If you’re a freelancer then you’ll know that getting paid on time is critical. But did you know you can use your contract to protect yourself and nail down everything related to money?
Earlier this summer, Freelancers Union and Vinay Jain, Chief Legal Officer of Shake (an app that allows you to create, sign and send legally binding agreements) hosted a webinar packed full of advice on how freelancers can use contracts to their advantage and get paid on time, every time.
The goal is to try and leave as little room for ambiguity as possible in writing. That means anticipating things that, hopefully, won’t happen but giving yourself a pre-decided path to follow if they do. Here are six recommendations from Vinay that every freelancer would be wise to follow:
1. Get a Deposit
When a client agrees to pay a deposit, it’s a good signal that they are serious about working with you and is actually a common practice among service businesses large and small. The goal of insisting on a deposit is to protect yourself, should the contract be cancelled (it’s always easier to keep money that you already have than chase money that’s owed to you). Vinay suggests including the following language in your contract:
“Of Freelancer’s fee, $X is due at signing of this agreement. This is a non-refundable deposit made in consideration of the reservation of the Freelancer’s time.”
Be sure to calibrate your deposits to the anticipated loss you might incur as a result of the cancellation. Remember, you’ve set time aside for this project; you might even have turned away other work to take it on – all projects involve a calculable risk, and the deposit needs to reflect that.
Talk to others in your field and gauge what percentage of their fee is charged as a deposit.
2. Consider a Kill Fee
Did you know that the law protects freelancers against losses incurred in the event of a contract being cancelled? This is where a kill fee comes in use. A kill fee is a pre-set amount that a client agrees to pay you if they decide to cancel the contract.
A kill fee needs to be fair and agreed upon by both parties and protects a freelancer against damages (time, materials, the cost of going out and finding new work to replace this project, etc.).
Here’s the contract kill-fee language that Vinay recommends:
“If Client terminate the agreement for any reason other than a material uncured breach by Freelancer, then Freelancer is immediately entitled to $X as liquidated damages*, less any fees already paid to Freelancer.”
*Note “liquidated damages” is the kill fee.
Where do you set the bar with kill fees? If the amount is too low, for example if you’ve done 80% of the work for a $1,000 contract and you set the kill fee amount to $150 – then you’re not covering your actual work losses. On the flip side, if you’ve only done 15% of the work, but set your kill fee at $800 then there’s a strong argument that the kill fee is too high and punitive.
Vinay recommends having a staggered kill fee, meaning that the fee goes up with the completion of each stage of the project – a great argument for building stages into your work (more on this in point 4. below).
3. Late Fees
Late fees are a bit of a grey area for freelancers. Many steer away from including them in contracts, while others include them but don’t consider them to be enforceable.
It’s recommended that all freelancers include a late fee line item in their contracts – even if you don’t expect to be able to collect it – because it sends a signal to your client that you’re serious about being paid on time.
As with deposits and kill fees, don’t make your late fees punitive. Set them at a reasonable amount, there are even state and usury laws that cap them. Vinay suggests including the following language in your contract:
“Any amount not received by its due date will collect interest at 1.5%* per month”.
*1.5% percent per month is the number you see most often.
4. Use Milestone Payments
Breaking up your project into pieces or milestones is a useful way of ensuring you get paid what’s owed to you at reasonable intervals, rather than at the end of a project.
Almost any job can be broken up into smaller pieces. For example, a writer could break up a white paper writing project into several pieces: Initial research and interviews, delivery of first draft, edits, and final piece.
Here’s another example, this is for a web designer scoping out a contract for website design:
- June 3: Signing of agreement. $500 due at signing
- June 10: Delivery of wireframe mockups. $500 due
- June 17: Delivery of detailed design and architecture specs. $500 due.
- June 24: Deployment of new site on staging server. $500 due.
- June 30: Deployment of new site on deployment server. $500 due.
How does this protect you? Well, if a client decides on June 17 that they no longer want to continue with the project, it’s very clear that $500 is due to you as of that date. If you’d proposed all of this as one lump sum, it would be less clear how much you’re still owed.
Make sure your invoicing practices support this milestone model and that you invoice as-you-go rather than on completion. This language will take care of that:
“Invoices will be sent on milestone dates. All payments are due within 15 days of invoice date, except for initial and final payment. Initial payment is due before the start of work. Final payment is due before deployment of site on production.”
Notice those payment caveats for the deposit and final payment? Agreeing to withhold deliverables is a really good strategy for getting paid.
5. Be Clear about Expense Reimbursement
If you incur project-related expenses be clear about what is and isn’t reimbursable in your contract. Include language about whether you need your client’s prior-approval to incur those expenses.
6. Be Clear about How Fees are Calculated
Use your contract to specify whether you’ll charge a flat fee, payment for time, or a hybrid.
You’ll also want to make sure that your invoice schedule is unambiguous. For example, telling a client that you’ll bill them every two weeks, is actually different than saying you’ll bill them on a semi-monthly basis. To avoid confusion, use your contract to specify the days and/or dates that you’ll invoice your client.
For More Info!
Check out the on-demand video of the webinar for more expert, plain English contract advice for freelancers on subjects such as handling scope creep, liability, and ownership of work.
About the author:
Fundbox is a technology company that is fixing the small business economy. Fundbox is helping SMBs, freelancers and home offices grow by managing their cash flow better and by overcoming short term cash flow gaps.