It's not easy to get your clients to follow a consistent payment plan. These useful tips will help you develop a hassle-free payment strategy that's fair to both you and your clients.
It's the nature of working in a creative industry—each job and client has unique characteristics, requirements, and needs. Although the professional flexibility can be rewarding, devising a consistent payment strategy can be another matter altogether. What may work for one client may not be quite right for another. Your best strategy is to approach your payment schedule as you would any design project, personalizing your methodology with forethought, research and creativity.
Before initiating a client relationship, use several proactive measures and precautions to define your payment schedule and help prevent future obstacles.
START WITH THE PAPERWORK
Before starting a project, provide your client with all necessary written documentation. This includes proposals, estimates, letters of agreement, contracts, schedules, and change orders. Where applicable, get your client's signed approval. Although oral agreements are legally binding, they're much harder to prove. If all written documentation is clear and appropriately detailed, you'll establish a professional relationship from the start, allowing for any potential disagreements and/or “stumbling
blocks” to be ironed out beforehand.
ESTABLISHING YOUR PAYMENT SCHEDULE
Once you complete your research and fully evaluate the unique needs of each
client and project, you can develop an effective payment schedule that includes
several progress payments. Progress payments are based on a percentage or portion
of your estimated costs. As mentioned earlier, each payment should be due at
a specified, defined project phase and encompass defined deliverables and responsibilities.
An advantage to receiving incremental payments throughout a project versus
one lump sum at the end of a job is that your financial liability throughout
the project will be greatly reduced, especially if the client delays payment
later on. Of course, this advantage is contingent upon you effectively managing
and enforcing the payment schedule.
UP FRONT PAYMENT
Establish a standard policy that requires partial payment from clients prior to the start of the project and before any billable work is incurred. This strategy, termed an “up front” payment, is standard within our industry and is usually based on a percentage of the total project fee and/or estimate. For this up front payment strategy to work effectively, it's crucial that you enforce it consistently, firmly and without apology for all your clients. Be cautioned. This simple request can often become a time-consuming struggle. Clients may give you various objections, ranging from the reasonable “Our corporate procedures preclude me from processing any up front payment without either receipt of work or an approved, internal purchase order” to the plausible “As a small business, our cash flow is tight and overhead payments, like rent and utilities, may need to take priority” to the red flag “Why should I pay for work I haven't seen yet?” or “We don't have any money right now, but are expecting a large check soon.” Respond to these scenarios calmly and creatively.
First, emphasize that up front payment is a reasonable request and a common procedure within the design industry. If you don't receive an up front payment, then you are, in effect, incurring billable hours and extending credit to the client. This reasoning can also apply to asking for a deposit or retainer against out-of-pocket expenses.
Also, without up front money, you may inadvertently be working on spec with payment promised only upon acceptance. Like other professionals (such as architects and lawyers), you're hired based on experience. This means that you're entitled to be paid regardless of whether your work is accepted or approved. (This is provided, of course, that your services follow the client's initial creative direction and is of the same quality and creativity you were initially hired for.)
GET IT IN WRITING
When establishing a job contract, negotiate a written and equitable payment schedule, including a due date for each payment and your specific responsibility or presentation to be delivered or completed by that date. Don't use vague terminology that can be misinterpreted such as "Payment due midway through the project." Another important strategy is to indicate that payment is due upon completion and delivery of the specified presentation/responsibility, not upon client approval. Such approvals can get delayed by several days or weeks for reasons beyond your control or the project could get put on unlimited “hiatus.”
Don't rely on client-defined target dates that reflect client objectives since these also may get delayed for reasons beyond your control. For example, one designer I know who was responsible for a comprehensive identity project for a store opening was asked to delay the last invoice until the store opened. Unfortunately, the opening was delayed several months after the target date. Luckily, the designer based the final payment on the date when her client first anticipated the store was to open, rather than agreeing to a general statement like “Payment to coincide with the opening of the store.”
MANAGING CHANGES
Often, design firms have the most difficulty collecting for additional charges above and beyond the contracted project scope and fee. This common problem can be alleviated by a few proactive measures.
First, before accepting a project, make sure you have provided a detailed outline of your services in a tight, comprehensive proposal and/or contract for the client's written approval prior to the start of the project. This document should include detailed project parameters that were utilized to craft the initial budget. Such information may include, but should not be limited to, detailed specifications of each project component, defined deliverables (number of design concepts/presentations and revisions included) and exclusions (i.e. expenses, illustration, photography, writing, programming).
Second, one employee within the design firm should be assigned responsibility for keeping track of each project's progress. When changes/overages occur in either services, deliverables, time or expenses, the employee would issue a change order for the client's approval before incurring such costs. A change order outlines, as simply as possible, the change requested and the fee to be incurred for the client's approval. If the change/revision requested by the client is critical, then their approval of the additional costs will be faster as the design firm has something the client needs. By keeping client's informed of overages before they happen, it also helps the client see the financial impact of their changes and helps them prioritize the necessity of such changes and better manage internal approval processes.
Most design firms bill clients for any additional fees after such costs have been incurred. This is an ineffective and passive-aggressive way to manage a project and is unfair to both the design firm and clients. If a client is billed after changes have been made, there are few recourses left to the designer if the client refuses to pay or wants to negotiate a reduced cost.
In this fast-paced business climate, design firms often feel like they don't have time to create these change orders. However, a change order doesn't take that long(and it can be kept simple. There will always be exceptions, so in rare cases, change orders can be issued at the same time as changes have been submitted. Ultimately, it will be much easier to negotiate additional fees, while it's fresh in the client's mind and before costs are incurred.
Another effective negotiating tool is not to charge additionally on some changes. The client should be informed of this wonderful news, both verbally and in writing. Make it clear that such a change was not included in the initial contract but, as a courtesy, they won't be charged for the related costs. However, any additional changes thereafter will need to be billed accordingly. In doing this, the client knows and appreciates that you went above and beyond the call of duty and is more amenable to paying for additional changes thereafter.
MANAGING INVOICES
Familiarize yourself with your client's payment policy and keep your invoices in manageable increments. Many corporations and businesses won't pay unless an approved purchase order (P.O.) has been processed; the absence of a P.O. at the time of invoicing will delay payment.
For large expenditures, your client may have to go through several rounds of time-consuming approvals-often involving upper management and accounts payable-before a P.O. will be issued or an invoice processed. As a rule of thumb, smaller invoices are often easier to process. Ask your client how much is too much before an invoice or P.O. gets delayed because of internal processing and approval procedures. Once you know the cut-off amount for a large expenditure, you can adjust your progress payments accordingly.
When you do receive a P.O., read it carefully. Clients will often include special, often “standard,” conditions and/or descriptions that may or may not be appropriate or applicable to your project and relationship.
Typically, a client will compensate you for only up to 10% over the amount indicated in the P.O.-check with your client for the exact percentage they can or will pay. If the scope of the project changes and additional fees are incurred that exceed 10 percent of the P.O., inform the client and request a revised or additional P.O.
Many clients have an established policy for how soon they pay invoices and have timetables that range from thirty to ninety days. It's important to find this out in advance and invoice accordingly. For example, if a client agrees to pay all in “net sixty,” and the project can be completed within two to three weeks, you may want to issue all invoices at the start of the project. This will help shorten the approval and processing time, and ensure that payments are made closer to the project's completion, rather than three months later. If this isn't possible, you can ask for a large percentage of your total costs to be paid upfront, thereby reducing some of your financial liability later in the project.
CHECK IT OUT
During the negotiation process, ask the client for credit references (three names is standard), then call the references to confirm credit history. The references should include, if available, a contact within a related industry like a photographer, copywriter, or illustrator.
Then run a credit check on your client through a company like Dun & Bradstreet. Keep in mind that a credit report can't predict your client's continued dependability, reliability, or their ethics. The report simply provides a useful credit history on the client.
TERMINATION POLICY
Include a termination or cancellation clause in your agreement or estimate, like: “In the event of the cancellation of this assignment, a cancellation fee will be paid by the client and will include full payment for all work completed, expenses incurred, and hours expended. The cancellation fee will be based on the prices outlined in the estimate/proposal. Any initial payments that have been received will be credited against any amounts due.”
BE CREATIVE
Depending on your business goals and cash flow, you may be able to negotiate less common, but sometimes viable, alternative arrangements. Although it's less popular, bartering can be an acceptable alternative for a cash-starved client offering an exciting creative opportunity. First check with your accountant-barter arrangements may be taxable. When bartering, make sure you negotiate, in writing, an equal value exchange. For pro-bono and nonprofit work, or for projects you accept at a reduced rate, you can also ask for full creative control and compensation for all out-of-pocket expenses. If you decide to negotiate such nontraditional agreements, treat them like your other professional relationships and have them approved, in writing, by the client. Also, always emphasize that you're posing a nontraditional, one-time agreement that may or may not be applicable for the next project. The downside is that you risk establishing a reputation for these types of arrangements, possibly lessening the perceived value of your services.
KEEP IN TOUCH
Once you've negotiated a payment schedule, don't assume the client will follow through. After you mail an invoice, follow up with a friendly phone call to confirm its receipt and then, a few days before it's due, call the client to remind her of the upcoming payment deadline. This last call may be more effective if you can couch it within a project-related conversation. Most importantly, discuss payment and collections in a win-win scenario, maintaining a proactive position (for instance, ask if there's something you can do to speed payment along faster). You can also offer a discount to clients for invoices that are paid early, although this option may not be advantageous for firms with tight cash flow and should be first discussed with your accountant. Once you have received payment, follow through with a thank-you note or phone call to show your appreciation.
IF ALL ELSE FAILS
Even if you follow every possible precaution, there will be clients who won't pay for various reasons. In these cases, you have several choices: You can either accept the loss as part of doing business and learn from the experience or seek help through arbitration, collection agencies, small claims court or, as a last resort, civil court. A clause in your project documentation clarifying how potential conflicts will be handled can help. Chapter 21 offers further coverage of this topic. But, for example, if you prefer arbitration, The American Arbitration Association recommends including the following clause in your contract:
“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof.”
BUILD A RELATIONSHIP
The design firms that have fewer collection problems are often firms that emphasize client relationships and provide responsive services tailored to each client's needs. These design firms work in partnership with their clients, providing timely progress and schedule reports and change orders. If a client is not kept informed or is treated badly, collections will certainly become difficult. However, if you work in partnership with a client, the client will become your advocate and help guide you through the client's own internal maze of approvals and contacts and defend your fees.
Also, trust your instincts. Gut reactions to a client or project can often guide you in the right direction in formulating a payment plan-or working with the client in the first place.
In general, payment strategies and the processes you go through to develop, negotiate, schedule, and collect them should be flexible and adapted to the needs of you and your client. Just because you're in a creative business doesn't mean that your finances can't be straightforward.
©Emily Ruth Cohen 2005
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