Why GCs Don’t Give Deposits – And What Subcontractors Can Do About It

For subcontractors, getting a deposit payment on a project is a good way to improve cash flow and ensure that you can pay for your materials. For GCs, being asked to pay a deposit can put a real crunch on cash flow. It can also leave them worrying whether a sub will perform once they make the down payment.

How can subcontractors and GCs come to an agreement on deposit payments? First, we’ll look at why GCs are concerned about providing money up front. Then we’ll discuss some tips for subcontractors to work together with GCs and other parties, so everyone can get what they need.

Why GCs Don’t Like Giving Subs Deposit Payments

Upfront deposits are increasingly rare in the construction industry. In a 2020 construction payment survey, only 23% of contractors said they always get a deposit at the start of a project. There are several reasons why GCs aren’t particularly fond of giving deposits to subcontractors before they begin working. Giving out money up front carries significant risk for the general contractor.

The GC doesn’t trust you yet

Once they have a deposit in hand, the subcontractor may walk away from the project. No one wants to pay someone to do work and then have them skip out.

Once a sub has some cash in hand, the work may not seem as important. Or a sub may be suffering from cash flow problems and may not be able to do the work, even with a deposit. Making payment up front leaves the GC with a liability they can’t control. Having a strong construction contract helps, but it can’t bring the money back if a sub walks away. Litigating a breach of contract is an expensive endeavor, and may not be worth the amount they can recover.

The GC has multiple subcontractors to pay

The GC has to find the cash to pay a deposit to their subcontractor. Many GCs, like many subcontractors, run on tight margins. Finding the funds to pay for an unexpected expense of any kind can be difficult. GCs often have little notice before starting a job, and they are also responsible for paying up-front expenses for mobilization and the temporary facilities for the project.

Add material deposits from several subcontractors, and a GC can suddenly be out a lot of money in a short amount of time.

The GC isn’t getting a deposit, either

It can take a long time to get paid in construction. The GC won’t get paid for the subcontractor’s work until it’s complete or the materials are installed. Most prime contracts (between the owner and GC) stipulate that only installed work is paid for. The GC often can’t bill for material expenses and deposits until the work is in place, which could be weeks or months down the line.

Meanwhile, the GC foots the bill for the deposit and has to find a way to cover those expenses out of their own pocket. And they still have their own expenses to pay. This can put a GC in a deep financial hole that they may not be able to recoup for months due to draw schedules.