It’s common practice in contracting work to get a deposit before starting a job. It’s a good faith measure for both parties, the contractor agrees to do the job for the specified amount and the customer offers a payment to show they are serious buyers.

But what happens if the project falls through? Can a contractor keep the deposit, or should it be returned to the customer? The answer depends on several factors.

What Does the Contract State?

This is an issue that should be included in the contract and agreed to by both parties. If there is language about how to handle deposits in the contract, then that language dictates what happens to the deposit.

For example, if the contract states that if the project is canceled by the customer, then they forfeit the deposit, then the contractor can keep the deposit. Or if the contract states that a percentage of the deposit will be refunded the customer after a “convenience” or “kill” fee is deducted, then that language would determine how much of the deposit is returned. If there is no language regarding deposits written into the contract or the job is canceled by the contractor, things can get complicated.

Who Canceled?

If the contractor cancels the job, then the contractor should return the deposit. Contractors should not profit off jobs they cancel or don’t complete.

If the customer cancels, unless there’s a breach of contract by the customer (and there is no language about deposits in the contract), the contractor should return the deposit. Even though the contractor Is the injured party, without specific language, keeping the deposit could be more hassle than it’s worth.

Why Give it Back if the Contractor Isn’t at Fault

In the short-term, keeping the deposit might seem like a keen business move. After all, a contractor might have turned down other jobs in order the schedule this job, the contractor might have bought materials to work on the job, and undoubtedly several hours’ worth of time has gone into the project from the estimate to early-stage planning. The deposit might have covered all of this, so keeping it might make sense.

However, contractors also do a lot of business via word-of-mouth. So, even though the contractor might be morally correct to keep it, in the court of public opinion, gaining the deposit could lead to bigger losses in the long term.

A customer who feels treated unfairly (and that’s the risk the contractor takes if he keeps the deposit) will waste no time telling anyone who will listen that they were cheated out of their deposit by a contractor.

Will they tell both sides of the story? That doesn’t really matter, because all most people will hear is “the contractor kept the deposit.” And the reality is, even if you have 100 positive reviews, it’s the one bad review that can tank a business. So even though keeping the deposit might seem like the fair thing to do, giving it back is sometimes the best thing to do for a business’ overall reputation.

Even though a contractor might be out some money because a job was canceled, it is often in the best interest of the contractor to give back the money and learn a valuable lesson. Make sure there is deposit language in the contract. Detailing exactly what happens with the deposit removes all doubt in the event the job is canceled.

Have you ever faced an issue like this? How did you handle it?