This week on the Podcast, we talk with Tina White of Panoramic Business Solutions. Tina talks a lot about collections. You should give it a listen! If it isn’t up when you read this, it should be up soon, so make sure to check it out. (Tina even gives away a script to help you on collections phone calls). To add to the conversation we had about how to collect money without turning it over to the lawyers, I wanted to give you a heads up on what you should be doing before you ever sign your first client. It all starts with your client agreement (you do have one right?). Today, we are going to discuss your payment terms provisions.
Payment Terms in a contract are important to the cash flow of your business. They are important to the ebbs and flows of money and how you keep the doors open. Payment terms are what you point to when your client doesn’t pay or they are late or, worse, you have to go to court to collect the money you are owed. So, what does that look like and how do you deal with it? There are a lot of questions you should ask when you are working on a DIY contract to make sure you get your payment terms right. I covered many of those questions in episode 11 of the Podcast.
Just for you, I wanted to go through some payment term language that could work for your business. So, let’s get into the language:
Payments to Service Company. Payments will be made to Service Company according to the payment schedule that is a part of the Development Plan. Service Company reserves the right to cease development on the Project if payment is not received as scheduled.
Billable Time. Client will be billed for any work on the Project. Such work shall include, but is not limited to, travel time, consultation time, work on and off site.
Due Dates. Payment is due on the dates stated in the Development Plan. Service Company will make every effort to meet agreed upon due dates. Client’s failure to submit required information or materials may cause delays in the production and the estimated completion date of the Project. These delays do not affect the due dates for payments.
Fees and Additional Services. Service Company will charge additional services at the rate of $150.00 per hour. Additional services include any work the Client wishes Service Company to perform, which is not specified in section 1 above or incorporated into the Development Plan, as amended. All invoices for additional services must be paid fifteen days from the date of the invoice.
Changes in Development Plan. Any changes made to the Development Plan must be submitted in writing and agreed to by both parties. Requested modifications to the Development Plan must be submitted in writing by Client. Service Company will create a new Development Plan incorporating the requested changes. The effect on deliverables and price can be substantial.
Costs of Collection. Client agrees to pay any costs of collection, including attorneys’ fees. Client agrees to pay interest at the rate of 5% per month, or the highest interest rate allowable by law (whichever is less), payable monthly on any past due payment due under this agreement.
Expenses. Client agrees to reimburse Service Company for expenses necessary in completion of the Project including, but not limited to, Fonts, Messengers, Proofs, Props, Research, Shipping, Software, Stock photography, Travel, Telephone Consultation.
You see how this set of payment terms is broken into 6 paragraphs. It is important, in contract drafting, to cover one point per clause. You do not want a paragraph to take up too much space. Breaking your paragraph up into smaller bits (with subparagraphs as shown above) makes it easier to read and understand. So, let’s break this paragraph down:
Payments must be made according to a set schedule
In this contract, there is a Development Plan that outlines what is being done on the Project and when payments are due. This is similar to the type of contract Tina talked about for a web developer. You see how the first paragraph outlines the payment on a set schedule and that work may cease if payments aren’t made on time. If you slip down to the Due Dates paragraph, you will see that delays in production do not change the due dates, especially if those delays were caused by the Client.
The Development Plan covers everything that is included in the payment schedule. There, of course, may be additional work requested by the Client, which will be billed at $150.00 per hour. The additional invoices are billed on Net 15 terms, since they are not a part of the payment schedule in the Development Plan.
Changes to the Development Plan
Some additional services may be substantial enough to change the entire scope of the project. Those items will be adjusted and made in writing and the payment schedule and Development Plan will be updated to reflect the new project. This is not a new contract, but an amendment to the contract.
Costs of Collection
You cannot collect interest on late payments, attorneys’ fees or costs of collection unless they are agreed to before collection begins. Include this in your contracts!
Notice how the expenses paragraph is not under the Payment Terms, but is a new paragraph. It is technically different than payment terms. In this paragraph, there are several items that may be necessary to the completion of the project. This is effectively a blank check for Service Company to buy what they need. Your clients may want the right to approve expenses before they are made, so they can control their budget.
Ultimately, your contract is designed to help you get paid. If you make sure the payment terms are clear, you can go a long way to keeping the lights on and the doors open in your business. As Tina said, a “sale is not a sale without cash.”