For many years, I have helped out on the Ask The Experts stand at the Homebuilding & Renovating shows, which are held at various venues across the country. We work as a small team (usually about six of us) and we advertise ourselves as offering independent advice. It’s also a very useful exercise for us as working journalists in that we informally monitor the questions being fired at us, and this gives us good feedback on what issues are of concern to selfbuilders. Besides the ever-popular planning questions, for the last two years the main question has been “How should I heat my house?” A jolly good question it is too, and one which has no clear answer.
November always plays host to two shows, one in Yorkshire, the other in Somerset, and this year credit crunch questions were a notable feature at both venues. One question which did come up repeatedly was: “Is it safe for me to hand over a large cash deposit to a supplier for future delivery of some product?”
The main area of worry here is the package build suppliers, where deposits of tens of thousands are often requested, but it also came up in relation to a kitchen supplier and a window manufacturer. Many of these companies have built their business models on getting upfront payments and many have good reason to charge a large deposit, as the work about to be undertaken is usually specific to the individual contract and would be almost valueless if the client were to default. For instance, between 70% and 80% of the work carried out on a timber frame kit is value added by the manufacturer — the timber itself is rarely more than 20% of the final bill.
The unofficial line that we adopt (and we have as a group discussed it) is to suggest that, if the client is at all concerned, then they should insist on their funds being placed in a third party or clients’ account, also know as an escrow account. This would be run by a solicitor or a bank, and the deposit would stay there until the goods are delivered to site. In theory, it sounds fine, but in practice very few firms actually offer such a facility. The main reason is surely that just by mentioning it, the seed of doubt gets sown: it makes people think about the security of their deposit and that alone maybe enough to scare them away. It’s that confidence thing. In addition to this, escrow accounts are costly and time consuming to administer and once people start thinking about them, they tend to want to start adding additional clauses, such as quality audits and time penalties. You can see just why manufacturers don’t like them.
And yet, such is the severity of the downturn in construction that customers are focussed on security in a way they haven’t been before. Construction-related businesses are getting squeezed. In truth, many of the ones which primarily deal with the selfbuild market seem to be weathering the storm quite well — the selfbuild market isn’t exactly thriving but it certainly hasn’t ground to a halt either — but how is a customer to know what businesses the supplier normally sells to and what it is like for any individual company at any given moment? Again, it’s that confidence thing that’s so important.
The problem for the deposit-taking suppliers is that confidence in their businesses may just seep away, even if they continue to trade well. Potential customers may just assess the whole sector as being too risky and decide to postpone their project, or chose build methods which can be entirely funded in arrears. An industry-wide deposit guarantee scheme might have helped, but no such thing exists for package build and it’s probably too late to organise such a thing now, at least as far as this recession goes. A more realistic option is for individual companies to reduce the size of the deposits requested (be they via escrow accounts or not), or even to go ahead on contracts without deposits.
So my advice consisted of the following. Firstly, be aware of the issue surrounding deposits; don’t be afraid to mention it to the potential suppliers and to express your concern that your deposit might not be safe. Ask them what they can do to address your fears. If you like the product and the company, and you are tempted to go ahead with them, then by all means use the deposit as a negotiating tool. But do bear in mind that just as customers are ultra wary of paying out large deposits at the moment, so businesses are worried about delinquent customers as well. It might help matters if you, as a customer, could demonstrate your ability to pay before getting too clever with discounted deposits. It’s all about confidence, but that cuts both ways.