will be contacted two days in advance, either by phone or email, or both to confirm release date and time.
(10%) $500.00 Upon substantial completion of the installation of the cabinetry.
===============================

All of the numbers ($ and %) are in bold. We go over these figures with the client as we review the contract before signing.

Notice that we ask for the 40% before we even load the truck at our shop. This avoids the possibility of excuses, delays, etc. at the job site, a lot of wasted time, or worse, getting stiffed. The clients can see the finished goods in our shop prior to delivery if they so desire.

If you are getting a design fee, and applying it to the job, you can list that here also. It will show the client how they are getting a credit for that fee. For example, your terms might then be 10/40/40/10 (10% for the fee, 40% Production Deposit, 40% before delivery, 10% after substantial completion of the job).



From contributor D:
A signed contract of some sort is a must. It's not just about protecting yourself if something goes bad (even a contract can't stop that from happening). It's spelling out all the details, so that little or nothing is open for being misunderstood... none of that "but I thought..." "I was expecting..." And even if you put on the contract that a second deposit is due in three weeks or on a specific date, you'll still need to remind them.


From contributor Q:
We sent our contract to our lawyer for review, and she said we have covered all the business and none of the legal which would render our contract almost worthless in a court room, so the contract was rewritten. You may want to run your contract by a lawyer - that might save you a ton of grief. I also find detailed and signed and dated shop drawings and specifications as important as a contract.

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