Introduction
The work to be done and the price to be paid are often the subjects of much negotiation in the SOW. However, the terms relating to scope and payment are relatively simple. You’ll typically have less to negotiate here. Note that some of these provisions may appear in the statement of work. So, keep an eye on both the contract and the SOW to make sure you cover everything.
Invoices
Clients often have detailed provisions specifying how they must be invoiced. The following is a typical clause:
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📑 Invoices. Agency shall not invoice Client until Client’s final acceptance of Agency’s work. Agency will ensure that all invoices include the applicable PO number and be sent to the PO “Invoice To” address. Payments shall be made in U.S. Dollars, or the applicable local currency as set forth in the SOW, within 30 days of receipt of an undisputed invoice
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In negotiating these provisions, Agency’s primary goal is to get paid. To do so, keep the following tips in mind:
- Avoid Payment on Acceptance. We touched on this in tl;dr Ten Key Issues. In the example above, Client’s obligation to pay is triggered by acceptance of the work rather than delivery of the work. The danger here is that Client uses the acceptance criteria as a back door to scope creep: “I don’t like it; I don’t accept it yet.” Avoid this by triggering payment on delivery of the work. If an acceptance criteria must be used, then handle acceptance of work in a separate provision considering this book’s recommendations in the section about Acceptance of Work.
- Be Practical. Before making changes to an invoicing provision, an Agency might first see if it’s businesses processes can generate invoices that meet the Client’s requirements. If you can do so without too much effort, its generally a smoother path to find a way to comply rather than asking the Client to change its
- Details Matter. Don’t take invoicing details lightly. Clients, especially larger ones, can use technical invoice defects as grounds for delaying or refusing payment. Make sure your account person or project manager is reviewing draft invoices to ensure they contain all the information requested by the contract.
- Be Careful of Currency. If your Client is not in the same country as your Agency, then be mindful of currency clauses. You’d prefer to be paid in your home currency rather than in the currency of your Client (if different). This avoids risk of currency fluctuation over the course of the project.
Payment Terms
There probably isn’t a simpler provision that causes more business problems for an Agency than the payment terms provision. A typical payment provision reads like this:
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📑 Payment terms are net 60 days of receipt of invoice for undisputed amounts.
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Before we talk about negotiating this clause, let’s make sure we know what it means.
The above clause means the Client has 60 days to pay Agency’s invoice. And by extension, payment isn’t considered late until those 60 days have elapsed.
You’ll often see the word “net” before the time for payment (in this case, “net 60 days”). The word “net” is an old way of saying “the total amount due.” It makes more sense when seen its original context which would have been something like “2/10, net 30”. This phrasing means that the Client may take a 2% discount for payments made in the first 10 days with the balance, or net amount due, no later than 30 days from the invoice date. I’ve never seen the discount portion of this clause (e.g., “2/10”) in a Service Agreement (more common in contracts for sales of goods).
An important thing to keep in mind is that anytime you waiting to be paid, you are essentially acting as a bank: you are financing your client – making them a loan. Think of all the hoops your bank makes you jump through for a loan and you’ll approach the payment terms clause with a more business minded eye:
- Avoid Undisputed. If the Client's obligation to pay is subject to their "reasonable satisfaction" or that invoices be "undisputed", delete this language. Both of these formulations add a subjective element to Client's obligation to pay. I've seen these provisions abused by Clients to get more work out of the Agency for free ("We aren't happy with how the logo looks so we are disputing the invoice until you make changes.") Contract law already provides a mechanism for a Client to not have to pay (when Agency breaches the contract). So, don't add a subjective element here. If Client resists, offer an objective standarad that matches the law such as "Client may withhold payment on any portion of an invoice that corresponds to Deliverables provided that do not meet the specifications provided in the SOW."
- Shorter is Better (Duh). Obviously, you want the net payment terms to be as short as possible. 15 is great. 30 is probably most common. Large companies ask for 45 to 60. I know one large company that pays net 170 days (which is a disgrace). To negotiate this, see if you can find out the payment terms your Client demands from its customers (maybe on its website terms or in publicly available contracts). If the payment terms your Client demands are shorter than what it offers you, use the double standard to negotiate.
- Defer to SOW. Often a Client’s Service Agreement will specify terms like net 60. Rather than trying to change the Service Agreement, you might have more success in changing this via the SOW. As we discussed in the section SOW Conflicts, simply add “Except as provided in the SOW,” to the beginning of the payment terms clause. Then add details in your SOW as appropriate.