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Contractor glossary

Deposit

Updated

Definition

A deposit is a payment the customer makes before work starts, credited toward the final price. Contractors use it to cover materials bought for the job and to hold a place on the schedule. Some states limit how much a contractor can collect up front on home improvement work.

Also called: Down payment, Upfront payment

What a deposit is for

A deposit does two jobs. It covers money you'll spend before the work starts, like special-order equipment or materials, so you aren't financing the customer's project. And it turns a yes into a commitment: a customer who has paid has a stake in keeping the date.

It's credited toward the price, not charged on top, and it's different from the other payments on a job:

  • Progress payments come due as stages of the work are finished; see progress billing.
  • The final payment is the balance due at completion under your payment terms.
  • A cancellation or booking fee is money you keep under stated conditions. If any part of what you collect isn't refundable, say which part, when and why, and check that your state allows it.

How to size it

Base the deposit on what you'll spend, or stand to lose, before the job starts, not on a round percentage someone quoted you. Then check it against any limit in your state.

Example: An HVAC contractor sells a $10,000 furnace and air conditioner replacement. The special-order equipment costs the contractor $4,000, so a deposit that covers it is $4,000, or 40% of the price. If the job's state caps deposits below that, the contractor can take the smaller deposit allowed and, where the rules permit, bill a progress payment when the equipment arrives. The numbers are made up for illustration.

When there's little to buy in advance, the deposit's main job is holding the date.

Example: A detailer books a $1,200 ceramic coating that takes a full day, two weeks out. The deposit is $200, credited to the price, with a written policy agreed at booking that says what happens to it if the customer cancels late or doesn't show. The numbers are made up for illustration.

What to put in writing

On the estimate or contract, spell out:

  • The amount, when it's due and how it can be paid
  • What it pays for, and that it's credited toward the total
  • When you'll order materials, after any cancellation window has passed
  • What happens to it if the customer cancels, or if you do
  • How it will show on the final invoice

A clear scope of work makes it obvious what the deposit and the balance pay for. If the job changes, adjust the total with a change order and show the deposit as already paid against the new total.

Rules that can limit it

  • State limits. Some states cap how much a contractor can collect before starting home improvement work, and the limits are written differently from state to state. Before you set a standard deposit, check with your state's contractor licensing board or the attorney general's consumer protection office.
  • Cancellation rights. A sale signed at the customer's home can come with a short legal window to cancel; see the cooling-off rule. Don't order special materials or spend the deposit until any such window has closed.

How much deposit to ask for goes deeper on limits and contract wording.

Common mistakes

  • Spending it early. Using a deposit to cover last month's bills is a cash flow trap: you're short when that job's materials come due, and short again if the customer cancels and is owed a refund. Have your bookkeeper track deposits separately, and ask your CPA how they're handled for taxes.
  • Forgetting to credit it. Show the deposit as a payment received on the final invoice, with the balance due below it.
  • Asking for more than the job needs up front. A deposit far above what you'll spend before starting is harder to justify to a careful customer and more likely to run into a state limit.
  • Leaning on the word "non-refundable." It doesn't settle the question if a cancellation right or state rule says otherwise. Have a lawyer review your deposit wording once.

Go deeper

GuideHow Much Deposit Should a Contractor Ask For?How to size a contractor deposit from what you'd lose if the customer cancels, check state limits and cancellation rights, and write terms customers sign.GuideHow to Get Paid Faster as a ContractorHow contractors get paid sooner: payment terms set at booking, invoices sent the day the job ends, pay links, deposits, progress billing and reminders.HVAC guideHow to Invoice HVAC JobsWhat to put on HVAC service and replacement invoices, plus warranty registration, permits, deposits, financing payouts, maintenance plans and refrigerant records.Auto detailing guideHow to Invoice Auto Detailing JobsHow detailers invoice packages and upcharges, coating deposits, no-show fees, tips, maintenance memberships, and dealer and fleet accounts on net terms.
Progress billingProgress billing is invoicing a job in stages as the work is completed, instead of sending one invoice at the end. Each invoice bills the part of the contract earned so far, either for reaching agreed milestones or by percent complete against a schedule of values.Payment termsPayment terms are the conditions on your estimate, contract and invoice that say when payment is due, how the customer can pay and what happens if they pay late. Common terms include due at completion, due on receipt, net 15 and net 30.Cooling-off ruleThe FTC Cooling-Off Rule gives buyers until midnight of the third business day to cancel certain sales made at their home, workplace or a seller's temporary location, for a full refund. It covers home sales of $25 or more and requires the seller to tell the buyer about the right to cancel.Change orderA change order is a written amendment to your contract that changes the scope of work, the price or the schedule, approved by the customer before the changed work starts. It records what changed, the added cost or credit, the new contract total and any new completion date.Cash flowCash flow is the money moving into and out of your business, and when it moves. Profit tells you whether your work makes money; cash flow tells you whether the money is in the bank when payroll, suppliers and taxes come due.Scope of workA scope of work is the written description of exactly what a job includes and what it excludes: the tasks, materials, quantities, locations and standards of finish. It's the part of an estimate or contract that defines what the price buys, so anything outside it needs a change order.

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