Question
What is the minimum deposit you require before you will start manufacturing? California contractor law says subs can't receive over 10% beyond what work has been performed. I say I'm a manufacturer and can require as much as I want. How do you all work this out?
Forum Responses
(Business and Management Forum)
From contributor Y:
I get half down before I start the job.
The home centers require 100% in advance. They get around this law because of "special order." The law is void when ordering the product they are reselling. This law is only in effect when dealing with homeowners, not when dealing with contractors as a sub to them. You can require anything you can get.
I haven't done commercial work myself, but I read somewhere they don't get much of a down payment at all, if any. You provide the work and then bill and get paid later?
The idea is to take care of customers, spoil them if need be, so they can/will only use us. Then when you guys spit "pay now or get out!" our phone rings. If your business is well run, then you have operating capital and a credit line to utilize. Many small shop folks don't like to hear it, though.
For larger projects, whole kitchens, houseful of architectural millwork for a new client, I will get 50% down, 25% after 3 weeks, 20% before delivery and 5% upon substantial completion.
The "substantial completion" clause is important to have in there. If you have a missing knob or a hinge that doesn't function properly, it prevents them from giving you the last payment. This is why I also will not do 1/3 x 3 anymore. It leaves too much at the end of the job, giving the client way too much leverage. Usually they want free things out of you before they give up the check. With 1/3 of the job unpaid you will usually succumb to these demands just to make your client happy and to get the check. With 5% left, I'll walk off the job and send them a bill in the mail and/or issue a lien on the property. But 5% usually doesn't hurt that bad. I miss getting the big check at the end of the job, though.
I do ask for and receive deposits, but I'm considering moving away from that policy. It's always the most uncomfortable conversation we have with our clients and contractors, and I find it harder and harder to justify.
The argument always goes something like this... "By you giving me 50%, you're taking a risk, but also showing me that you're committed to the project and willing to absorb half of the liability if something were to go wrong. By the time the job is done, I will have shouldered the other half, having paid for all of the materials and labor to complete the project. This shows my willingness to absorb the other half of the liability."
It's ironic, though, that none of us ever pay for our cabinet doors ahead of time. None of us give deposits to our employees. Yet we feel somehow betrayed or taken advantage of if a client doesn't trust us with $25,000 of up-front money.
I agree that a well run business should have vendor accounts in place and a line of operating credit. It seems infinitely more professional to me to be able go into production with no more than a signed contract or purchase order. This is what our clients are already thinking. Shouldn't we start thinking this way too?
Asking for money can be awkward for many of us, but there is really no need to justify it to a client. Look at it this way - try getting an addition put on your house and tell the contractor you don't want to pay a deposit. Explain to him that his business should have lines of credit and once he's built the addition, you'll pay him in full. Of course you wouldn't, because you already know that's just not the way things are done. So why should a client need to be convinced we need a down payment?
There are standards in every business, and though the details may change (how much down and how many payments, etc.) common practice in this profession for residential work is to collect a deposit. I haven't had any problems yet, and actually contrary to contributor L's experiences, I've on occasion collected additional payments before the work was completed because unforeseen events caused the job to take extra time. But I also put a lot of effort into developing a good working relationship with most of my clients.
Anyway, that's what works for me, and as I said, different people and areas have their own standard operating procedures, and what works for one may not work for another.
I also think it is bad business practice to run your business on your money. The smart way is to make money with someone else's money. Not asking for that deposit and acting like you don't need it is just arrogant. "I'm a big company and I can handle the cash flow. I'll finance your job for you for free." Just not smart business practice to me.
How many threads center on "no-good, shiftless guy won't pay when I back up my truck, so screw 'em!" As the threads play out, it comes to light that there was no contract, or a poor one, no terms, no warranty, no reasonable preparedness for what is inevitable in business. That table saw may let you think you are a cabinetmaker, but it doesn't make you a businessman.
If you are dealing with thieves, then you need a defensive posture. But if you deal with honorable people, then be honorable yourself.
When you order a unit of plywood from a vendor with whom you have terms and pay on time, do you send him 50%? Nope. What about your finisher? You gonna pay him 50% first? Go out to dinner, where there are tables and plates - do you have to show some cash first? No. Trust is what business is based upon. Mutual trust.
It is almost like the more paranoid/desperate a cabinetmaker is, the more self-fulfilling the transaction. Thinking small will definitely keep you small. Acting starved will bring starvation.
You might have a problem walking out on that dinner without paying - and you don't drive a new car off the lot until they have all their money. I give money up front to any and all my employees whenever they need it. I need cash to do that, so it might as well be theirs, rather than mine.
There's no doubt in my mind that my cash flow would be smoother without deposits than with them. So for me, this is not about trust, or the inability to ask for money, or arrogance. It is about two things:
1) There is no doubt that I am perceived as a little less professional, that I lose a tiny bit of respect, and that I create a little bit of uneasiness when I ask for large deposits up front. I cannot ignore this fact.
2) My cash flow would be smoother if I received our month's worth of receivables reliably at the same time each month for exactly what we produced. Predictable, without any ambiguity... We built it, you pay it, no discussions. Deposits always add a level of uncertainty to the month's cash flow. Will they pay it? Is it too early? Should I ask for 50% on this $200,000 job, or should I ask for 25%?
This is the direction I'm headed. And you can bet that I'll be using it as a sales tool against all you deposit-seekers as soon as I get there. Hey, it's not personal, it's just business.
And we are not talking about getting 50% of a $200,000 job here. Or 50% deposits on commercial jobs. That will not happen. I thought we were talking about around $30,000 kitchens. I think any reasonable homeowner has to expect to have to pay something when signing a contract.
I mush have different clientele than you do. In my market I am lucky to see 2 - $30K plus kitchens a year. Most run from $15K to $25K. These people are at a different level than a $60,000 kitchen.
I learned long ago to get more of a commitment from a customer than just a signature and certainly a verbal. A lot of people today don't have the loyalty and integrity that people had in the 50's and 60's. I see it as, if they went down the street after signing your contract and found it cheaper, they would cancel the order with you or squeeze you to meet that lower price. I just don't think it is wise business practice to not work on the customer's money.
Different professions work differently. If you want to argue that you don't like how cabinetmakers operate, you have every right to do so. But don't make it sound as though we're somehow making up the rules as we go because we're desperate or starved. Or that we have some crazy system out of touch with our clients. This is the way we operate and have for generations. If you want to operate your business differently that's fine, but don't compare us to a retailer or a restaurant or any other unrelated business. Apples to apples, contractors get deposits, architects get deposits, designers get deposits, woodworkers get deposits - it's how our industries work and it works fine. Nothing to do with trust or starvation or thieves or any other business.
I have yet to hear from anyone I know, never mind clients, that they're thinking what you guys seem to believe they're thinking. When I hired electricians to wire my house they asked for a deposit. I gave it to them and it never crossed my mind that he didn't trust me; it's just how business is done. I'm not sure where you get your perceived client's viewpoint, but it's definitely not been my experience. And as far as everyone being a gentleman, that's also not been my experience. Although I have yet to have any problems concerning money with my clients (knock on wood), realistically you never know what a person is really like from several meetings. You won't really know if they'll pay until payday comes.
I think it's less professional to not ask for a down payment. It's outside the norm and makes you look like you're afraid to ask them for money. But that's just my opinion and it's obviously not for everyone.
The job that got me asking this question will be close to $70k with a general contactor that I haven't done business with in the past. This is a high end contactor with an excellent reputation, so I'm not worried about getting paid. But as a small shop I am worried about being able to feed my family before I get paid. This contractor has been using a shop that caries the job net 30 days. I'm finding that the higher end I get the harder it is to get front money from general contractors.
I did meet with the GC this morning and we're working out a schedule that will work for both of us. I'll be getting money for materials up front with some progress payments as the job progresses. A $70k job with potential future work is hard to turn down in what's been a slow season. Thanks for all the input.
The analogy of paying for a hamburger and fries up front is misleading too. When you pay for a burger and fries upfront, the expectation is that the manufacturer will begin immediately on production and you will possess that burger and fries within a few minutes. I also believe that not having some sort of commitment from your customer will leave you on the short end far more times than not. So what is the magic answer?
I think it will vary depending on the life cycle of your business. If you are a new, smaller business, then it makes sense to collect a larger deposit on your initial jobs. But don't collect a large deposit on every job, or you will end up avoiding your phone if things go wrong. Instead, collect a schedule deposit just to keep jobs in the pipeline for two/three months. If your schedule goes out more than three months, don't collect a deposit on those jobs. Larger shops will have lines of credit and supplier accounts they can depend on and will have faster production schedules so they can adjust their deposit schedule too. However, the larger shop can get into the same trouble as the smaller shop, so be careful when collecting money.
When you collect a deposit, you are making the commitment to complete their job according to prior discussed schedule. If you can't perform to your terms, that is when the problems arise, so to all you new guys just getting started, be careful. This deposit issue can really bite you if you aren't careful!
Contract number two handles the installation, should I want to do it or sub it out to others. This contract is based on actual time spent on the job site. If more time is to be spent on job site, weekly checks are requested. So regardless of how many trips I have to make to the job site, my expenses and time are covered by the final check.
Mechanic's liens are fine, if they ever sell. For a one man shop, taking a $7400 and $5000 hit nearly killed us. I now take a 70% deposit up front. They don't want to do that, they can walk down to Lowe's and pay 100% for crap and wait 2x as long to get the product.
The market you are in, or moving toward, will determine where you are on the spectrum - "full payment before I unload" to "send me a check when you get a chance." When I have a new customer in a 7 year old car focusing on price, I get a 50% deposit. Writing that check focuses them and is good "earnest" money. I have some customers to whom 30,000 is a good (or bad) morning in the market - sort of like me paying 25 cents for a tomato on a sandwich. If I waited to unload, and they are ballooning across Africa, I'll have a long wait - but the work is still needed on the job. Know your customer as well as possible.
Decide where you want to be in the market and then work towards that. If you like the 10,000 kitchen arena, and feel the Chinese won't replace you, you are profitable but not sure of how you get paid, fine. If you want to be bidding 100,000 kitchens, then you have to work to get there. And hanging around the back of your truck with your hand out absolutely will not get you there.
So many of the "collect deposit" responses have a thread of desperation in them. I think that cannot help but telegraph through to the customers. The customer searching for desperate (particularly strong in today's cutthroat market) will seek you out and expect a problem, or make one. And that will be the bulk of your business, and you'll always struggle, and you won't ever see any logic to giving your customers 30 days.
There is danger to those deposits as pointed out above - for both customer and shop. Shops go out all the time on the rob P to pay P principle. And asking for a deposit may alienate some customers that aren't used to the process. A good policy is to publish your payment policy so it is out there early and clear. You can always back off a bit if you feel it is hindering negotiations and the customer warrants it.
I was at a home the other day while four brand new Mercedes were being delivered. The lady of the house called up the dealer and said she was considering "something sporty" for the summer. He responded by delivering four cars to the house the next morning, inviting her to take a few days to see what she liked. 2 or 3 hundred thousand dollars worth of cars (or more - I don't know that market) sitting there on a phone call, full tanks of gas. When she solicited my opinion, I replied I'd need a few days driving to decide. The dealer invited me to his showroom, offered a card, but did not deliver any cars to my house. He knows his customers.
To elaborate on an earlier post... A lumberyard/millwork shop offered all approved customers - mostly residential builders - 60 days to pay. At the end of each year, 1% to 2% (or more) of the previous year's sales was rebated to the customer, in his private name (not corporate), depending upon how much he bought. All invoices had to be paid on time.
This way, the builders could order a house, get it nailed together, and get a draw to pay the lumber bill. Or order all the interior trim and get it in the house and be nailing it up for another draw. The lumber bills always got paid on time, even if the subs (standing out by the truck with their hand out) didn't.
This place easily had the best products and highest prices of anyplace. Also had good service. But contractors flocked to it for those terms. Granted, if you were one day late, they came down on the slow pay with the full wrath of god, but the slow pay was rare. Yes, it did take cash to do this, but their sales increased, and profits soared.
They made all the builders dependent upon them. You could not force them away. When rebates were mailed out, the lot was full of new cars and trucks, all the top customers comparing their windfalls. Am I the only one that sees the logic behind this?
Contributor D, something to consider, for those that order their doors, etc... I am sure that on the first order they were required to pay in advance or COD, and after that, established a relationship with their vendor, which included terms (which are usually 30 days from my understanding). This relates to smaller shops who don't have a business credit rating.
The problem with not collecting deposits on a custom product/service is that there are still many expenses presenting themselves as a project unfolds. This exposes the way a lot of small businesses think. They look at the end of the project to collect their profit and pay things off, which leads to a perpetuation of the Peter robs Paul mindset. Now, imagine this scenario without a deposit, or worse yet, they have a problem client and don't get their profit - compounded tremendously for no reason.
Always collect deposits, and get as much as you can. Turn your thinking on deposits around to reflect the realities of your business expenses and realize that you are not just collecting a deposit to buy materials, but you a have a business to run and expenses to cover. Why do you feel bad about collecting any number under 100% when you are providing the products and services you are providing when the home centers, who make their suppliers wait 60-90 days, collect 100% upfront?
For remodeling services, here's our schedule (what the client is told):
25% Order - (covers drafting services, samples preparation, administration, manufacturing labor, partial materials)
25% Measure - (a week later - covers remaining material purchases)
25% Job Start at customer home - (covers labor, electrical, plumbing, inspection deposits)
15% - Completed Inspections (covers remaining expenses for electrical, plumbing and labor)
10% - Job Completion (what we as a company make, which helps run and grow our business - cash, money order or certified check required on last day or no work begins - doors are hung on last day)
Custom cabinetry or countertops only -
75% - Upfront
25% - Delivery (cash, money order or certified check required)
If you do a good job for your customers, respond to their concerns, service them properly, I guarantee you that none of this will matter to them... Customers are more concerned about getting the end result they want without being screwed. Give them what they want and service them responsively and you will set yourself apart from others who are still on that journey to realizing they are in a business.
One of the things I tell customers upfront is that I don't fund customers' projects, customers fund the customers' projects. That's all a long-winded detailed way of saying always collect deposits as a matter of policy, and if they balk, just bring up the fact that the home centers require 100% upfront for stock cabinets.
The more confident you are in your policies, the better you will be perceived. If you are not confident in your policies, you will come across as vacillating and cause your client to question you.
P.S. Make it a practice to always order all of your materials upfront.
A deposit is not leverage in any way I can think of. A deposit is a payment towards services. Your only leverage is the physical product you've built, until it's delivered and installed, at which point your leverage is gone. A lien is leverage, but that's a different post.
And blackmail? That one really doesn't make sense. I think you either have a very skewed view of the business world or have no understanding of what blackmail is. Asking for payment on services rendered is far from blackmail.
These comments in addition to the "trench warfare" remark lead me to believe contributor D's either had very poor experiences with other cabinetmakers in the past, or is just completely out of touch with how we really work. I have very good relationships with most of my clients and the bulk of my work is repeat and referrals. No warfare or blackmail or even so much as a nasty look.
Case in point, on my last big project I ended up falling behind for several reasons. I kept my client informed and updated throughout the process, though, and at the end of the job, as I was apologizing once again and collecting my last check, I was handed an envelope with my cash bonus. Now I did throw in several little extras toward the end as a way of apologizing for the delays, but this exceeded by far whatever those would have cost. My client was obviously happy about the outcome of her project, as well as the way I conducted business with her. So I guess she wasn't really thinking all that much about her initial 40% deposit. She was just happy, and so was my wife, who got a little extra play money.
Anyway, we all have the right to make our own decisions on how to run our businesses. To collect or not is obviously one of those decisions and far be it for me or anyone else to say it's right or wrong. I say do what works for you, just lay off the nonsensical comments that don't help anyone. Just because someone thinks their way is better than the rest, doesn't make it true.
"So you consider a deposit, blackmail?"
I said nothing of the sort. And as a matter of fact, a deposit is for services that haven't been rendered. You're not hearing what I'm saying, and clearly don't understand the circumstances that guide why I feel the way I do. We'll just have to agree to disagree.
We are mainly residential, but have done commercial, and have never contracted a job without a deposit. If you are doing a $100K project with no deposit, not only do you expose yourself to immense liability, but you give that customer an interest-free loan, with you paying the carrying costs, that I don't think you are factoring in. Even if you have it covered in cash, the company cash you are using is losing money on any interest/asset management while such a project progresses. Even if you are financing the project, you are losing money carrying the costs (not to mention the added administrative costs). If you are then going to add additional carrying costs to your quote (which is legit), the marketing edge you thought you had is minimized via high prices. A lot to be factored in...
When you said... "I know that deposits are a vital part of the residential market when working with homeowners and small contractors. I wouldn't work for them without a deposit either."
My question would be... Why the distinction? They are still projects on a different scale. Both markets can have credit pulled and assets attached. Both can sign contracts. If you would collect a deposit on a small to large scale residential job, and wouldn't work without one, I don't understand your reasoning for not doing so with commercial (much bigger risk, and longer to get paid). You mention it as a competitive advantage, but realize that while you may benefit short-term on legit companies, with the business credit to sustain it, and who will pay you after 60-90 days of invoice, word will also get out to the not-so-legit, who are all too ready to take advantage of a company who does this... All you need is one to take advantage of you on a large scale project, and you are not only out of the project money, but then also the legal costs (and years) of collecting it. Meanwhile, they go out of business, open under another name, and move on, with you not collecting a dime (or they incorporated in Nevada - good luck).
My opinion is that, as a company policy, you either do or don't accept deposits, but you absolutely should accept deposits. I think it exposes you, your company, your employees and your family to too much unnecessary risk for really not much return on investment. Do a Benjamin Franklin T-Bar on it, and it will become quite clear.
I have had two major bankruptcies occur during projects over the years. The first was a contractor that I initially lost $45,000 to, and the second was a homeowner where I initially lost $70,000. I received deposits on both jobs, yet the problems didn't occur until the very end (I eventually received $15,000 and $50,000 months later through the power of the lien).
You claim I'm taking a huge risk by not requesting a deposit. I don't believe that deposits protect me. They don't guarantee me that a contractor or a client is financially sound, and they don't guarantee me that the client is trustworthy. All it does is get me some limited startup capital that I will eventually exceed anyway.
For anyone to understand my position, let's look at a typical scenario for me. The job is $100,000. It comes with a 25% deposit that I invoice for on the 25th of the month preceding the start of construction. The following month I will build the project in its entirety and submit for a progress payment for the remainder on the 25th of that month. I am into that job $75,000 of my own money anyway; if something goes wrong, that $25,000 deposit isn't going to save me.
8 out of 10 contractors that I work for give me that deposit no questions asked, as long as it's part of a normal billing cycle. The other 2 out of 10 either can't (the bank won't give them the money) or won't as a matter of policy. Their inability or unwillingness to give me that deposit is not a reflection on their health or trustworthiness of their company.
For the sake of argument, let's say I continue to solicit deposits from those contractors who are willing to pay them. The advice I'm getting here is that I should not work for those other 20% of contractors, even though they are strong companies and even though I have the ability to finance the project without the deposit. In this economy, does that make good business sense?
I think it would be naive to ignore my point of view gleaned from 20 years in this business. Just because we cabinetmakers don't want people to be uncomfortable with our deposit policies doesn't mean they're not. The truth is I'm not in a position yet to not accept deposits. It would take about 300 or 400 thousand in the bank for me to comfortably operate without them. But I'm not going to ignore it like some of you. It's a real issue.
I do laugh, however, when I hear, "no cabinets coming off this truck unless you got cash or a certified check!" It's a two way street. If a supplier tried that, I would be buying elsewhere!
I use several different types of terms for my clients, and they are based on the level of trust at the point in time we are entering into a contract to do business together.
For individual homeowners, I seldom know them, or their fiduciary reliability, well enough to offer anything other than multi-payment terms. I use two differing types of terms for these clients - 50% down to place project into production schedule, 40% due prior to delivery, and 10% upon completion, or 50% down to place project into production schedule, 40% due at delivery, and 10% due upon completion.
The first is used for those I have absolutely no financial information on, nor an effective way to check into past payment history. The second might be used for friends, friends of a friend, or a builder that has come highly recommended by another subcontractor, or another builder.
The stipulation that the deposit is due to place project into production schedule is based on the fact that if there is no financial commitment from the client, then we make it too easy for them to simply change their mind three months later (or however long a time passes between the signing of the contract, and the beginning of production), and then you end up with a great big fat hole in your production schedule that will be impossible to fill at that time.
The second important part of the 50% deposit for those you are not familiar with is that you are, as has been mentioned on multiple occasions in this thread, about to produce a custom product that can't be used by anyone else.
For my repeat clients, like builders and some individuals, I offer several types of terms, but most would fall into the 5% discount if paid within 10 days of delivery, net 30 category. These are people or companies that either have stellar credit references, or have proven over time to be credit worthy, and do business with us on a fairly routine basis (a level of trust has been established).
The conditions of the terms do state that they (the purchaser) will be billed in full if the project is delayed, and the cabinetry cannot be installed on the agreed upon delivery date, and all but the installation portion will be due per the stated terms.
As for builders who cannot pay a deposit, that typically means they do not have what contributor D is saying he has, which is the ability to pay from their own resources (in my opinion, they either should have a line of credit, or the cash flow to pay their subcontractors), just like we should have the ability to carry the cost of our clients with net terms projects.
I run my shop on our terms and they are ours, not the contractor's. They will all give you the same line, and now the new line is, "I haven't gotten paid yet, so I can't pay you." I hear this all the time.
I don't care what anyone says or how others operate - our terms are our terms. I have several pieces of advice to hand over, and they are from hard knocks.
1- Get a deposit or material draw, and place your material draw or deposit request when you submit your contract or shortly thereafter.
2- Bill or demand a check when cabinets hit the site.
3- Finish as fast as possible and bill for extras, changes, and final portion of original contract.
A mechanics lien only works if you place it before the bank and owner close on the property. So demand your money immediately. No bank or title company will close on a property with a lien on it.
Credit checks - it takes ten minutes to find out who pays and who doesn't. Don't go out on a limb and expose yourself, no matter how desperate you are for work.
This serves two purposes. The first is to eliminate the false sense of security that depositing deposits into your working account gives, and second, we earn interest on the money (and know that the deposit check is good). In the past, I have just held the deposit check in the job file to prevent confusion, but started to worry about a check being bad, and me not being aware of it.
In addition to the custom built aspect of the work, once the product has been unloaded from the truck, it is no longer the shop's property. We run into a consumer about once a year that is building their home by soliciting work, paying a deposit, then stiffing the company for the balance. They are building out of their pocket, no bank, and a lien doesn't mean jack to them.
When we run into these crooks, the court records will show they usually settle for half of what is owed, sometimes they squeal quality issues and get away with paying nothing. They always give themselves away by their attitude and we check them out at the courthouse website before bidding.
We will do government work with no deposit because you will get paid. Homebuilders all pay up front deposits and after install, I'd better be paid before a week passes by or his phone will be ringing nonstop. Not a problem to visit the job site and ask all the other subs if he is paying his bills on time if the jerk dodges my calls.
My advice to those who feel embarrassed to ask for money? Sell your tools and equipment and spend the cash on counseling.
Is this comment made in defense of deposits? I can see both sides of this issue.
By their very nature, custom cabinets fit only one place. If the box stores can get 100 percent at time of order, on stuff that has been sitting in a distribution center for 5 months, surely you won't squawk for a deposit on a custom order, and pay the balance less install fees just minutes before I carry them in your house. You still have the leverage of my install fee to resolve any issues.
I am a smaller shop, though, and don't have quite the running capitol to work without payment for months at a time, although even if I did I would still want a deposit so if the customer goes bad at least I haven't lost everything. For me it is partly a security issue. I like the customer to show they are as committed to their project as I am to building it. Signed contracts and their word aren't good enough in today's economy for me to have my shop work for free for a few months. I also don't send bills for the final payment. My contract states that final payment is due upon delivery/installation, just like you would expect. I can see how this system would not work as well with commercial work.
What I see as the missing component here, is that some don't realize that a hamburger has a 700% markup. Most lumber has a 300% markup, and they are commodities.
It's exactly like consumer electronics: a DVD player (by economies of scale and distributed manufacturing) only costs $1.35 to make, and it sells, after the middlemen, for $99. A chain store can afford to have a 100% money-back guarantee because a single sale can more than compensate for 2 or 3 defective returns.
I used to guarantee satisfaction. I naively figured that whatever they didn't like, I could fix (even at a loss) to their satisfaction. I hadn't realized that there are people who have learned how to appear normal, but are actually borderline psychotic. A lot of people hear only what they want, and quite a few are irrational. None I have met understand physics, and most refuse to think about the repercussions of their actions. In short, some people cannot be satisfied. And there are quite a few who watch Las Vegas and The Sopranos, and want to imitate their heroes. (Intentionally trying to defraud businesses like ours, because they are always painted the victim.)
I don't mind paying a deposit on cabinetry. It annoys me to have to pay twice, so I tend to pay in advance. I am treated generously by my stock cab rep, and I try to steer business to him.
In answer to the original post, 50/25/25 on most jobs, and material + 50% labor on small jobs. If a job is huge, I break it up into smaller bids, and run 50/25/25.
Our line of work, by its nature, has a smaller profit margin than retail, and so it is natural to expect our clients to make a commitment. We didn't ask for the work, they came to us.
I’m curious how many of you (contributor B is excused) actually use a specific customer’s deposit for that customer’s job. In other words, how many of you are actually securing that deposit in a separate tracking account? I daresay that contributor B is the exception. (Not picking on you. I actually admire your business model.) I would venture a guess that many, if not most of us, put the deposit into our general fund, earmark on a schedule that we have collected the deposit, and when the time comes, we begin work.
Of course it goes without saying that unless it is a special order like book-matched Peruvian walnut or Enkenboll carvings, most of us are buying plywood by the unit and probably keep a ready stock of the major hardwoods, drawer slides and hinges. So when the guys get ready to build up the cabinets, all they have to do is go over to a stack of plywood with their cutlist and get after it. After all, we are dependent on cash flow to keep our shop stocked, right?
So how many of you can readily refund a 100% (or nearly 100%) deposit if the customer decides to cancel prior to you actually beginning work? I daresay probably one out of 100. Probably that deposit has already been spent on labor and materials, which is my reason for suggesting that deposits are a dangerous animal to be safeguarded and watched as closely as the collection of the final check.
Granted, some of the smaller shops who are only doing one job every two months can better track this. But I guarantee you that the smaller shops can’t refund a full deposit for a customer who cancels on them. The more reason that smaller shops need to be careful in the amount of deposit they collect and the number of customers they put on a schedule.
I’m curious what the general consensus is, and I just finished reading an article in our local paper about a small cabinetmaker who has been arrested for violating a fiduciary trust in which he collected a deposit and did not begin work prior to the customer canceling, and refused to return the deposit.
On another note, I'm beginning to see this debate a little clearer now. I see this issue moving down two separate trains of thought, in two different markets. The first market is the residential, small shop. The jobs are for individual homeowners or small, one-job-at-a-time contractors. These jobs are probably $10,000 to $50,000, performed in their entirety one at a time. There's probably a little delay between jobs or maybe a slight overlap, but for the most part the mindset is the same - get the deposit, buy the materials, build the job, collect the balance. The day the deposit is requested and the day the balance is requested will be on any given day of the month, whenever the contract is signed or whenever the cabinets are delivered.
I view this market as kind of artsy, like having a portrait done, a piece of furniture built, a custom motorcycle made. I can see the necessity of the deposit, I can see the mutual need for trust, and I can see the cash flow pitfalls of not following this type of schedule.
The other road is the one where the shop is always busy. There's a long backlog of work, multiple projects are being worked on at any one time, there's 10 to 50 employees on the shop floor, the work is high end architectural, and the projects range in scope from $50,000 to $500,000. The cash flow always works the same, going from the homeowner or the bank to the contractor and then to the subcontractors in predictable 30 day cycles. The cabinet shop has no need to pre-qualify the homeowners, as that has already been done by the architect and the contractor before work on the 5 million dollar house was ever started.
If your world is the first scenario, then I think the practice of receiving deposits is totally appropriate and expected by all the parties involved. If your world is the second scenario, then deposits are tolerated as long as they're a part of the cycle. Not requesting deposits wouldn't be viewed as a good thing or bad thing. In fact it probably wouldn't even be noticed. The money flows in its cycle month after month, and the only thing that upsets the balance is if you request money outside of that cycle. The idea of getting a check the day of the contract or the day the cabinets are delivered would be viewed as unprofessional, but maybe you'd get a superintendent to do it once as a favor. But if the practice continued, you'd no longer be asked to bid work. These two worlds are like oil and water. I think we should probably acknowledge that and give each other a break.
To not steer too far off the subject, the general operating fund needs to have enough in it to refund the customer's money, less your time, labor, and parts already cut. They can have the parts - we don't care - but they are going to pay for everything we do when there is a refund; it's in our contract.
It's not just about volume, cash flow and the like; it's about every job being profitable, and not letting anyone dictate how you run your business and pay your bills. And you sure as hell can't turn back the clock and get your time back.
For myself, and I would guess other small guys also, there may be a closer relationship with our clients. I've never had a client who wanted to cancel an order, at least not yet (knock on wood). And I don't really subscribe to the "do it my way or else" attitude either. I try to do whatever I need to make sure my clients are happy, and so far it's worked for me. All my business is word of mouth and referrals. And so far I've never had a problem collecting money. I know it will happen someday, but I agree that bigger shops, like the commercial one I started out in, have to run much differently. As attractive as the money is in a bigger shop, I'd rather keep it small and keep some of the enjoyment.
They have the product, they probably had the money - they just applied it to the wrong payable, most notably their truck or bass boat payment, or a dream vacation they couldn't afford. Beyond the obvious cash flow problems, I don't have time for it. Nothing personal, but I'd cheerfully suggest trading somewhere else, saving us both some hard feelings, and possibly the weaker of us some physical trauma (LOL). It gets personal real quick when payment is stalled.
Where I see the issue is in perception. Far too often, small shops are financed on a shoestring, hardly enough cash behind them to pay the lunch truck. Without a deposit, they couldn't produce the price of the materials. If you don't have the cash on hand to finance 90 days worth of operations, you are on perilous financial ground in my opinion. Far too often the new car or the boat takes too much of a strain on the small business cash flow.
If you take a deposit to schedule, and the job is cancelled before production starts, could you refund the deposit? If not, you had better be looking for another line of work - you'll need it some day.
1. "Custom" work cannot be used by anyone else. Therefore, if the customer wants to back out or even make drastic changes, they should logically pay for any work that is already completed.
2. Depending on the size of the project, it may be more than 30 days for completion and this helps with cash flow to pay for material and labor on this project.
3. Most companies do a very poor job of controlling cash flow and this helps to establish (at least a little) discipline in this area.
4. Materials and labor cost real money. The customer should be willing to pay for materials, engineering, design and labor that is being undertaken on their project.
I was asked to bid on a wealthy architect's personal house. Jeffersonian style home, all mahogany millwork. I submitted my proposal and was declined because I required a deposit on a $100,000 job. While at the jobsite, I watched him pay his subs by cash under the table, even deducting time/money because they went to the porta-john on the clock. I walked away without a worry. He gave it to someone else, on his terms, and then didn't pay them. They went out of business fighting to get paid, and he's still in his two million dollar house.
I'm not envious of the wealthy, and I'm not saying every wealthy person would act this way. But, I don't feel there is any shame in requiring a deposit for a custom product, nor do I feel it is unprofessional. I am a professional and act as such. Even lawyers require a retainer.
The assumption that because someone has a lot of money, or appears to, is more able and willing to pay, is bull. What they really have is the resources to not pay. Unless you can afford the legal talent equal to theirs, you are out of luck. You can get a lien on the property. I have gotten three liens in 35 years in this business. I even got paid on one, 14 years later and partially.
Then there is what might be called "The Contractors Retirement Plan." This works especially well for fast growing builders that start to get a lot of publicity from doing bigger and bigger projects. Over a couple of years they start getting ever more ahead of their subs in money owed. By giving more and more work to subs and gradually slowing payments or using partial payments, in no time the plumber will find himself in arrears $70, $80, $100,000, with no choice but to keep working for the contractor in hopes of collecting his money. Multiply this by the electrician, the framer, mason, etc., and there is a huge incentive for the contractor to cash out by doing Chapter 13. Instant retirement to Colorado.
If you are selling Mercedes, they can easily be repossessed and resold at near full value. Try repossessing a $40K kitchen, much less re-selling it.
Everyone (at least everyone with any sense) works with as much other people's money as possible. Do you think that the GC is financing his jobs out of pocket? Asking for a reasonable deposit, far from making you look desperate, tells customers that you have experience and a track record. It is also much easier to get that last $5000 than getting a homeowner to write a $35,000 check at the end of a job when every other sub is in line to get paid.
If you value image more than good judgment, finance all your jobs out of your own pocket, but as your hubris grows and you have more and more money at risk, it is a certainty that you are going to get your real financial education.
Depending on how long of a time transpired between her rejecting your contract and looking around for a better price, the minimum would be the original price with the designing fee you already collected not being put towards the total of the kitchen. If weeks or months have passed since this happened, your costs have risen since then and should reflect in the price. The price of fuel, lumber, steel, etc. have been rising 2-6% per month lately. So adding 10% to the price wouldn't be out of line. I would almost take it as an insult that she came back to you. Make her beg.
Comment from contributor A:
We used to do the 50/50 down payment but after a few bad experiences a local machinery dealer told me to do what they do. He puts 60% down, 30% upon completion at my shop and the final 10% upon installation. No one has complained yet, and if there's something they want changed we can fix it before installation.
