Maridel @ Wingspan
How to Use Contract Terms to Help You Get Paid

How to Use Contract Terms to Help You Get Paid

May 20, 2020

Maridel @ Wingspan

Wingspan members are constantly asking: “Do I really need a contract?” After all, developing a standard client contract takes time and money, and asking every client to sign it can slow down your onboarding process. Here’s Wingspan’s take: You always need a contract. A succinct, well-drafted contract presents many benefits, not only through concrete legal protections but also for the health of your relationship with your client. Good fences make good neighbors, and a contract acts as a “good fence:” It outlines how your relationship will work. And you’ll be very glad you have this document if things go wrong. For many self-employed professionals, a contract provides a crucial backstop when issues arise about who owns the intellectual property, how the contractor fits into the client’s organization, or who pays if something goes terribly wrong.A good contract can also help self-employed workers address what is perhaps the most common way a client relationship can go awry: The client won’t pay. Here are ten key contract terms you need to know (and use) to protect yourself. Defining the PartiesOne of the most under-recognized benefits of a contract is that it lays out who is making the deal. In the self-employed world, it’s not unheard of for disputes to arise about whether the freelancer was hired at all. A slippery client, determined to not pay for your work, may try to deny that they ever even asked for the work. They may argue that these were just open-ended discussions and that you went to work without a final greenlight and did things they didn’t ask you to do. In this scenario, a contract lays that issue to rest. There are times when things can get murky as to who you’re really working for. Perhaps an advertising agency hires you to take some custom photography for their client as part of a larger campaign. When it comes time to get paid, the agency tells you they are in a payment dispute with their client, and they can’t pay you until it’s resolved. What are you supposed to do? Perhaps your understanding was that the agency was to pay you regardless. But they might not see it that way. A contract can help cut through any confusion. A good contract usually begins by clearly defining who is entering into the agreement, as below:

This Freelancer Services Agreement is entered into as of the date of the last signature affixed hereto, by and between Fran Freelance, a sole proprietor (the “Freelancer”), and Client Corp. Inc., a Delaware corporation (the “Company”).

That short sentence alone can be crucial when a nonpayment dispute arises.Rate of PayA key function of any contract is setting out the freelancers’ rate. In many cases, this will be a simple hourly rate, and won’t require much legal jargon. Here is a simple hourly payment contract term:

In consideration for the Freelancer’s services, the Client will pay Freelancer at an hourly rate of $50 per hour.

If you don’t work on an hourly basis, having a good contract is even more important. Perhaps you have agreed to a flat fee, to be paid at certain milestones. Here is a bare-bones contract provision that addresses this:

In consideration for the Freelancer’s services, the Client will pay Freelancer a flat fee of $5,000, paid in accordance with the following schedule:
  • First payment due prior to the start of the project ($1,000)
  • Second payment due 6 weeks after project kickoff ($2,000)
  • Final payment due upon completion of the project ($2,000)

This is just the minimum. The more specific you can be, the less likely that differing expectations between you and your client will lead to conflict.DeliverablesIf you’ve agreed to be paid when you provide certain items, there are all sorts of mishaps and misunderstandings that can lead to issues down the road. (Spoiler: none of them are great.) This includes getting paid later than you wanted, less than you wanted, or not paid at all. Lawyers often use the term “deliverables” to refer to intangible pieces of “product” that may be purchased through a contract. For example, if you’re a software developer, you may be paid as you create and provide certain groups of code that perform particular functions on a website. Contract terms that call for payment based on certain deliverables can get complicated. They require not only some familiarity with contracts, but they also require a detailed understanding of the work that is being done. If you work with a deliverable system, you may want to speak with an attorney to draft a contract for this. At a minimum, your contract should set forth what payment will correspond to what deliverable:

In consideration for the Freelancer’s services, the Client will pay Freelancer the following amounts in conjunction with the Client’s acceptance of the following deliverables:
  • Home page ($400)
  • Contact Us page ($300)
  • About Me page ($200)

Be sure to set some ground rules for “acceptance of deliverables.” Acceptance, in this context, is legal jargon for when the client acknowledges that they got what they wanted. A deliverables contract, at a minimum, should set a time limit by which a deliverable is “deemed accepted” if the client hasn’t raised any issues with it. For example:

Acceptance. Client, within 5 business days of receipt of each Deliverable (the "Acceptance Review Period"), shall notify Freelancer, in writing, of any failure of such Deliverable to comply with the specifications as agreed upon by the Parties, or of any other objections, or alterations that Client wishes made to such Deliverable. In the absence of such notice from Client within 5 days of receipt of each Deliverable, that Deliverable shall be deemed accepted.

This type of language can be crucial if a client keeps raising new issues for projects that you thought you had completed months ago. If you have a good contract, you can stick to your guns and tell the client that the deliverable has been accepted, and if they have new work they want to be done, they will have to pay you for the additional time spent tweaking a project that you thought was already complete. Setting Out Due DatesMany contractors have been caught off guard by a client who, having received the freelancer’s invoice 30 days ago, tells them that their company customarily pays invoices within 90 days. You could have averted this problem with a simple contractual provision on invoice due dates:

Payment: Payments for each invoice delivered by Freelancer to Company are due within 15 days of receipt.

If your client pushes back on this contract term, at least you will know when to expect payment. Stop Work ProvisionsWhen invoices are overdue and you start to worry about paying your bills, you may consider holding off on doing more work for the client until they pay up. The downside: You risk angering the client.Perhaps you were hired to develop a website, which they hope to go live by the end of the month. When you say that you can’t do any more work until your overdue invoices are paid, they may accuse you of precipitating a disastrous delay to their plans, causing a domino effect of lost profits. They may even threaten to sue you. In this scenario, it’s crucial to be able to rely on a contract term that allows you to stop work whenever payments are late, as such:

In case of overdue payments, Freelancer reserves the right to stop work until payment is received.

That one simple sentence alone can greatly improve your ability to address this sticky situation. Expense Reimbursement ProvisionMany freelancers will have to pay for expenses related to their work for a particular client. Perhaps you are a graphic designer, and you have to pay certain license fees to use particular elements in your project. But you can’t always predict how much these will cost, and that money spent might not be easily covered by your own revenue from the work. In such a case, you’ll want to have your client reimburse for these expenses. But a cheap client may say, after receiving your expense invoice, that they never agreed to pay your back-end costs. Your contract is the opportunity to address this conflict before it arises. It should make clear what type of expenses might be forwarded on to the client for reimbursement. It should also establish whether your client’s authorization is required before you incur a particular expense. Here is a simple expenses provision which lays out some “good fences” about what sort of expenses a freelancer can incur:

Expenses. Client shall reimburse Freelancer for reasonable out-of-pocket travel expenses, including transportation, lodging, mileage, and meals incurred in rendering Freelancer’s professional services, as well as all expenses incurred for Client’s account in connection with Freelancer’s providing of services and performance of duties hereunder, including but not limited to the cost of packaging material for shipment, postage, messenger, shipping charges, copyright or trademark charges, third-party research costs, website hosting, and any media buys associated with radio, print, or other media and online sources.

Often, an expenses provision will also set out what sort of expenses require the client’s prior authorization:

Freelancer shall obtain Client's prior written authorization before incurring any Expenses costing in excess of $100 USD.

An expenses provision should also note when reimbursement is due:

All Expenses not paid directly by Client shall be paid within ten (30) days of receipt of Freelancer’s invoice.

Choice of LawMany self-employed professionals don’t put much thought into which state’s law governs their agreement with a client. But with business conducted online and across state lines, not having clarity can seriously complicate things. In the United States, the interpretation of contracts and many other areas of the law are governed by state law. And state contract law can vary to a surprising extent. If you ever have to bring a collections lawsuit, you want a straightforward nonpayment case. If the court (and your attorneys) first have to resolve a complicated question of which state’s law applies, the cost of the lawsuit can increase significantly. As a rule of thumb, the state where you live is often the best option. A simple choice-of-law provision can help you head off such issues:

Governing Law. The validity, interpretation, construction and performance of this letter, and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of state of California without giving effect to principles of conflicts of law.

Choice of ForumRelatedly, a contract can dictate where the parties will sue if a lawsuit comes up. This can have a huge impact on the feasibility of a collections lawsuit, should it come to that. Say you work in New York but you connected with a client online who is based in Atlanta. After many months of work, it becomes clear that your client won’t pay you for more than $15,000 of work. You decide your only option is to take them to small claims court. You may waste an entire day (or week) in small claims court, only to find out that your client must be sued in Georgia. The prospect of traveling to Georgia or hiring an Atlanta-based lawyer may end up costing you more than the unpaid invoices are worth. To avoid this, include a choice-of-forum provision:

Exclusive jurisdiction and venue for any claims made by either party against the other shall be within the state and federal courts located in the State of New York.

This may seem similar to the choice-of-law provision above, but they are in fact different. A New York court could interpret the law of Georgia in resolving a lawsuit, if required by a relevant contract or other legal principals about what state’s law applies to a particular dispute. Interest Charges on Overdue InvoicesA good way to incentivize your clients to pay on time is to include a contract provision that permits you to charge interest on overdue invoices. In many states, you can’t just do this as a matter of practice—your client must agree to it (via a contract). Here’s a typical provision:

Client acknowledges and agrees that all sums owed or otherwise payable to Freelancer hereunder shall bear interest at the rate of one and one-half percent (1-1/2%) per month, or such lower rate as may be the maximum rate permitted under applicable law, from the date upon which payment of the same shall first become due up to and including the date of payment thereof.

But don’t go overboard with your late fees. If it’s too high, a court may declare it unenforceable. Interest rates are usually capped by state law. Aim for 1.5% per month. It's the highest rate most states allow.Attorneys’ Fees and Collections CostsIf you ever have to sue to get paid, you will find that the cost of hiring an attorney for such a lawsuit may dwarf what you’re actually owed. One way to avoid this catch-22 is to include a provision stating that your client can be liable for attorneys’ fees and collections cost. This will allow you to recover not only what you’re owed, but also the money spent hiring a lawyer to take your client to court. Just having this provision in your contract may help you convince a nonpaying client that it’s in their best interest to cough up what you owe them, rather than forcing you sue. Here’s a typical provision:

Collections Cost. In the event that Client fails to timely pay duly submitted invoices as required by this Agreement, Client agrees that it shall be additionally liable for all costs and expenses of collection, including, without limitation, reasonable fees for attorneys and court costs.

Get help managing contracts and collecting delayed payments with Wingspan. Sign up for a free 90-day trial here.You Might Also Like:If Your Client Says They Can’t Pay You Anymore, Do ThisDealing with Nonpaying Clients During a Crisis3 Boundaries to Set with Clients Before You Start Working Together (And How to Bring it Up)

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