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.
Clients often have detailed provisions specifying how they must be invoiced. The following is a typical clause:
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
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.
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:
Payment terms are net 60 days of receipt of invoice for undisputed amounts.
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.
- Down Payment and Invoicing Frequency. One way to deal with slow payment terms is to change your down payment and invoicing frequency. For example, for a Client demanding net 45, try and word the SOW to collect about 60-days’ worth of fees up front and then invoice every two weeks thereafter. This way, even with net 60 payment terms, you’ll stay ahead of Client’s payment cycle and get checks every two weeks starting about the time your initial deposit runs out.
- Charge More. The Negotiation Equation applies here just as surely as everywhere else. Longer payment terms add to your risk: time for Client to go bankrupt, change its mind, change its staff, lose a major client, etc., all of which can jeopardize your ability to get paid. So, if your client insists on lengthy payment terms, consider increasing your total fee to compensate you for that risk. Sometimes even the specter of an increased fee is enough to get a Client to be flexible about its “standard” payment terms.
- Connect with Accounting. Whatever payment terms you negotiate, see if you can connect with the person at the Client’s business responsible for authorizing payment or cutting checks. This person is a critical gatekeeper and source of information. Keep this person happy! A happy payables clerk can sometimes mean the difference between prompt payment and getting kicked to the next check run (whenever that may be).
Long payment terms are a pain. Use the above strategies to the delay until you can start cashing checks.
You’ll often see Service Agreements that make a particular party responsible for taxes. This section breaks down what these provisions do and how you should handle them.
The following is a typical taxes provision:
Any charges payable under this Agreement are exclusive of any applicable taxes, tariff surcharges, or other like amounts assessed by any governmental entity arising because of the provision of services by the Agency to the Client and such shall be payable by the Client to the Agency in addition to all other charges payable hereunder.
This (poorly written) clause says (i) the Agency’s fee does not include any applicable taxes and (ii) if taxes are assessed, that the Client has to pay those taxes. The taxes at issue here are things like sales and use taxes. For these types of taxes (if they apply to your transaction, and they may not) the Agency has a duty to collect those taxes from the Client and remit them to the government. This IS NOT referring to income taxes imposed on the Agency’s earnings. You are still responsible for those.
Things to watch out for:
- Avoid Inclusive Fees. If you haven’t expressly included taxes in your project budget (rare to do so), then avoid a provision that says that the fee is inclusive of all taxes. If a taxing authority later decides that your deal is subject to tax, stating that taxes are included in the fee means that taxes due will come out of your pocket. So, state that taxes are not included in the fee.
- Permit Later Invoicing. Be sure to supplement a provision like this with a clause that allows you to invoice for taxes after the project is complete. Again, should a taxing authority decide after the fact that Agency should have collected taxes from Client, a provision like this will allow you to send your client an invoice for the taxes.
- Simplify. A simpler provision that incorporates these recommendations might read:
Client shall pay Agency the fees described in the SOW plus any applicable taxes, even if assessed after the project is complete.
Solid invoicing and payment terms are key to your Agency’s health. Just because Net 30 is common, don’t feel like you are bound to accept it or that it is the right fit for every project. Be sure that the payment obligation is triggered by delivery rather than when the Client has accepted or is satisfied with the work. A good deposit coupled with frequent billing (ideally in advance) are fair terms – especially in new client relationships. Tell your clients that more favorable payment terms can be earned by paying on time over the course of a few projects!
Like the Field Manual? We can build a version of this resource customized to your Agency's Service Agreement and SOW containing your target negotiating position (and fallbacks) on key terms. Want to learn more? Hit that contact form.