Size a construction deposit to what the job makes you spend before the first progress payment arrives: mobilisation plus the first material commitments the schedule forces. Not 10%, not a third and not whatever the last job used. Build that number line by line from the estimate and the schedule, then check it against any cap your state sets. Do that and you are never financing the client's job with your own cash in the weeks before the first bill is paid.
A percentage measures the wrong thing
A percentage scales with contract value. Early cash out does not. It scales with what the job demands up front, and two jobs at the same price can demand very different amounts.
An addition with a framing package and custom windows forces orders in week two. An interior remodel built from in-stock material forces almost nothing until rough-in. Apply the same percentage to both and one is underfunded while the other is over-collected.
Neither failure is free. Under-collect and the gap comes out of your operating account, which is the same cash meant for payroll on the other jobs. Over-collect and you are holding money you have not earned. Some states restrict that outright, and it becomes a refund argument if the client cancels before you have spent it.
What the deposit actually has to cover
The deposit covers two categories. Everything else belongs in progress billing.
- Mobilisation — permit and plan-review fees; engineering or survey you must pay for before you can start; dumpster and portable toilet set-up; temporary fencing and floor protection; job-specific insurance certificates or bonds; sub mobilisation charges for demo or excavation.
- Forced material commitments — orders the schedule requires you to place before the first payment lands: windows, trusses, cabinets, special-order doors, specified fixtures and appliances. The test is whether the supplier wants a deposit, will not take the item back or has a lead time that pushes the order into the first weeks.
Labor is the judgment call. If your first billing period ends after four weeks and the client pays on net 15, you will have run six weeks of payroll before money arrives. Some builders include direct labor in that window. Others carry it as the normal cost of progress billing. Decide once, then write the decision into your method so every estimate is sized the same way.
Margin, overhead recovery and a cushion do not belong in the figure. The deposit is not profit. It is the client paying for the client's job at the point the job starts costing money.
How to size it from the schedule
- Build the schedule from the estimate, not separately. The deposit depends on when things are ordered, and the order dates live in the schedule.
- Find the date the first progress payment actually lands, which is the end of the first billing period plus the payment terms in the contract. That date closes the window. The date you send the invoice does not.
- List every mobilisation cost that falls inside the window, at your cost.
- List every material commitment inside the window. Use the supplier deposit, or the full price for non-cancellable special orders.
- Add direct labor if your method includes it.
- Total it, round up to a clean figure and compare it against your state's limit.
- Put the itemised basis in the proposal so the client sees what the deposit buys.
Step 2 is where most deposits go wrong. A builder bills on the 30th and the client pays on the 20th of the following month, so the window is seven weeks, not four. The construction cash flow forecast your schedule already contains shows this gap job by job. The deposit is just the first entry in it.
Some states limit what a contractor can take up front on residential work. The limit is sometimes a fixed dollar amount and sometimes a small percentage of the contract, whichever is less. Taking more than the limit can be a licensing violation regardless of what the client signed. Read the statute or ask your licensing board. Check how it treats special-order materials and whether it applies to your contract type. Size to month one within the cap, never over it.
A worked example
These are illustrative figures, not benchmarks. Take a $180,000 two-room addition. A flat 10% deposit is $18,000. Built from the schedule, the first seven weeks look like this:
- Permit and plan review: $3,200
- Dumpster, portable toilet and temporary fencing: $1,400
- Excavation sub mobilisation: $2,500
- Windows — custom order, supplier wants 50% of $22,000: $11,000
- Roof trusses — ordered in week two to hit the framing date: $9,000
That totals $27,100. The 10% deposit leaves $9,100 of the builder's cash inside the client's job until the first payment lands. Start five jobs like that in the same quarter and the operating account is carrying a large share of other people's additions.
Now take a $180,000 interior remodel with stock cabinets delivered at rough-in and no structural work. Month one is permits, protection and demo, perhaps $6,000. The same 10% takes $12,000 more than the job needs. In a state with a cap it may not be allowed at all. Anywhere else, it becomes the first thing argued about if the job falls through.
When the cap is lower than month one
Sometimes the statute limits you below what the job forces. Do not front the difference. Restructure the payments so the money arrives when you make the commitment.
- Make the material order a billing event. Where your state allows it, invoice the supplier deposit on the day you place the order, with the quote attached, as a contract line rather than a progress percentage.
- Shorten the first billing period. Billing at two weeks instead of four pulls the first payment forward.
- Tighten first-bill terms. Net 7 on the first invoice closes most of the gap.
- Have the client buy the item. For appliances and specified fixtures, the client can pay the supplier directly, which removes the cost from your cash entirely. Say in the contract who is responsible for delivery and damage.
- Move the order date. Sometimes the schedule can absorb a later order without moving the finish. Check before assuming it cannot.
Applying the deposit: first bill or last
Where the deposit is credited decides how long it works for you. Credit it against the first progress bill and it covers month one. After that the job returns to the normal lag, and you spend in month two before month two is paid. Credit it against the final bill and it rides as float through the whole job. That is fairer to the builder and still fair to the client, who paid it to cover real costs.
Either method is defensible. Leaving it unwritten and crediting the deposit wherever the books happen to fall is not. State the method in the contract. After that, cash flow depends on bills that match the work, which is the subject of progress billing built on measured percent complete.
Where BuilderSolve fits
This method needs the estimate, the schedule and the proposal to read from the same numbers. In BuilderSolve the schedule is built from the line-item estimate, so the order dates for windows and trusses sit beside their costs. The proposal pulls the same line items to show the client what the deposit pays for. The client portal shows the payment schedule, and budget vs. actual tracks the deposit against the lines it was sized to cover.
There are limits. Purchase orders are in development and have not shipped, so supplier deposits are tracked as committed costs against the budget rather than as POs. QuickBooks stays the book of record. BuilderSolve reads from it and does not write the deposit back. If the back office is the bottleneck, the finance team on the services side can build the month-one schedule for each new contract and keep the billing calendar moving.
What to do next
Pull your next signed or pending contract. Find the date the first progress payment would actually land and list everything you would have to pay for before then. Compare that total with the deposit you were going to ask for. If the numbers do not match, change the deposit or change the order dates. Do it before the client signs, not after the window supplier calls for the money.
Common questions
how much should a construction deposit be
A deposit should cover mobilisation and the material commitments the job forces before the first progress payment arrives, and no more. That usually means permits, site set-up, sub mobilisation and supplier deposits on long-lead items like windows, trusses or cabinets. Build the figure from the schedule, at cost, then check it against any limit your state sets on residential down payments. A flat percentage ignores how front-loaded the job is.
is there a legal limit on contractor down payments
In some states, yes, particularly for residential and home improvement contracts. A limit can be a fixed dollar amount, a percentage of the contract or the lesser of the two. Some states treat special-order materials differently. Taking more than the cap can be a licensing violation even if the client agreed. Check your state's statute or licensing board before quoting, and size the deposit within the cap.
should a deposit be applied to the first or final invoice
Either works if the contract says which. Crediting the deposit on the final invoice keeps it working as float through the whole job. Crediting it on the first progress bill covers month one, then leaves you carrying the normal lag between spending and being paid from month two onward. The mistake is leaving the method unwritten and deciding later.
what to do if client won't pay deposit before work starts
Do not mobilise or place orders until the deposit is paid. Write it into the contract as the condition that starts the schedule, so the start date moves when the payment does. If the client objects to the amount, show the itemised basis: permits, site set-up and supplier deposits. You can also offer to make long-lead orders separate billing events, rather than funding them yourself.