Deposit Schedules: Required in Today’s Economy

When I first began working in the kitchen and bath industry years ago, the normal deposits were 33% of the contract price. Generally, customers were happy with that, but sometimes they grew concerned that we might not do what we said we would. In those cases, we would work out a payment plan that allowed us to earn their business (and trust!) and for them to feel comfortable doing business with us.

The National Kitchen & Bath Association taught me that a fair deposit schedule was 50% deposit with the signed contract, 40% when we started the project and the final 10% upon completion. That’s exactly the formula what we used for the next 20 years. While we did have to make some adjustments when a customer objected that we were getting 90% of the payment before we’d done anything, we also had to explain to them that we were ordering the products needed for the project, and paying for them well in advance of needing them, so their project would not be delayed waiting for materials.

Additionally, we had to book the installers in advance to have them when we were ready to install their project. So there was definitely a clear reason for the payment schedule. Still we sometimes had to re-negotiate the deposit schedule with clients to give them a comfort level in doing business with us.

One of the things I’ve discovered over the past 20 years is that as soon as a customer wants to re-write your contracts, or thinks you should be doing business the way they think it should be done, it sends out the proverbial red flag. More often than not, these turn out to be the problem customers.

While many articles in consumer publications tell homeowners to never give more than 10% to a remodeler, I have to explain that everything we are ordering for them, for the most part, is customized specifically for their home. If I were having a new deck put on my home, there would be no need to ask for 50% of the entire project when the majority of the contract is for labor, but kitchens and baths are different because they are so product heavy.

Collecting Material Costs

One of the positive things home centers have done for this industry is made it a practice to collect 100% of the material costs before they order anything. Because of this, we have changed our deposit schedules. For installed projects, we get 100% of the materials for the deposit, 50% of the labor when we start the project and the 50% balance due upon usable condition.

Notice that we do not say “upon completion.” That’s because if customers do not want their project to be complete they can find ways to keep you from making it complete.

Our agreement says: “Usable condition is when the project is complete as per the agreement; any repairs or replacement of parts or pieces is no reason to hold out the final payment.” We then have them initial that as part of the contract.

We also have a clause that states: “We do not service projects that are not paid for in full as per our agreement.” This has saved us from the customer who wants to hold that carrot out in front of us to get us to jump through hoops so we can collect our money. Too often we found ourselves doing extra work that was not part of our agreement just so we could get the money that was due us.

For material-only contracts, we get paid in full. No more running around to collect the money due us, or having a COD that did not get collected because the homeowner was not at the job site when the delivery was made. When we have a project that is to start when the homeowners will be out of town, we get the job start money before they leave. Sometimes we’re paid weeks before because of this agreement.

We no longer will order small items or additional items for a project without getting paid in full for them. I got quite tired of throwing away the extra trim moldings or special shelves that the homeowner ordered and never picked up. After we would call them, they would say things like, “I changed my mind” or “We decided that we didn’t need that after all.” This is not to say that we don’t have open accounts with builders or contractors we do business with on a regular basis. Rather, this is for our one-time customers, and it seems to work well for us.

Building Credibility

I recently had a discussion with one of our designer’s customers who objected to our deposit schedule because he thought it offered him no protection if we didn’t do our job. When I called and asked why he was concerned, he relayed a horror story he’d experienced with another remodel project and how the contractor ran off with his money and never did the work as promised.

I asked the homeowner if he’d called any of the 100 referrals that we provided for him, and he said no. I then asked him if he had called any of our vendor references. I then explained that we take the time to provide plenty of references, and if he couldn’t do his due diligence to check on us, then I couldn’t help him any further. While he said he was not happy about it, he did in fact bring in the deposit for 100% of the material.

If you’re going to be asking for this sort of deposit, I believe you should provide your customers with the ability to check on you as a company and research your reputation. Along with the other information I just described, we also go as far as to provide the name and phone number of our banker, our accountant and our attorney. If a client still does not think this is enough information for them, then we figure we’re probably better off in the long run passing on their business.

In general, we’ve found that the more money that’s held out at the end of a project, the harder it is to collect. The longer you leave that money out there without asking for it, the harder it is to collect. As part of our job we, as business people, must collect the money due us when it is due us, not when the customers think they should pay us for our services.

Now I realize that in some states and areas of the country, you may be bound by local laws as to how much you can collect. Certainly that is a factor for consideration, but for those of you who are not bound by that sort of a restriction, I would definitely encourage you to try this deposit schedule. It will make you more money and give you more time to sell more projects instead of chasing your money.