Handling an Order Cancellation Early in the Contract

Two lessons are learned from this case where a customer wants to cancel without explaining: One, contracts should spell out the exits for both parties; and two, some things in life are more important than business. January 31, 2012

I am no rookie to the residential kitchen cabinet business, but I just got hit with a (new to me) painful blow! My salesman and I have been working on a particular prospect/client for near six months now. We have had six-seven face-to-face meetings. We designed, redesign, and hammered out every little detail to a T! We have been to the house twice to measure which is 50 miles away. We have 50-60 hours into this project already. We finally closed the deal and signed the contracts on a Friday at near 7:00 PM. We went back and forth through the week with maybe five-seven e-mails regarding style, sink type, added soft close doors, sent layout for countertops, and naturally we released our full set of computer designs and measurements.

This morning I received the following e-mail:"Please stop work for all cabinets if you have already proceeded. Please inform me of what refund we may have if we do not proceed any further with this project"

Immediately I called to talk to him about this most unprecedented turn. He sounds like a different person. I have been prying for information, but he remains dead silent. I ask questions like: Is this something we did? Is this something we can work out? Whatís the problem? What do we need to do to get the project on track? He replies with short one-two word replies: No, I donít think so. Nothing to do with you. I told him I do not have an answer right now and he says he will call me back later.

I am baffled! We had a great rapport with this guy for six months until this attempt to cancel. I have already ordered the sheet goods, send the stain color to be matched, turned away another job for the time window he requested, threw a party for my crew for a good sales week, etc. I have real time, dollars, and obligation into this project. No, I havenít cut anything yet, but heck.

The job is north of 25K, and we really need it right now. What do I do? I received 40% deposit, and was contracted to receive 50% on delivery, and 10% on installation. What would you guys do? What is moral, ethical, and will feed my kids at the same time?

Forum Responses
(Business and Management Forum)
From contributor M:
A lot will come back to your contract but with little information on your customerís part it would seem the best you could do is to calculate what your out of pocket to date is (time and materials) and assess some reasonable penalty and see how that stacks up against the 40% you received. This would give you an idea of what, if any, refund is realistic. Itís hard not to jump to conclusions and think the customer is shopping, or shopped, around but it doesnít seem like with a five-six month design/negotiation process and a sizable deposit that would be the case. It may simply be the cold fact that he is facing a very small refund if at all but it would seem to me that initially it will all depend highly on your contract.

From contributor G:
There probably is a third party that is causing the difficulty. Even though you need the work, I guarantee this job would have been trouble no matter what. Once you clear your mind of these people you will get a good job in its place. Regarding the money - just be fair.

From contributor W:
I get a different read on this, and I have the feeling something came up in his personal life - health, relationship, something with his kids, etc. Contributor Mís comment about the contract is correct, but you do have his money. Your schedule and income is damaged by this. I would definitely hold your ground so that you don't lose money.

From contributor I:
What does your contract say regarding cancellations? Depending on the laws in your state you may have to give them a partial refund. I would create an invoice detailing time and resources used on the project, and send it to the client. Then offer to refund whatís left from the deposit, or send them a bill if it exceeds that amount.

Once they see how much they will lose by taking a refund they may choose to proceed. I would also run this by an attorney and perhaps have them send a letter to the client. Your best bet may be to run from this one. If they don't want to pay you now, chances are you will have problems when it comes time to collect the final payment.

From contributor B:
I've run into similar situations, have actually had two projects right in a row pull that off, after I'd collected a deposit. Both were well over the numbers you gave, in my small business, those two projects amounted to almost 30% of my work for the year. They did not do so based on anything I'd done, rather one almost lost her job and became worried about her financial future. The other suddenly was entertaining the idea of selling her house instead of upgrading it. Neither was my problem, except that events in their world created havoc in mine as well.

If only one of them had done it, I could have stumbled a bit, swallowed, and went on, but two in a row meant that I had to do something extremely difficult and let a very valuable employee go. It happens to the best of us.

A couple things that caught my attention in your post: ďThrew a party for my crew for a good sales weekĒ. While landing some projects is definitely something to be thankful for, my experience reminded me that the sale isn't really a successful sale until you collect the final check. At that point, you have delivered all you contracted to do, and in return, you have been paid the full amount. That is the best time to throw a party for the crew. You brought it up as a factor, so I commented on it.

Another thing is something that has already been mentioned, and that is accurately billing for your time. Obviously, a party isn't billable time, but outside of that, if your proposal records are detailed enough to clearly determine what parts of your project are billable, it is not that hard to figure out what you owe the client for a refund. It will likely be less than they were hoping to get, but that is normal and to be expected. On the other hand, if your proposal process doesn't really spell it out, you have a larger issue on your hands. For example, do you have a specific charge for the time it takes you to engineer the project shop documents, order the materials, etc? If so, then charging for that time is a no-brainer.

As far as lost work (what you will do for the next week or two) it will likely never be regained. For me, it was a stab in the gut, I had to take it and move on. I feel for you, and hope you can find a way through it without losing a lot, but remember, sometimes a very upset customer can do more damage on the internet than any money you lose in this situation. Some will do it to you no matter if you're fair or not, don't let that drive you, but rather just use it as a caution to be fair and honest in whatever you decide. In both the previous cases above, I offered to hold onto their money and project documents until things settled down for them, and both clients decided to move ahead with their projects a few months later.

From contributor Z:
Itís only been a week, maybe less. You could not have progressed far if at all on this project beyond your design time. Refund all his money - you will have a hard time proving you have 10g's worth of time and material in it already. If you kept 10% of the deposit I don't think he'd gripe.

My policy is if a client cancels before work has begun (actual work) they get all of their money back. Once material has been cut then itís prorated. Be the bigger person and return his money. If you pursue this and force him to proceed with the project you will have more trouble and more at risk.

From contributor L:
I would calculate the time you have on this job. You said 50-60 hours plus the released drawing. You turned away a job to make room for his. This is value. Figure out what is left from the deposit and give it back to them along with the invoice detailing the charges, including restocking fees for the ordered material.

A contract was signed and breached. You have legal precedence. It would be much better if you had wording in your contract that states how this would be resolved. If you don't I suspect you will have it added to your contract promptly to avoid this situation again.

From the original questioner:
I would love to be in a position to operate as Contributor Z recommends, but looks like I will be going more like Contributor L states. Contributor Z - I take that you are a little further along in establishing your estate than some of us but its good advice if you can afford to do it. As tight as money has been lately, I cannot eat all this. The party was based on the whole week.

I think from now on I will order all the material as soon as the customer walks out the door, and as soon as the wood arrives I will build the first ten cabinets then set it aside until we start for real. I have officially started the job, no more cancellations.

From contributor K:
I think part of your answer lies in the email you received from the customer. "Please inform me of what refund we may have if we do not proceed any further with this project."

According to that email, they (rightfully so, in my opinion) are not expecting a full refund. The wording leads me to believe that they found a third party and are weighing how much of a refund they would get against the third party price to see how much of a difference (over or under) it would be.

It is one thing to provide a "free estimate", but a totally different matter when you have 50-60 hours into a project. It would be totally appropriate to recompense your business the hours you have into this project X your shop rate plus drawings (since you already provided them (we provide them after final measure and when materials have been ordered). You should also add a factor of X% for the ding to your schedule (you need to determine what is appropriate) to cover your operating costs.

$25K Purchase Price
$10K Deposit (40%)
- $4500 (60 hours x $75/hr - adjust accordingly)

- $300 to $500 (drawings)
- $1500 (X% for ding to schedule - adjust accordingly)
$3500 refund to customer out of the $10K

While I agree with Contributor Z that you are only a week in, and assuming these aren't exotics, you can also use the raw materials for another project, so you probably aren't on solid ground just keeping the full deposit. I also don't think it is right for you to just "eat this", as it went way beyond something you just write off as a cost of doing business. Something to consider Ė a lot of suppliers have a "re-stocking fee". All that said, it also comes down to your agreement and what it says concerning refunds and the "rite of rescission" law (which is usually three business days) in your state. Get back on the horn to that job you turned down for this one and let them know the great news that you have opening in your schedule.

From contributor C:
I agree with Contributor K: "All that said, it also comes down to your agreement and what it says concerning refunds and the "rite of rescission" law (which is usually three business days) in your state." A quick phone call to your attorney, asking for an explanation of "right of rescission", will explain the rules for your state.

I added such a clause in my contract, then had the contract reviewed by my attorney. He advised that, since I was not entering into an installment loan agreement with my customers, I did not need to include such a clause. It simply did not apply to my usual 50-40-10 payment schedule.

I left it in, giving the customer an added benefit, in the hopes of letting the customer know that my contract was not a one-sided document. Hence, I normally do not order materials until three days after the contract is signed. I can violate that rule at my own risk, of course.

Again, make the quick phone call as different states often have different legal rules. Regarding the current situation you have, I would not take it personally. This is a business transaction. Lots of great advice by others has already been given.

From contributor D:
There is some good advice above but you need to remember a couple of things. You are entitled to be compensated for costs incurred and the customer is entitled to a refund. The general state of business is not the issue. The fact you need the work is not the issue. Something came up could mean he has another price or some issue may have come up (death in family or whatever) that was unplanned and he no longer feels he has the resources to do the job. His letter/email is looking for an amicable way out.

Suggestion: Present a bill for direct costs that can be substantiated, cancel any orders that can be stopped, and apply restock charges where necessary. Bill for the drawings and offer to apply the costs to the possibility of a future order and move on. Time spent making a sale is rarely considered direct cost.

What I guess I'm suggesting is offer him what he'll get if he sues you and don't waste a whole lot more time on it. Your time will be better spent working on (or finding) something else. Do it pleasantly and it may work in your favor either now or in the future.

From contributor W:
The only thing I don't know how to rectify is damage to the schedule. You promised time in your schedule, you are not making money during the days you are idle and generating another job. To me this is financial loss to be compensated by the customer. This happened to me on a big job that did not finish. The owner did not have the money to continue, and he was trying to press me to keep building without payment. What a mess, and I was hurt by it. I bailed, and I did not get compensated for the big hole in my schedule, but I was able to get even later. I mean, in the business world, are you simply out of luck when someone decides not to do the job after signing the contract? As far as the three day rescinding thing, itís designed to protect against high pressure sales, and your sales process took so much time I don't think the three day clause counts in this case.

From contributor Z:
Youíre going to have a hard time justifying the 50-60 hours of sales time. Your design fee if it was itemized in the contract is yours as well as any restocking fee to suppliers. Any product you already have as stock anyway can be disputed. I've been there. The quickest way out of this will be your least expensive. It will also keep the lawyers out of it. If you've already spent the deposit to pay bills and now no longer have all of it to refund then you have a problem.

From the original questioner:
I have some light shed on the subject. It looks like a happy ending for all after a near devastating blow to my (now sympathetic for) client! I was up until 4:00 A.M. this morning calculating costs, and writing my (wanting to back out) client explanation, after explanation of how and where his deposit monies were spent, and why any substantial refund would not be agreeable. After perfecting the long, and detailed letter, intended to amicably end this dreaded situation, I decided to sleep on it, and re-read it in the morning before sending it. Glad I did that!

The client called at 9:00 A.M. I told him that I am working on it. I informed him that it is very complicated separating all the billable, from the unbillables as I was working on, and that I would have some answers just as soon as possible. My salesman gets a call from him around noon relaying a message to me to "Don't work so hard at it, it may not be necessary". The customer asked for me to call him when I had a chance.

Afraid of what I may hear, and to not look overanxious, I wait about an hour to call him. He says: The news he was given yesterday, was not quite as bad as originally anticipated, and that he thinks we can move forward. At this point, sheer morbid curiosity overwhelmed me into shortness of breath, and begging him to please share with me, "What the heck is going on" I explained "I had been up all night dreading having to deal with this". He explained; He had a doctorís visit the morning prior where they informed him of the results of some tests that revealed him to be positive with cancer, and that a substantially shortened life was to be expected. He too was up all night, reading and studying his diagnosis and what it meant, and what he can expect as he goes through treatment, etc. He said, when he first received the news, he was inclined (and understandably so) to question the direction, and all big decisions of his life.

When I spoke to him on Monday, he had just received this news! This explains why he seemed to be short with me, and confused a bit. Wow! I don't know what to say! After the news set in with him a bit and he read up on what to expect he realized that he was going to have to proceed through life with some degree of normalcy. After all, he is not going to die today. I am sure some radical life changes are in the cards for this gentleman's lifestyle, but, he still has a beautiful wife, and some kids that will benefit from the renovations, as will he for some period of time.

I didn't get too detailed with him but he was in much better spirits, and he proclaimed in his own voice, "Proceed with the order as planned"! Thankfully, I didn't get so far as to having to discuss refunds or legalities before he voluntarily decided to go through with the project.

I really feel for him now. As I said, we have a great rapport, almost a genuine friendship now. My prayers were answered, now in more than one way. He has sure helped me, and my guys open our eyes to what is really important. Here I was, with my worst problem having to replace his order for shop time, and maybe lose a few dollars and/or hours, he is battling for his life.

Think about this when you fuss, and get frustrated about silly things in life - I know I will. I hope this has helped at least one of you to shift your perspective on life just a bit to be more grateful for the simple things. Please keep this gentleman in your prayers, and I promise, I will do the very best I can to see to it that I do the very best job imaginable for him, his family, and even his great-grandchildren to enjoy for many, many years. Thank you all for your help, and listening.