Deposit

How a contractor deposit works

A deposit is paid when the contract is signed or shortly after, before work begins. It reserves a place on your schedule and covers costs you have to pay before the job starts, such as special-order materials, permits and mobilization. Contracts call it a deposit or a down payment.

The deposit is part of the contract price, not an extra charge. When the job is billed, it’s applied as a credit, either against the first progress invoice or against the final one, and the contract should say which. A client who can’t see where their deposit went will ask.

Until you do the work, a deposit is money held for the client. In accrual bookkeeping it’s usually recorded as a liability, often called customer deposits or unearned revenue, and becomes income as the work is done. Even if you keep simpler books, plan as if it might have to be refunded, and ask your accountant how to record it.

The contract should also cover cancellation: how much of the deposit is refundable, which costs you can keep, and who owns special-order materials already bought. Some home improvement sales, such as those made in the client’s home, come with a short legal right to cancel, and a deposit taken during that window generally has to be returned if the client cancels. Check your state’s rules.

Types of deposits and upfront payments

Contractors use several kinds of upfront payment. They work differently, so name the one you mean in the contract.

A pro forma invoice is often used to request a deposit or material payment, because it shows the client what they’re paying for before any work is done. Whatever you call the payment, a state’s deposit limit may still apply to it on a home improvement contract, so don’t rename a deposit to get around a cap.

Why deposits matter

For contractors

A deposit limits your exposure before the first progress payment. Without one, you’re paying for special-order cabinets, permits and setup out of your own pocket for a client who could still walk away. It also filters out clients who aren’t ready to commit.

For homeowners and clients

A deposit holds a spot on the schedule and gets materials ordered, but it’s also money paid before any work is visible. Clients should know how much is allowed in their state, what the deposit covers, how it’s credited, and what happens if the job is canceled. A request for most of the price up front is a warning sign.

For contractors running several jobs

Deposits can make cash look healthier than it is. If deposits from upcoming jobs are paying the bills on current ones, a slow month of sales can leave you unable to finish work clients have already paid toward. Track deposits by job, and don’t spend them on unrelated costs.

How to set and handle a deposit step by step

1. Check your state’s home improvement rules for a deposit cap and other requirements. California, for example, limits the down payment to 10% of the contract price or $1,000, whichever is less; other states have their own rules or none.
2. Work out your exposure before the first progress payment: special-order materials, permits and mobilization.
3. Set the deposit to cover that exposure, within any cap. If the cap is lower than your exposure, plan an early progress payment tied to work you can complete quickly.
4. Write the amount, the due date, the refund terms on cancellation and how the deposit will be credited into the contract.
5. Send a deposit invoice or pro forma invoice, and don’t order special materials until the deposit clears.
6. Record the deposit by job, separate from earned income.
7. Show the deposit as a credit on the invoice where it’s applied, so the client sees it subtracted.

If a client asks to skip the deposit, decide case by case. A repeat commercial client with a clean payment record is a different risk from a first-time homeowner ordering custom materials.

Deposit example with numbers

Say a remodeler signs a $30,000 bathroom remodel in a state with no deposit cap. Before starting, the remodeler must buy $5,400 of special-order tile and a custom vanity, and expects $600 in setup and permit costs. The contract sets a $6,000 deposit to cover that $5,400 + $600 = $6,000 of exposure, and says it’s credited on the final invoice.

Midway, the client pays a $12,000 progress payment at rough-in and approves a $1,500 change order for a shower niche and upgraded fixtures. The final invoice applies both payments.

In California, the same contract would allow a down payment of no more than $1,000, because 10% of $30,000 is $3,000 and the lower figure applies. The remodeler would need another way to cover the other $5,000 of early costs, such as an early progress payment tied to completed work, and should check the state’s rules on progress payments too.

If the client in the no-cap state cancels after the materials are ordered, the contract decides what’s refunded. Under this contract, the client receives the special-order materials and a refund of the setup money not yet spent: $6,000 − $5,400 = $600.

Common deposit mistakes

• Asking for more than your state allows on a home improvement contract.
• Spending a deposit on another job’s bills instead of the materials it was meant to cover.
• Leaving refund terms out of the contract, so a cancellation turns into an argument.
• Ordering special materials before the deposit has cleared.
• Forgetting to credit the deposit on the invoice, so the client thinks they’re being billed twice.
• Counting deposits as profit when they arrive.
• Relying on one large deposit instead of progress payments on a long job.

A deposit should match a real cost, sit within the law, and be easy to trace from the day it arrives to the invoice where it’s applied.