Are you accepting client deposits before every building project? If not, you should be. Typically, contractors charge 5-10% of their project cost upfront. When used correctly, deposits can protect home-building businesses from incurring additional costs themselves.
The Benefits of Deposits
There are two primary benefits of client deposits. First, they act as good-faith payments, so you can confidently move forward with your next home build knowing that your team will be able to take the project from start to finish. And second, deposits should be your initial source of funding at the beginning of every build. Drawing on your clients’ deposits to cover the project and overhead costs between loan draws ensures that they are funding every stage of the build. Remember, you’re a home builder, not a bank.
The Risks of Foregoing Client Deposits
Some of you may be thinking: We have strong working capital and can afford to cover interim project expenses between draws. While you’re fortunate to be in that position, using your own business’ money to cover interim expenses leaves your bank account vulnerable. If the project gets seriously delayed, the client’s lender refuses to fund more draws on their loan, or your clients decide to end the project altogether, you’re still responsible for covering any lingering project costs, but without outside funds to draw on.
Deposit Management – And a Word of Warning
Say you’re building a million-dollar home and charge a 5% deposit worth $50,000. You get this deposit at contract signing and begin construction, putting most of the money towards the home’s foundation, plumbing, and initial labor costs. But three weeks later you hit a major roadblock. You have to backtrack most of your work so far, spending valuable resources and energy on correcting mistakes before you can continue with the build. It happens, but there’s a problem: you won’t receive another loan draw until you move to the next phase of the project, and you just spent your deposit.
The situation in this scenario could have been avoided if you had budgeted your deposit rather than burning through it all at once. Be sure to set aside a portion of the money each month so you never have to dip into your own funds.
Our construction-specific financial experts at Home Builders Financial Partners can help you navigate the billing process and make the most out of each deposit. We use proven financial management strategies that allow our home builder clients to stay on top of project costs while maximizing their financial resources.
Ready to see how the HBFP difference can become your advantage? Call (843) 402-0977 to schedule a FREE consultation or visit our website to learn more about our services: hbfpllc.com