Contract Provisions for Troubled Times: Part 1 Getting Paid
Successful business people know that the activities they monitor and manage are the ones most likely to succeed.
Getting paid is the top priority of almost all businesses. In a difficult economy, this means that, more than ever, you have to focus on making sure your revenue actually comes in the door. Get paid up front. If you can’t obtain the entire amount up front, then get a partial down payment. If the other party objects to a full up front payment, perhaps they can put some of the money into an escrow account held by a third party, or even an online service such as escrow.com. (Escrows for some industries and professions, such as law practice, are regulated, however.) Vague standards for release of payment from an escrow won’t work well. The standards should be very clear.
Ask for smaller, more frequent payments instead of a large payment at the end.The other party also could perform in smaller, more frequent increments. A “pay as you go” relationship could be fairer and create less risk than one in which one party holds all the risk for a long period of time. In addition, smaller payments may be easier for large companies to make without red tape and bureaucracy. Smaller payments can be approved at a lower level of purchase authorization or even via credit cards (known as “purchasing cards,” “procurement cards,” or “p-cards”). Here is an example pcard policy: http://able.harvard.edu/pcard/manual/.
If you are paid for performance, make sure the performance is clearly measurable For example, many independent contractor agreements tie payments to performance by listing a schedule of “milestones” (goals that must be met) and “deliverables” (products or services to be delivered to the hiring party), along with required dates, and corresponding payments due at each milestone. As with clear standards for release of escrow payments, the standards for performance payments (milestones, deliverables and any acceptance criteria) should be very clear. You can reduce risk even further by making the milestones and payments more “granular” (i.e., smaller, more detailed and more frequent).
Watch out for excessive delays in receiving payment. Many large companies now are trying to pay on Net 45 or even Net 60 terms, instead of Net 30, with no flexibility. Some now require a 2% discount if they make payments within 10 days, when this formerly was the vendor’s choice.
For late payments, charge interest, and have the right to charge for costs of collection (attorneys’ fees and/or collection agency fees). Rightly or wrongly, many businesses choose to treat their vendors as a source of financing. If you want to be a lender, that’s fine. Just don’t become a lender inadvertently, and without proper protections. In California, the interest you can charge is limited by the “usury” (http://tinyurl.com/hz45v) provision in Article 15 of the state Constitution (http://www.leginfo.ca.gov/.const/.article_15). Regulated financial institutions benefit from exceptions to this provision, but you may not. It continually amazes me how many “form” contracts omit the basic protection of accruing interest on late payments.
In the next issue, I’ll discuss contract provisions to ensure the other party performs obligations other than payment.