Late Payments

Steve Pruneau

When clients fall behind in payments, they usually say payment is coming.  Whether this encouragement is from good intentions or not doesn’t matter.  The effect on contractors is the same… it tempts us to wait without payment.  And just when you are down to your last dollar and you think you will be paid today, some unexpected interruption will occur and you will be asked to wait just a little longer.

Dear readers, I fell into this trap.  I was working on my last engagement without clear trigger points in mind for escalation.  I was a sub-contractor to a consulting firm which had the client relationship.  The client fell behind in payments to the consulting firm and the consulting firm began delaying payments to contractors – the project team.  As long as the project team kept working and accepting late payments, the consulting firm could “maintain the client relationship” at our expense.

Rather than the relationship manager stopping work with the client (he didn’t want to alienate his client), the project team ended up walking off the job.  But we should have forced the issue about 6 weeks before we actually did.  If I had clear escalation points in mind, it would have worked better.  Should have stopped work when payments were coming 6 weeks past the invoice date.  Some big companies don’t escalate late payments until they are 90 days past due.  The client project sponsor actually wanted the relationship manager to force an escalation weeks ago, so the problem could be addressed within the client company.

It is really important to make it clear to your client that you do not accept being put in the same category as all other “vendors”.  Individual contractors are not the same as a large corporation, even if both are operating as a corporate entity.

Next, clients (or if you are a sub-contractor, your consulting firm / placement agency) will usually suggest that you are being unreasonable for wanting to collect full payment on time.  They will suggest that you are challenging their trustworthiness by not “trusting” them when they say payment is coming.  Our work lives do not operate on trust, they operate on cash.  Without cash everything stops.

From now on, these are my check-points:

  • Before starting work, client understands what happens if payments are made later than the agreed terms.
  • At 1 week late, the client is reminded of consequences.
  • At 2 weeks late, the client is given final warning.
  • At 3 weeks late, work stops, even if there is a partial payment.

Your terms may be different.  But the main point is, have a plan for escalation.  Inevitably you will need it.

Some may say, this escalation plan is too aggressive.  It all depends on your tolerance for risk and how long you are willing to go without payment.  I say, no matter how relaxed your terms, someone will test them and will want you to believe you are being unreasonable for expecting to collect full payment on time.  Banish the thought.  Stick to your plan.

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Steve Pruneau leads executives and business owners to solve the gap between variable revenue and a fixed workforce. He is the first consultant at Free Agent Source. As a founder, Steve engages the broader community of corporate clients, entrepreneurs, startups and consultants. He manages company operations and lives in Los Angeles, CA.

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