Deposits for contractors: when and how much to collect

Contractors usually collect a deposit when a job requires them to spend money or reserve time before the work is done, such as ordering equipment, special-order materials or blocking off several crew days. Size the deposit to cover those up-front costs, not as a percentage picked at random, and check your state's rules first, because some states limit how much a home-improvement contractor can take up front. Put the amount, what it covers and your refund terms in writing on the quote.

Here's how to decide which jobs need one, how much to ask for, and how to collect it without awkwardness.

Which jobs should require a deposit?

Not every job needs one. A same-day repair where the tech carries the part and the customer pays on completion doesn't. A deposit makes sense when you're taking a risk before the customer pays:

• Equipment and special orders. A furnace, a water heater, custom cabinets, a specific tile, a garage door built to size. If the customer backs out, you may be stuck with it or pay restocking fees.
• Large blocks of scheduled time. A three-day install or a two-week remodel means turning away other work for those days.
• Projects with permits and design work done before anything is built.
• New customers on large jobs, where you have no payment history.
• Rentals and bookings, like a dumpster rental or a seasonal cleanup slot during peak season.

Jobs that usually don't need one: small repairs, recurring maintenance for established customers, and commercial customers with an agreed credit arrangement.

How much should a contractor deposit be?

Start with what you'll actually spend or commit before the job is done:

1. Materials and equipment you must order for this job specifically
2. Permit and design costs
3. A share of the scheduled labor, if a cancellation would leave crew days empty

Then compare that with any legal limit in your state, and with what customers in your market expect.

Worked example (illustration only):

A heat pump replacement priced at $12,000:

• Equipment you'll order: $5,200
• Permit: $250
• Up-front costs: $5,450, or about 45 percent of the price

A deposit of around 40 to 50 percent would cover your exposure. The balance is due at completion.

A different example: a $4,000 interior paint job with standard paint you can return or use elsewhere. Your up-front cost is low. A small deposit to hold the dates may be enough, or none at all for a repeat customer.

The principle: your deposit should protect you from real losses, not fund the job before it starts. Customers are more comfortable with a deposit that matches what you're buying for them.

What do state laws say about contractor deposits?

This varies a lot, and the rules change, so check yours before setting a policy. A few patterns to be aware of:

• Some states cap down payments on home-improvement contracts. California, for example, limits the down payment on most home-improvement contracts to a small fixed amount or a small percentage of the contract price, whichever is less. Other states have their own limits or none.
• Some states require specific contract language about deposits, payment schedules and the start date.
• Cancellation rights. The FTC's Cooling-Off Rule generally gives buyers three business days to cancel certain sales made at their home, and many states have similar or broader rules for home-improvement contracts. Deposits taken during that period may need to be refunded if the customer cancels.
• Licensing. In some states, taking a deposit for work that requires a license you don't hold creates serious problems.

Your state's contractor licensing board is a good place to start. For contract templates, have an attorney in your state review them.

What should the quote say about the deposit?

Put it in writing before you collect a dollar:

• The amount, as a dollar figure or percentage of the quote
• What it's for, like "to order your equipment and reserve your installation date"
• When the balance is due, like "remaining balance due on completion"
• What happens if the customer cancels, including any non-refundable portion for special-order items already purchased, if your state allows it
• What happens if you cancel or can't start, typically a full refund
• How the deposit is applied, as a credit on the final invoice

Clear terms prevent the most common deposit disputes: "I thought it was refundable" and "I didn't know it came off the total."

When should you collect it?

The best moment is at approval. The customer has just decided, and paying the deposit confirms it. If they have to call the office later to pay, some of those approvals cool off.

Make it easy:

• Collect it on the spot when the tech presents the quote in person
• Or include a payment link with the quote, so the customer can approve and pay at once from their phone
• Don't order equipment or schedule the crew until the deposit is paid

Accept the same methods you take for regular invoices. Bank payments usually cost you less than cards on a large deposit, so it's reasonable to offer both and let the customer choose.

How do deposits work with progress payments?

On large projects, the deposit is the first step of a payment schedule. A typical remodel might use:

• A deposit at signing
• A payment at a milestone like rough-in complete
• A payment when major finishes are installed
• A final payment at completion

Each step should be tied to visible progress, so the customer can see what they're paying for. For more on structuring big jobs, see our guide to remodeling estimates. If customers need to spread the cost over time, our guide to customer financing covers that option.

How should you account for deposits?

A deposit isn't revenue for the job until the work is done. Most accountants record it as a liability, often called customer deposits or unearned revenue, until the job is invoiced. The details depend on your accounting method and tax situation, so set it up with your accountant.

In practice, make sure:

• Every deposit is tied to the quote or job it belongs to
• It's credited on the final invoice automatically, so nobody pays twice
• You can see, at any time, which deposits you're holding for jobs not yet done

FAQ

Is it unprofessional to ask for a deposit? No. Deposits are normal for jobs that involve ordering equipment or reserving significant time. Explaining what it covers makes it feel reasonable, not pushy.

Should deposits be refundable? That depends on your state's rules and your costs. A common approach is fully refundable within the cancellation period, then non-refundable for the cost of special-order materials already purchased. Check your state's rules first.

What if a customer won't pay a deposit? For jobs where you'd be buying equipment for them, it's reasonable to decline to order until a deposit is paid. Offer to explain why. Some customers just need to understand what it covers.

Can I take deposits by card? Yes, and it's convenient for customers. On large amounts, bank payments usually cost you less in fees.

How ServFlo helps

In ServFlo, any quote can ask for a deposit on approval, as a percentage or a set amount. Customers approve the quote online and pay the deposit on the same page by card or bank, so a customer can approve and pay right there while the tech is still in the kitchen. Deposits are tracked against the quote, then move onto the invoice automatically when the job is billed, so the balance is always right. Large jobs can be billed in parts by milestone or percent complete. See payments, quotes and invoices and pricing.

Photo by immo RENOVATION on Unsplash.