You probably already know that “getting it in writing” is a good idea when you’re running a business—but you might not be aware of how closely it’s related to getting paid in a timely manner.
Let’s look at the basics of creating a contract that will get you paid in full, and paid on time.
Before we get started, let's pause for a second for an important disclaimer. This post is being provided as an educational resource that should prompt you to work with your lawyer, who can provide more tailored guidance for the unique needs of your company.
So, a contract is a document that defines expectations. Here’s what you’re gonna do and here’s what I’m gonna do. It doesn’t need to be a hundred pages long to be effective, but it does need to cover the basics to do you any good at all. And since our goal at InvoiceCare is to help you get paid, I am going to focus primarily on the parts of the contract that have to do with the money.
So what are the contract terms that are essential to getting you paid on time?
First: Define the Scope of Work
Define exactly what you will be providing as part of the contract so you don’t end up being a victim of “scope creep” where the client slowly adds services without paying extra for them.
Be sure to outline anything that costs extra, including any expenses that you might incur along the way.
Also, don’t be afraid to include what you won’t be providing if you think there might be confusion down the road. Better to address it up front that to have that uncomfortable conversation later.
Second: Define How You Will Charge
For most services businesses, you real have the choice of a fixed price model (which means you have to clarify exactly what you’re delivering up front) or hourly (which usually is better when you’re unable to or when it’s difficult to define the deliverables up front). Either way, be very specific with your pricing definitions. A clearly defined scope plus clearly defined pricing will go a long way to helping you have a very effective contract.
Also be prepared for the unexpected. Clarify what happens if you “go over” on hours or scope and what the process is in case something unexpected arises.
Third: Define When You Will Charge
Be specific about when you will charge. Define when and how often you will bill, and whenever possible, don’t put off the billing until the end of the project. Once the work has been completed and/or the product has been delivered, you have very little leverage to use if payments go awry. The closer the money is aligned with the work performed, the better.
Fourth: Define When You Expect Payment
Define when payments are due, and remember that optimal terms are between 14 and 21 days. (We have a great post that explores payment terms in detail. If you haven’t already seen it, check it out.)
Also define what the penalties will be if payments go past due. A common provision would be something like: “Past due accounts are subject to interest at one and a half percent per month until paid in full”. You may also consider making the client liable for fees if an invoice is forced into collections.
Fifth: Name the Billing Contacts
Now there’s one more item that almost never gets included, but that’s really valuable in getting you paid successfully: Ask the client to define who the billing contacts are. Include their full contact information: name, email address and phone number…and get more than one contact if possible!
It could be the “escalation” person or an A/P clerk or someone else. The more people that are involved in the flow of money in your organization and your customer’s, the more vital it is to get this kind of contact info up front.
A great contract is a great foundation for profitable client relationships, so never settle for ambiguity. It’s easier for everyone when your terms are clear, direct and understandable.
Get it in writing, and go get your money.