15 Nov Five Essential Contract Terms for Consultants, Independent Contractors, and Freelancers: Part 2-Invoicing and Payment
This is the second in a series of five posts on the Five Essential Contract Terms for Consultants, Independent Contractors, and Freelancers. This post will be about the one thing Rod Tidwell wanted Jerry Maguire to do, “Show Me the Money:” Invoicing and Payment. It may be a little crass, it may be a little greedy even, but unless you actually do run a charity, knowledge workers operating their own business actually expect to get paid.
When consultants, independent contractors, and freelancers provide their knowledge based services and the work is done the next step is to be shown the money. Establishing a strong, easily understood Invoicing and Payment clause in your contracts makes it easier.
Contracts provided by clients, often larger organizations, have often modified an existing contract often used for the purchase of goods. So when knowledge businesses get contract drafts from their customers, the contract language does not comport with the purchase of services or knowledge based work product. The language used often contains the ambiguous term “Payment terms are net 30 days.” The definition of “Net 30” reads “A specific type of trade credit where the payment is due in full 30 days after the item is purchased.” The term Net 30 is particularly ambiguous if used in the proper context, which is often related to the purchase of physical items.
The definition might be acceptable for knowledge professionals if the “item purchased” is a single report or an article written for a publication on a one-time contract. But what if the work involves multiple work products delivered over the course of months or even a year? What should be the protocol if you require a partial payment to begin work (something I recommend)? Even worse, I have seen contracts for knowledge workers in which payment won’t arrive for as much as 60 days. Should a knowledge worker have to wait 30 days to get paid simply because the customer puts a Net 30 term in the contract? No one should have to wait sixty days for payment of an invoice or final payment on a project.
Invoicing and billing should be negotiated, since you have done the work on their terms. Why not get paid on your terms, or at the very least an amalgamation of terms?
A well-crafted Invoicing and Payment clause will contain four parts. Written together, these provisions will provide the path to be shown the money. Business Tip: When dealing with clients that are larger organizations, you are going to have to deal with an accounts payable process and bureaucracy that is not designed to move quickly. Even in that event, you should strongly negotiate payment terms that will get you paid faster.
First, as the consultant, contractor or freelancer, you should set the time of your invoicing. You should be invoicing no less frequently than monthly. If you have a series of deliverables that will be produced on a less than monthly schedule, I recommend billing with each deliverable. However, no matter what you choose, invoicing should be on your terms. Whether you will bill on the first day of the month, the last day of the month or some other date, state the date in the first part of the Invoicing and Payment section. Business Tip: When you invoicing date falls on a weekend or holiday, consider a phrase that you will invoice on the last business day prior to your normal invoicing date.
Second, define when payment is due. This can be any reasonable amount of time after the date of the invoice, be it seven days, ten days, fifteen days or any other choice. This provision will often be subject to negotiation to accommodate the accounts payable process of your client. No matter how many days you choose, I recommend you choose the phrase “calendar days” as opposed to the generic “days” or even “business days” in order to eliminate ambiguity. For example, what is a business day and who determines that definition? A good recent example would be days like Columbus Day, which is a federal holiday, but a day in which many private businesses are operating. Choosing “calendar day” is easy to simply calculate by counting the days, including weekends and holidays.
Third, in order to encourage on-time payment, define the consequences for late payment. One of the best ways to do this is a combination of a flat late fee and an interest provision. A late fee should be imposed when the payment is overdue in a billing month. For example, if payment is due 15 calendar days after the date of invoice, allow three to five calendar days for the mailing process and impose a late fee at say five calendar days after the payment date. You can choose a late fee of between two and five percent of the payment due. Again, by example, if the payment due is $2,000.00, a three percent late fee is $60.00.
In addition to a late fee, when an invoice is 30 days overdue, interest should begin to accumulate. The interest rate applied should be a simple interest rate between six and ten percent. Alternatively, you can determine what your state’s legal pre-judgment interest rate is (usually defined by statute or court rule) and use that rate.
Fourth, define a mechanism by which clients can dispute particular charges on your invoice. This is simply good customer service and enables you to orderly address billing errors. However, while a dispute may happen regarding specific items, I strongly encourage clients to not permit their own customer to withhold all payment while the dispute charges are resolved. You should insist that payment of non-disputed charges be made on time per the terms of the contract while the disputed charges are addressed. Once the dispute over charges is resolved, payment on the resolved charges can and should be made promptly.
Getting paid for your work should be done on your own terms as much as possible. Negotiation of payment timing is likely to be necessary, but try to be closer to your terms than your customers.
Your Invoicing and Payment clause should contain four essential elements:
- A clearly defined invoicing date, on your terms and consistently adhered to.
- A consistently defined payment due date. If you customers are larger organizations with an accounts payable bureaucracy, you can expect some negotiation.
- A two-part late payment clause. A late fee assessed for payment that are three to five days beyond the payment due date and an interest clause for invoices that become 30 days or more overdue.
- A dispute charges provision that provides for payment of non-disputed charges while the disputed charges are being resolved.
Being shown the money is probably the most important provision to consultants, independent contractors, and freelancers. You should work to have these terms as close to your preference as possible.
At the Law Offices of Matthew S. Johnston, LLC, we can help you both negotiate payment terms and to draft Invoicing and Payment terms to meet you needs. Contact us for more information or to seek our assistance.
What payment terms have you seen or used in your contracts? Are there terms that you have found to be more effective?
Also in this series:
- Invoicing Software: What is The Best Option For You? (fitsmallbusiness.com)
- 5 Ways to Keep Your Cash Flow Healthy (smallbusinessbonfire.com)
- Practical Tips For Freelancers to Get Paid On Time (earningdiary.com)