Should You Require a Deposit on Contracting Projects?

One thing new contractors often want to know is whether they should charge deposits on construction projects. Should you ask your customers for money up front before you start working?

The short answer is probably “yes,” especially on big or complicated jobs. That’s because a customer deposit can help you smooth out your cash flow (which is always a concern to self-employed contractors) and protect you in the event your customer can’t pay or the job gets canceled halfway through.

The bigger the construction project is, the more thought you need to put into your deposit amount. Typically, you’ll want to ask for at least a little bit of money upfront with a signed agreement. The amount you charge to begin should include amounts for:

Any material costs you’re paying up front. The last thing you want is to lose money on a construction project. So if you’re paying for any materials out of pocket before the project begins, those expenses (or at least a majority of them) should be included in the deposit amount.

Enough to cover any labor expenses. The same goes for any other construction laborers or subcontractors you’ll be working with. Should a customer be unwilling or unable to pay their balance later, you don’t want to have labor costs coming out of your own wallet.

A minimum amount for your time. Even if you’ve been reimbursed for out-of-pocket expenses, remember that your time still has value. If you know you’ll be putting a lot of effort into the project in the beginning (and possibly turning down other work), that should be reflected in the amount you ask as a deposit.

Note that, beyond an initial deposit, you may want to ask for installment payments on large construction projects. Customers who have had construction or renovation work done in the past will expect this, and know that it’s an important step you have to take to protect your company and your future.

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