Upfront Construction Deposits: Cover Early Payables & Protect Cash Flow
- Cost Construction Accounting
- 1 day ago
- 5 min read
A contractor who runs out of cash three weeks into a project faces mechanic's liens, abandoned work, and possible business failure. This is why construction deposit requirements exist.
You've landed a $750,000 commercial renovation. Contract signed, client excited but no deposit required. Now you're scrambling to cover $125,000 in immediate outlays out of pocket while your first progress payment won't arrive for 60+ days. This cash-flow squeeze happens daily.
The problem: suppliers and subs demand payment within 30 days, but client progress payments lag 30–90 days. Without upfront deposits, you're providing interest-free financing while risking negative cash flow, maxed credit lines, and project delays.
Deposits bridge this gap, covering initial account payable outlays to protect your financial health and keep projects on track. In this post, we'll cover how to calculate them based on real outlays, legal considerations, contract structuring, and client communication.
Understanding Accounts Payable Outlays in Construction
Account payable in construction are short-term liabilities owed to suppliers, subs, vendors, equipment providers, and labor. Early-project outlays often include:
Materials and supplies:Â Lumber, concrete, drywall, fixtures suppliers typically require payment within 30 days or on delivery, especially for specialty items.
Subcontractor mobilization fees: Trades need upfront payments to schedule crews, order materials, or mobilize often $5,000–$50,000 per sub on larger jobs.
Equipment rentals:Â Excavators, scaffolding, lifts immediate fees upon delivery.
Permits, insurance, bonds:Â Upfront before work begins.
Initial labor burdens:Â Payroll runs weekly/biweekly; a crew of 20 at $35/hour can mean $28,000 weekly before billing.
Long-lead items: Custom windows, specialty steel, imported tile 8–16 weeks lead time, often requiring supplier deposits (e.g., 50% for $50,000 custom curtain wall).
Mobilization costs (site prep, temp facilities, safety setup) typically run 3–8% of project value, sometimes capped at 5–10% in bids. The timing problem: outflows start day one, but inflows lag, creating negative cash flow without deposits.
Consequences of skipping deposits: reliance on loans, late vendor payments, liens from unpaid subs, delayed timelines. Deposits provide working capital when it's needed most.
The Purpose and Types of Construction Deposits
Deposits bridge AP outlays and incoming funds, allowing immediate starts without loans or personal funds. Common types:
Mobilization deposit: Covers startup costs (equipment transport, site setup, initial labor) often 5–10%.
Material deposit:Â Secures long-lead items with limited resale value if canceled.
Full upfront deposit: 30–50% for smaller jobs (<$50,000) to simplify billing.
Industry norms: 10–30% of contract value, higher for material-heavy projects, lower for labor-intensive ones. Deposits differ from progress payments: front-loaded for immediate needs vs. ongoing work coverage.
How to Calculate the Right Deposit Amount
Don't pick arbitrary percentages based on the actual first 30–60 days' outlays. Step-by-step:
Estimate initial AP outlay:Â List every expense before first progress payment: materials, sub mobilization, equipment, permits, labor, long-lead items.
Add a buffer: 10–15% for surprises (price hikes, delays).
Factor project risks:Â First-time clients, remote sites, strict permits, or heavy long-lead items justify more.
Example: $500,000 office renovation
Initial 60-day outlays: $45,000 materials + $25,000 sub mobilization + $8,000 equipment + $2,000 permits/insurance = $80,000
Buffer (15%): $12,000
Risks: First-time client + $8,000 custom millwork (supplier deposit required) = $8,000 extra
Recommended deposit: $100,000 (20%)Â covers outlay + buffer + risks
Transparency wins: Provide clients a breakdown (e.g., "$45k materials, $25k subs") to justify and build trust.
Legal and Contractual Best Practices
Deposits are smart, but mishandling invites trouble. Include clear clauses:
Amount and due date (e.g., "$100,000 within 5 days; work starts after receipt").
Application:Â Full against first invoice, pro-rata across billings, final payment credit, or milestone-specific.
Refunds:Â If canceled pre-start, refund less incurred costs (ordered materials, non-refundable fees).
Termination/scope changes.
State-specific rules: Residential projects often have caps California limits home improvement deposits to 10% (or low fixed for small jobs), Maryland to 33% (1/3). Commercial/public projects face fewer restrictions, but prompt payment and retainage laws apply (e.g., California's 2026 5% retainage cap). Texas has no cap but requires specific language. Always check jurisdiction.
Trust fund laws: Many states (e.g., New York Article 3-A, Michigan, Texas, Colorado, Maryland) treat deposits/project funds as trusts. Funds are for subs/suppliers/labor; misuse can trigger fiduciary breaches, personal liability, civil remedies (interest, fees), or criminal penalties (e.g., NY larceny, TX misdemeanor/felony if intent to defraud, CO theft with treble damages). Some prohibit commingling; others allow with good records. Violating can pierce corporate protections.
Risk mitigation: Document receipts, use escrow for large deposits, get written change orders. Consult a construction attorney for state compliance laws to evolve.
Accounting for Deposits
Deposits are liabilities (unearned revenue), not immediate income until work is performed, you owe the work or refund. On the balance sheet, record as current liabilities; this affects bonding capacity, banking, taxes.
Track applications precisely: As milestones hit, convert to revenue via journal entries matching progress billings. Use job-cost systems linking deposits to percentage-of-completion for accurate profitability. Improper booking distorts reports and invites auditor/surety scrutiny.
Communicating Deposit Requirements to Clients
Clients resist due to risk perception or cash concerns. Frame as mutual protection: "The deposit lets us order materials, mobilize subs, and secure permits immediately ensuring your timeline and reducing lien risks from unpaid vendors."
Tips:
State early in bids/proposals, no surprises.
Provide a schedule of values showing application.
Build trust: Share references, insurance proof, past projects.
Negotiate for strong/repeat clients (lower deposit); hold firm on high-risk jobs.
Take Action to Protect Your Cash Flow
Deposits aren't favors, they're essential for solvency. Skipping them risks crises; structuring them properly builds strong projects and relationships.
Key takeaways:
Calculate based on real early outlays + buffer + risks, not arbitrary %.
Document clearly in contracts with application/refund terms.
Communicate transparently and show breakdowns to justify.
Account properly as unearned revenue; track applications.
Review state laws (residential caps, trust funds) and consult pros.
Audit your next bid: Project 60-day AP, adjust deposit accordingly.
Construction margins are tight, don't start undercapitalized. Smart deposits are a simple, powerful tool for financial health and smooth execution.
Get Expert Help Managing Your Construction Cash Flow
Struggling to manage cash flow between deposits and progress payments?Â
Construction Cost Accounting helps contractors implement smarter financial systems that protect your working capital and prevent cash crunches. Our team specializes in job costing, cash flow forecasting, and deposit structuring tailored to construction's unique challenges.
Schedule a free consultation with our construction accounting experts at CCA to review your deposit policies and build a cash flow strategy that keeps your projects and your business on solid financial ground.
