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Question DetailsAsked on 10/25/2017

Can a company take a deposit down for future work without beginning the project?

We gave a large deposit to a contractor for a home improvement project. They cashed the check but won't start work for two more months. Is this legal?

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Yes - though in a few regulation-heavy states like California the percentage or amount of any advance payment is limited by law. But basically, the amount depends on what you negotiate with the contractor and put into the documents before signing the contract.


Certainly, for work a couple of months out, unless this involves a lot of custom-ordered cabinets or doors and windows or such which he is ordering (and paying most or all the cost of up-front) now and will take up to 2 months to arrive and be ready to install, I would say a reasonable deposit would be not more than the smaller of 10% or a thousand or few $ (like for a new home build) - plus any funds needed for permitting and architect/engineer design services which may be included in his scope of work.


Some contractors do charge 50% or so up front - some have in the fine print that it is non-refundable and basically use that as a way to scam people, sometimes even making himself look bad so they will cancel, losing their deposit. This is an old well-known contracting scam used by disreputable contractors - particularly storm-chaser types who take the deposits from a bunch of people and then skip town, never starting work or doing just a pittance so they can say they did start the job.


Other very in-demand contractors, especially during building booms, may demand a high (50% to sometimes near 100%) up-front payment if they distrust the ability to pay of the customer, or if they have more work than they know what to do with. I know my Dad during the 60's/early 70's building boom, required an 80% payment be deposited into his builder's escrow account within 2 weeks before start of work or the job got dropped off the schedule (which was booked out 6 months or more at that time). During slack work (recession) years he demanded zero deposit on small (less than 2 day) jobs unless he doubted the client would pay readily, and only 10% up-front on larger ones until he was at the point of buying significant materials or was due a scheduled progress payment. So advance deposit amount can be used by a contractor to weed out the clients who might be thinking of having second thoughts on the job. And of course, the larger the job, the bigger hole it will leave in the contractor's schedule if it is cancelled, so a larger or earlier deposit payment may be applicable - or a smallish "earnest money" one at contract signing then maybe a larger (say 15-25%) one a couple of weeks to a month before start of work when he is committing to materials orders and crew scheduling for your job.


Since you have already paid it - getting it back without cancelling the contract (which could also be a major hassle and cost plus a schedule nightmare) is unlikely. Did the contract not include a start of work date or at least a completion date ? In the latter case, if only a completion date was in the contract then it would be up to the contractor when to start, provided he did so in a timely fashion to be able to reasonably expect to finish by the contracted date.


Also, and this may more directly address your concern, in most states he does not have to escrow or put the money in trust for your job. Generally, he can use the funds for operating funds on other jobs, basically "kiting" the jobs by using deposits and even progress payments to cover bills due on previous/other jobs, and planning on paying off the expenses of your job with funds from a future job ! Not fair, but the law generally allows it provided he plans and expects to be able to successfully do it, and the lawyer types and politicians in general will not outlaw it. (If he can not reasonably or does not expect funds from follow-on jobs to cover all his costs, then that is fraud). So your protection (though if not already mandated in the contract you are probably out of luck on this job) would be setting up a construction escrow account (usually done by the lended if a lender if providing construction or improvement loan) or putting the funds in a trust or escrow account which requires your agreement that the specified progress payment work has been done, for disbursement to occur when the contractor submits an invoice asking for a progress payment.


Here are links to a number of similar questions about project deposits and advance payments, and what happens if the contractor does not stsrt on time or finish as contracted - some might be helpful, some describe situations you hopefully will not get into:


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Answered 1 year ago by LCD




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