Guide
Deposits and progress billing done properly
A deposit is not revenue yet. Booking it as though it is makes a profitable month look better than it was.
Reviewed by Darren Lim, US CPALicence CPA.742536027 min read
Taking a deposit is one of the simplest things a contractor can do to fix cash flow. You stop funding other people's material out of your own working capital.
It is also one of the easiest things to record wrongly, and the wrong version makes a good month look better than it was.
A deposit is not revenue yet
When a customer pays a deposit, you have their money and you have not yet done the work. You owe them either the work or the money back.
That makes it a liability, not income. It sits on the balance sheet as customer deposits until the work is performed, and only then does it become revenue.
Book it straight to income and two things go wrong. Your revenue is overstated in the month it arrived, and understated in the month you actually did the work — so both months are wrong, and neither is comparable to anything.
Worse, it feels like a good month. Contractors take deposits, see a strong P&L, and spend against profit that has not been earned. Then the work has to be delivered out of money that has already gone.
How much to ask for
Enough to cover material, roughly. You are trying to stop funding the job yourself, not to be financed by the customer.
For most residential work a deposit covering material, with the balance on completion, is normal and rarely questioned. Larger jobs justify a schedule rather than a single payment.
Two practical notes. Some states cap deposits on home improvement work or require them to be held in specific ways, so it is worth knowing your state's position. And a deposit that looks disproportionate to the work makes a customer nervous — which costs you the job, not just the deposit.
Progress billing on longer jobs
Anything running more than a few weeks should bill in stages rather than at the end. Waiting until completion means financing every cost for the whole job and carrying all the collection risk to the last day.
A workable schedule ties payments to visible milestones:
- A deposit on signing, covering material
- A payment at a clear stage — rough-in complete, equipment set, first fix done
- A payment at substantial completion
- The balance on final sign-off
Milestones the customer can see for themselves cause far fewer arguments than percentages they have to take on trust. "The rough-in is done" is checkable. "We are 40% through" is a debate.
The number that tells you if it is working
Once you are billing in stages, one comparison matters: work performed against amounts billed, per job.
If you have completed 70% of a job and billed 40%, you are underbilled — financing the difference yourself. That is the position that quietly drains cash on long jobs while the P&L looks fine.
The reverse, billed ahead of work done, is comfortable for you but is a liability: you owe work you have been paid for. On larger commercial jobs this is exactly what a work-in-progress schedule reports, and it is one of the first things a surety or lender looks at. See getting bonded.
Either way you cannot see it without job-level tracking. See job costing for contractors.
Getting customers to accept it
Deposits and staged payments are standard in the trades, and resistance is usually about how it is raised rather than the request itself.
Put the schedule in the quote, so it is a term of the job rather than a request made later. Explain it once, plainly — material is ordered up front and paid for up front. And apply it consistently, because exceptions are what make it look negotiable.
The contractors who struggle to get deposits are almost always the ones who ask after the quote has been accepted.
Related
General information. Deposit limits and holding requirements on residential work vary by state — check yours.
How we do this
We build this into your books. Starting with a month that costs you nothing.
Deposits held as a liability until the work is earned, and progress billing tracked against contract value per job, so your revenue is real and you can see which jobs are under-billed against the work done.
- Every transaction categorized, accounts reconciled, the month closed
- Reviewed and signed by Darren Lim, US CPA — licence CPA.74253602
- The Two-Day Guarantee: Your first month back in two days, or the next month is free.
Books that treat deposits as revenue tell you the business is doing better than it is, right up until the work has to be delivered out of money already spent. One free month puts it right. CPA-signed, yours either way.