Getting paid for completed work is high on the priority list of every small business owner and independent contractor. But when clients or customers don't pay on time or in full, the frustrating process of getting them to come up with the cash can undermine long-term business relationships and waste your time collecting rather than earning money.
What can you do to avoid these problems? If you sell products, it's relatively easy--require payment upon purchase or delivery and communicate a clear return policy to your customers. If you provide services, however, it's more complicated. Consultants, developers, marketing specialists, publicists, lawyers, and other service providers risk wasting their time and resources if they wait for payment until completing their services.
One of the best tools for ensuring timely payments is a written contract. A good contract is one that is fair to each party, clearly states the services your client expects, those you agree to provide, the money you expect to receive, and the timeline for the process, and if necessary is enforceable in court by either party.
Getting a client to pay for your services up front before you begin the work is the best deal for you, but because clients normally want to see the work before paying for it all, installment payments are a good compromise. With installment payments, you require your client to pay a portion of the total fee before you begin working, as evidence of your client's good faith in his promise to pay. You agree to wait for final payment upon completion of your services to ensure your client is satisfied with the work.
Splitting the payment into only two parts, however, can be risky--if your client is dissatisfied with the completed work and doesn't make the final payment, the up-front payment may not fairly compensate you. To reduce this risk, set up one or more additional payments during the course of the project.
For example, suppose a company hires you as a marketing analyst to research a product and analyze potential customers' purchasing decisions. The price will be a set fee (a fixed amount) rather than an hourly fee (unfixed since the number of hours may vary). You prepare an outline of the work in order to get the job, and draft an agreement stating that the company will pay a certain portion of your fee upon signing the contract to compensate for the outline and a portion of the research services to follow. You then get to work. When you complete the research, you provide a summary to your client, along with an invoice for another payment, which compensates you for the research, the summary, and a portion of the analysis to follow. Final payment is due after you finish analyzing the data and submit a report with your opinions and conclusions, which represent the value of the last portion of the services.
The amount you charge for each payment should reflect the value of some of the work already completed and some of the work to be performed. Don't agree to a final payment that amounts to the biggest portion of the overall fee; what if your client is unsatisfied during the project and withholds the final payment? At each point during the project you want to feel fairly compensated for the work you've completed, in case you never see another payment.
When you're providing something of a proprietary nature for your client, such as copyrightable work or anything considered a trade secret, you have more leverage regarding payment. Your contract may include a provision that restricts your client's use of your work product until you receive payment in full. If your client wants to own copyrightable work that you create, avoid a work-for-hire agreement that would make your client the owner of your work "from inception." Instead, agree to assign all rights to your client only upon receipt of payment in full, or payment for the portion that has been completed, accepted, and reimbursed.
When you prepare a contract, make sure you work with a lawyer knowledgeable in contract law. If you can't afford an attorney for every project, at least hire one to prepare the first contract, then double-check with him whenever you make similar deals in the future. Many lawyers will help you tweak agreements they prepared for you in the past to conform to your new deals.
Of course, contracts aren't the only tool at your disposal to promote prompt payments. Next time I'll explain how to set up a merchant account to accept credit cards from clients.
Based in Northern California, Susan P. Butler has been practicing law for 17 years. Her practice involves intellectual property, Internet, and entertainment transactions throughout the U.S., Europe, and Japan. Susan's first book, E-business Legal Kit for Dummies, is now available from IDG Books. She is now embarked on a promotional tour starting in October, speaking at cities across the country. Susan can be reached at email@example.com.