When most people think of what should be included in a contract, they consider the dollars and cents as one of the most important pieces. And I agree wholeheartedly! It’s a really important provision where I, unfortunately, see lots of mistakes and careless drafting.
That’s why today, as I continue this new series on contracts and begin my review of different contract terms, I’m starting with payment provisions. This is a topic that most people need to know and understand. Whether you’re paying someone or getting paid, the ability to understand and negotiate payment provisions is vital for any small business owner.
In this episode, I first breakdown what you’ll often see in payment clauses, including a few questions to ask yourself first. Then, I discuss some of the most common payment structures and how they might appear in an agreement. Now, let’s dive in!
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In this episode:
[02:26] – Danielle starts off the discussion with what goes into a payment clause.
[03:01] – How much is being paid? A contract needs specificity about the amount and how to calculate it.
[04:24] – Be aware of and clarify the type of currency offered if you work with people internationally.
[04:49] – Look at the agreement closely to ensure you’re doing all that needs to be done to get paid.
[05:38] – Payment contracts will typically dictate the due date of payments which can vary considerably, especially with larger companies.
[06:30] – Is there anything contingent on the payment? Usually, this means starting or continuing services.
[07:18] – Danielle talks about what happens if a payment is late. Many payment clauses include this specific provision for this scenario.
[08:09] – Additionally, you may want to include this language in your payment provision.
[08:58] – What happens if a client wants more services?
[09:49] – Price changes will often depend on the wording of the agreement and the type of payment structure in place.
[11:06] – Flat fees generally work really well for this type of project but can be structured in several ways.
[13:09] – While payments for time spent are fairly simple, you’ll still want to keep these specifics in mind.
[13:49] – Danielle discusses fixed monthly payments for ongoing services and several things to include in these agreements with clients.
[14:48] – Retainer agreements get discussed frequently but aren’t always clear.
[16:18] – Three action steps to wrap up this episode.
Links & Resources:
Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
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Let’s get started.
Hey there, I’m Danielle. Welcome to episode 9 of Simplifying Legal. In the last episode, I kicked off a new series on contracts and answered the question when do you need a contract. In this episode, we’ll start the discussion on different contract terms.
I’m starting with payment terms because this is a topic that most people need to know and understand. Whether you are paying someone or getting paid, being able to understand and negotiate payment provisions is important for a small business owner.
In today’s episode, I’ll first do a breakdown of what you often see in a payment clause. Then, we’ll talk about some of the most common payment structures and how they might appear in an agreement.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Now let’s talk a bit more about the payment terms in your contracts.
When most people think of what should be included in a contract, the dollars and cents are one of the most important pieces. And I agree wholeheartedly! It’s a really important provision and I unfortunately see a lot of mistakes and careless drafting.
Payment Clauses within Your Contract
Let’s start the discussion with what goes into a payment clause. I find it’s easier to think of it by asking yourself a few questions:
- How much is being paid and how is it calculated?
- What needs to be done to get paid?
- When is the payment due?
- Is anything contingent on the payment?
- What happens if the payment is late?
- What happens if a client wants more services?
- Can the price change?
Now, let’s look at each of those questions more closely.
Payment Provision Amount
First, how much is being paid?
- A contract should be specific about the amount to be paid. A fairly standard payment provision may state something like, Company will pay Service Provider $500 for the Services.
- Or, it could say, Company will pay Service Provider $35 per hour for all Services completed.
- If the payments are made on an hourly basis, you should give details on how the time should be tracked. For example, some companies will request that the time is tracked through an app, like Toggl. Others will simply want an itemized invoice with the time spent listed. It may be billed at quarterly or tenths of an hour or the exact time. Just make sure it is clear within the agreement.
- If paid on commission, what is the percentage, and what qualifies for that commission? This type of provision might say, for all qualified sales, the Company will pay a 10% commission of the sale price of the service. The agreement should also define what is considered a qualified sale to ensure there is no confusion. If there might be confusion as to the amount, it should also define the sale price on which the commission will be calculated.
- If you work with people internationally, make sure you state what currency the payment should be made in. If you are in the US, many international contractors prefer to be paid in US dollars, so be clear about the currency.
- If it is a multi-month or multi-payment agreement, make sure your contract language reflects that. We’ll talk more about the different payment structures in just a few minutes.
Determining Payment Protocol
Next, what needs to be done to get paid?
If the services aren’t prepaid, typically, the work needs to be completed and then an invoice is sent. Make sure you are looking at the agreements closely so that you are doing whatever needs to be done to trigger the payment.
If you are a service provider, this could mean registering with whatever system the company uses to pay their contractors. Some people prefer to pay their contractors through their payroll software, like Gusto.
Usually, these steps aren’t complicated, but if you miss something, it can delay the payment process.
Along with these steps, you may also want to consider listing the acceptable payment methods. I think most places that send electronic invoices are okay with receiving a credit card payment, but be sure that a check or ACH transfer isn’t required under the agreement.
Payment Due Date
Next, when is the payment due?
The agreement will typically dictate when the payment is due.
Some payments are due immediately upon receipt of the invoice. Others are due within a certain period of time. For example, if you see a contract or invoice that says the payment is due net 14, that means it is due within 14 days. This time can vary considerably and often gets longer if you’re dealing with a larger company. The longest I’ve personally seen is 180 days. Yup, that’s right, people were waiting 6 months to get paid.
It’s really important to be clear about when the payments will be received. This is so important for business planning. Knowing when money is going to be coming in and out allows you to better budget and plan.
Contingencies for Payment
Next, is there anything contingent on the payment? Usually, this means starting or continuing services.
If the start of services is dependent upon receipt of a payment, the agreement might say something like, the Company will pay the Service Provider $500 for the Services. The Service Provider will not begin work on the Services until the payment is received.
Additionally, if it is a multi-month agreement, it may state that the Services will stop if the payment is not received on time. An example of this language is “If payment is not received by the due date, the Service Provider reserves the right to stop Services until the payment is received.”
If you are a service provider, this is often another way that you can ensure timely payments.
Next, what happens if the payment is late?
Many payment provisions will include a provision for a late fee. Be clear about the amount of the fee and when it will be charged. This also means that your terms need to be very clear on the due date and whether there is a grace period.
An example of this type of clause might be, “Payment is due net 14. If a payment is not received by the due date, a late fee of 1% will be added to the amount due and will be added again for each month that the payment is late.”
Some people prefer a flat fee for late payments, which might state, “If payment is not received by the due date, a late fee of $25 will be added to the invoice for each month that the payment is in arrears.”
Additionally, the agreement might include language that states that the service provider is able to get reimbursed by the company for any legal fees or costs associated with collecting a past due balance.
Rather than late fees, some companies have success offering a small discount for early payments. Like, 3% off if they pay within 30 days, rather than net 60. This is often something I’ve seen for corporate clients who can take longer to pay.
Client Request for More Services
Next, what happens when a client wants more services?
If you are a service provider, it’s a great thing when a client wants more services! If you’re paid hourly, it may be a simple change that you just add more time and invoice the client for the additional work.
If you’re working on a flat fee or project basis, you may need to give more information about the process for adding services. Typically, this would be providing an estimate to the client and asking them to approve the additional cost. Then, you’d begin the additional services after the approval is received.
Depending on what industry you work in, this could also involve a more formal process, like change orders. If change orders are involved, your contract should be very specific about how that process will work.
And last, can the price change?
Price changes will often depend on the wording of the agreement. This may also only be applicable for longer-term agreements, which we’ll discuss in a minute.
For example, it could state that there is an annual review of the rates included. Or it might state that the service provider reserves the right to change the right after notifying the client.
Other times, if you are a service provider, your agreement may be silent and you simply send the company a notice and advise them that the rates will change at a specific date and advise the agreement may be terminated if they don’t agree with the change. This is usually for longer-term month-to-month contracts.
Additional Payment Clauses
These aren’t necessarily EVERY option that might occur in a payment clause, but it covers many of the most common that I see in my practice and that we’ve included as options in the Businessese templates. If you have something unusual, be sure that it is clear for both parties, and don’t forget to include the important details.
Payment Structures for Contract Agreement
Now that you know what generally goes into payment terms, let’s talk about some of the most common payment structures and some of the things you may see reflected in each type of agreement.
One-Time Flat Fee
First, let’s start with a one-time flat fee that will be paid in full.
- Flat fees generally work really well for a particular discrete one-time project.
- For example, in my legal practice, I offer certain trademark services on a flat fee basis.
- I find this is easiest as a service provider when you know about how long it will take and you can then assign an appropriate rate. It’s a lot harder if the time will vary considerably.
- When it comes to one-time flat fee agreements, It’s important to know when the payment will be made: before the start of services or after the project is completed. Be sure that you check the agreement for this.
Installments or a Payment Plan
Next, you may have a flat fee that is broken into installments or a payment plan.
- Similar to the one-time flat fee that is paid-in-full, this often works well for a particular project that is going to take a longer period to complete.
- For example, if the estimated completion time is 90 days, you may require a payment to start the work and another payment each month.
- You may have services that require a downpayment prior to starting and an additional payment due upon completion.
- An example of this is 50% down and the remainder upon completion.
- Or, you could have a downpayment that is due at signing, and then payments are due at certain milestones. If you are using this type of agreement, make sure that the milestones are clear and that there won’t be any argument as to when they are completed.
- There are a lot of ways to structure this type of payment. The key in your agreement is to be clear about the amounts and due dates. Also, if there is any impact on the services, make sure you provide the details.
Payments for Time Spent
Next, there are payments for time spent, such as an hourly rate. As we discussed before, these are often fairly simple.
- Make sure that the agreement is clear regarding how time should be tracked.
- Next, the agreement should also include how frequently invoices should be issued.
- If there are any caps on the hours to be worked, make sure you include them.
- An example that covers all of these may be:
- Company will pay service provider $35 per hour for the services, which will be billed on a monthly basis after the services are completed. All time should be tracked in Toggl. Service provider may not bill more than 15 hours per month.
Fixed Monthly Payments
Next, you may have fixed monthly payments for ongoing services.
- For example, if you are a Pinterest manager, you may have a package that states you will be paid $1,000 to manage scheduling a certain number of pins on Tailwind.
- For these agreements, you want to be clear about how much the package is and what is included.
- Also, state when you will be invoicing. Some service providers bill after the services are completed and others require prepayment.
- It’s also important to include any minimum time commitments. I often see service providers state that there is a 90-day minimum, and then the contract goes month-to-month.
- This means that during the first three months, the agreement cannot be canceled and the service provider will be paid the set amount for each month. After that, the agreement can be canceled in accordance with the termination provision of the agreement.
Next, you may have retainer services.
- I hear the phrase retainer agreement discussed frequently, but it’s not always clear what it means.
- Typically, this is a prepaid amount that the services are then billed against.
- For example, someone might pay $5,000 and then bill against that for the services performed until the $5,000 is depleted. Then, if there are additional services to be offered, an additional retainer amount may be paid.
- These are used commonly in the legal world, especially in litigation.
- Some people also use the term retainer to refer to a fixed package of prepaid services.
- For example, you may pay $1,000 a month to a service provider for a maximum of ten hours. If you exceed that amount, you would then be required to pay at an hourly rate or the work would stop until the following month.
- In this type of agreement, you may want to include whether or not unused hours may roll over to future months.
- Some companies will allow some hours to roll over, but will cap it at a certain amount.
This wraps up the discussion of some of the most common payment structures. Just like the terms I mentioned above, there are a lot of other options that you might see in an agreement. Ensure that whatever provision you use is clear to both parties. And, as always, if you aren’t sure, consult your lawyer for advice.
Now, let’s review the Action Steps for today’s episode:
- Review your existing agreements. Are the payment terms clear? If you’re a service provider, don’t make it difficult to get paid. Be clear and specific with your terms.
- Next, if you have had any issues with late payments, have you adjusted your agreement to include late fees?
- If you’ve had any other issues with making payments or getting paid in the past, revisit those issues and adjust your agreement to help you avoid a similar situation in the future.
This wraps up today’s discussion on payments. Next week, we’ll continue our series on contracts.
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