How much deposit should I pay to a contractor?

December 14, 2008

QUESTION FROM A HOMEOWNER

I am renovating kitchen, two washrooms and installing hardwood floor in the dining room.  How much should I pay as a deposit to my contractor or renovator when I sign the renovation contract and before the contractor starts working?

ANSWER BY OUR EDITOR

The answer to this question is not straightforward.  The deposit the contractor or renovator is asking for is serving several purposes:

  •  Commitment money – the renovator needs to make sure that the homeowner is serious about his home renovation project and that he is not going to change his mind later.
  • Trust money – the contractor want to make sure that the homeowner has the money to pay for the kitchen and bathroom renovation and that he is going to pay him in full upon completion of the job.
  • Protection against loss – the renovator want to make sure that if he buys custom material specifically for this homeowner’s renovation project, he is not going to get stuck with the material if the homeowner changes his mind about the project, or about the selection of the materials.
  • Working capital – the contractor needs money to get started on the project, especially if it involves the purchase of large amount of construction material up front.

As you can see, all these reasons are for the benefit of the contractor.  The homeowner is naturally motivated to pay as little as possible, or nothing, at the start of the home improvement project.  Some homeowners believe that there is an “industry standard”, or “usual” deposit that is charged by contractors and renovators.  That is strictly speaking not correct.  The amount of the deposit needs to be negotiated as part of the home improvement contract, just as the total cost is negotiated.  It boils down to the question of thrust.  If the homeowner and contractor trust each other they will settle for low, or no deposit.  If the contractor doubts the homeowner’s trustworthiness, or ability to pay, he will insist on large deposit.  Conversely, if the homeowner does not trust the contractor, he will be reluctant to pay large deposit.  However, if the homeowner does not thrust the renovator, perhaps he should reconsider hiring him in the first place.

Answer provided by Ivan Koval, President, ReliableConnections.com

 

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