Should a Service Business Require a Deposit Before Starting Work?

How much to ask for, and what the deposit should cover

Tie the number to a cost, not to a habit. A round percentage that matches nothing on the job is hard to defend when a customer pushes back and hard to refund fairly when one cancels. Massachusetts writes that idea into its home improvement statute: a deposit before work may be one-third of the price, or more when special-order materials that must be ordered in advance cost more.

Three costs can justify a deposit, and the quote should say which one it covers:

• Materials: special-order items bought for this job, with the supplier quote attached, at what the business would lose if the order could not be returned.
• Reserved time: the crew days, truck or appointment block held for this customer, at what the business would lose if the date emptied too late to fill. A consultation fee credited toward treatment is the same idea on a small scale.
• The first phase: labor and materials up to the first progress invoice, where the state allows it, so the business is not financing the start of someone else’s project.

Then write the deposit line so nobody has to remember it: the amount in dollars, what it pays for, when it is due, that the start date is held once it arrives, which invoice it is credited to, and what happens on cancellation. One public reference point for commercial work: where a federal contracting officer authorizes commercial advance payments, FAR 32.202-1(b)(6) says that before any work is performed they “shall not exceed 15 percent of the contract price,” a buyer’s ceiling, not a rule for private contracts. Illustrative example: a hypothetical design firm signs a $40,000 project whose first month is estimated at $9,000 in staff hours; a $9,000 retainer covers the hours the firm would otherwise carry until its first invoice.

Where a state cap comes in

On residential work, check the job’s state before setting the number. Some states cap the deposit: California’s is the lesser of $1,000 or 10 percent of the contract amount, and Maryland and Massachusetts allow up to one-third, Massachusetts more when special-order materials cost more; others, such as Florida, set no cap but attach duties to a large deposit. The statutes, their exceptions and what each cap does to a draw schedule are in the guide to contractor deposit limits by state; confirm with a construction attorney in the job’s state. This is not legal advice.

Commercial and professional clients: deposit or retainer?

The two words describe different money. A deposit is a part payment of a price, credited against an invoice for that price. A retainer, in the sense used here, is paid in advance and drawn down as work is billed, with any unused balance settled at the end. Some firms use the same word for a fee that only reserves their availability, so the engagement letter should say which one it means.

Lawyers have a specific rule. ABA Model Rule 1.15(c) reads: “A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.” Comment 4 to Rule 1.5 adds: “A lawyer may require advance payment of a fee, but is obliged to return any unearned portion.” Each state adopts its own version, so the state’s rule governs, not the model. For a law firm the operational point is that a signed fee agreement whose trust deposit never arrives is an intake still open: someone has to follow it up, and the fee agreement should say whether work waits for the deposit. This is a plain reading of the model text, not legal advice.

For accounting, architecture, engineering, IT and agency work, this guide quotes no comparable rule, so the engagement letter carries the weight: what the advance is (a deposit applied to the first invoice, or a retainer held to the final one), how it is drawn down, and what comes back if either side ends the engagement. A retainer the letter does not explain becomes an argument at the last invoice.

A commercial client pays through a payables process, where a deposit invoice with no purchase order behind it can sit unpaid while the job waits. Ask at the proposal stage whether the client will pay a deposit, and if so, put the PO number on the deposit invoice. Some buyers will not pay one at all; FAR 32.202-1(a) states the federal government’s position: “for purchases of commercial products or commercial services, financing of the contract is normally the contractor’s responsibility.” Where a deposit is off the table, other terms can do part of its work: a mobilization line on the first progress invoice, materials billed on delivery, monthly progress billing, or shorter payment terms.

What happens to the deposit if the customer cancels

The contract’s cancellation clause decides the ordinary case, and several rules override it where they apply. The summaries below are from the texts as they read on October 22, 2026. Rules change and vary by contract; confirm with an attorney before writing or relying on a cancellation term. This is not legal advice.

• Sales at the customer’s home. The FTC Cooling-Off Rule, 16 CFR Part 429, covers consumer sales of $25 or more made at the buyer’s residence ($130 or more at other locations away from the seller’s place of business), with exclusions that include a visit the buyer requested to repair or maintain the buyer’s personal property, though not for anything sold beyond the replacement parts used. The buyer may cancel until midnight of the third business day, and on a valid cancellation the seller must, within 10 business days, “Refund all payments made under the contract or sale.” The companion guide on the three-day window covers what not to order or schedule inside it.
• Florida residential work. Under §489.126(2)(b), when a contractor holding an initial payment above 10 percent misses the permit or start dates, the customer must first send a written demand, by certified mail with return receipt requested, that it apply for permits, start the work or refund the payment. Doing none of those within 30 days of receiving the demand allows an inference that the contractor had no just cause.
• Interstate movers. The federal household goods rules, 49 CFR Part 375, do not use the word deposit. Two lines bear on one: §375.217(a), “You must specify the form of payment when you prepare the estimate,” and, in the section on card payments, §375.221(a): “Once you provide an estimate you are bound by the provisions in your tariff regarding payment as of the estimate date.” That makes the tariff and the estimate the safe place to write any deposit and its cancellation terms before the customer pays. Keep it small: the FMCSA’s consumer page lists “The moving company demands cash or a large deposit before the move” among the red flags it tells customers to look out for. The guide to extra items on a binding estimate covers what the mover signs before loading.
• Everything else. Outside those rules and any state cancellation law that applies (Massachusetts, for one, requires a home improvement contract to give notice of the owner’s three-day cancellation rights), the contract decides. A clear cancellation clause says what is refunded, what is kept and why (materials ordered and not returnable, a supplier’s restocking fee, hours worked), and by what date the refund goes out. Whether a deposit labeled nonrefundable stays nonrefundable is a question for the attorney in that state.

How to record a deposit so it is applied to the final invoice

A deposit goes missing in the books the same way an invoice goes out late: nobody owns the step. The payment arrives by card link or check, is recorded with no job attached, and sits as an unapplied credit while the final invoice bills the full price. Five habits prevent it:

• Bill the deposit from the job record, as its own numbered invoice or a line on the first one, so it carries the customer, the job and the contract.
• Record the payment against that customer and that job the day it arrives. Until the work it pays for is done, it is money held for that job; how the books classify it is the accountant’s decision.
• Show it on every later invoice: contract price, approved changes, deposit applied, payments received, balance due.
• For a law firm, keep advance fees in the client trust account, drawn only as earned.
• Log every refund with the date, the amount, the reason, and the clause or rule it followed.

Then a weekly check, a few minutes on a Friday, by one named person, of three lists: deposits received for jobs with no start date or a slipped one (in Florida, against the permit and start dates); deposits on finished jobs never applied to an invoice; and signed jobs whose deposit invoice is unpaid while the work sits on the schedule. Each line gets an owner and a next date.

When to leave the policy alone, and where the Review fits

Leave the policy alone when the records say it works: signed jobs start on time, every deposit is applied on a final invoice, and quotes that asked for one sign at about the rate of comparable quotes that did not. Do not change a contract template, a refund clause or a retainer letter without the company’s attorney; the rules above carry penalties this guide does not interpret.

If the deposit is one of several places where money stalls between the quote and the first day of work, the Revenue Review counts it under the Quote → Contract hand-off. From read-only exports of quotes, contracts, invoices and payments, it can list the deposit asked on each signed job, the date it arrived, the days to start, and any deposit never applied or never refunded. It does not write contracts or give legal advice. It takes two weeks and runs on terms like the ones above: a deposit to begin, the balance when the report arrives, and a written report the company keeps.

The next step is a free 20-minute call. If the deposit is the whole problem, we say so there; a clearer deposit line in the quote template may be all it takes.