Congratulations - you have gained planning permission for the works to your house. You have also found a reputable builder and worked with them to agree a start date and how payments will be made. But then, before works have begun, the contractor sends you an invoice for a large amount of money and the bill item simply says 'deposit'. In some cases this figure may be relatively small, say £500, but more typically we see deposit requests of 10% of the contract sum, which will be in the tens of thousands for larger jobs. This is a significant sum to put at risk.
The argument made by the builder is that they will need to pay for some materials up front and allocate labour to the project which they will still have to pay if you renege on the agreement at the last minute. They will also highlight that they will be allocating a work slot to you, which prevents them taking on other projects therefore if you do decide to cancel at the eleventh hour, the deposit will go some way to allaying their loss.
All of these points are understandable, but there is also significant risk for you as your deposit may be lost if the builder goes into liquidation, or if the individual you are contracting with suddenly ceases to trade. The chances of recovering your deposit in these circumstances are very low.
Traditional contracts will attempt to protect you from loss in the event of the contractor ceasing to trade. Bearing in mind that as a home owner you are likely to be engaging a small business in a historically difficult industry, this is a good idea. This traditional 'Architects' contract only pays the contractor the value of the works properly finished to date and will include all fixtures and fittings on site (so no payments are made for any materials that have not yet been delivered). This way the employer's (your) money is fully protected from the default of the contractor.
That said, most smaller building companies will not wish to enter into this sort of arrangement and it is also likely to be outside of their experience. In lieu of the deposit they will instead have some protection afforded to them under the contract, so that any losses they incur in the event of a breach of contract, can be recovered from the employer (though this will likely require the engagement of a legal professional).
The Federation of Master Builders have proposed another solution in order to 'solve' the deposit challenge. In their very clear construction contract, they allow for a bank account to be opened in joint names. This is a bank account set up in the name of the contractor and employer, where monies are visible to both parties and are released by a third party signatory. This means that prior to the works starting, the full value of the works can be paid into the account and then the monies are released to the builder as the works progress (usually every two weeks). In this way the contractor has assurance that the monies are available and will be readily released in a fair manner by a third party (usually a surveyor or architect).
Under both of the above arrangements contractors will be put in a position where they have done work on site without having been paid for it. They will always be one step behind the payment curve and it is them who is risking their capital. However, when the materials that they purchase are on 30+ day terms with their suppliers, and they will be likely paying their labour in lieu each month, the value of this 'debt' may not be as high as they may lead you to believe.