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Ensuring you get paid when contracting

Contractors are business-to-business service providers to their clients and agencies so, unlike permanent employees, they have no guarantee that they will be paid. As a result, contractors need to adopt strategies that ensure they get paid when contracting.

Before even starting a contract, contractors should perform a financial check on their agency or client. During contract negotiations, it may be possible to negotiate more favourable terms that reduce the risk of non-payment.

If, despite all of these measures a contractor has not been paid, then the best strategy is to stop work and start going down the legal debt recovery route. Any more time spent with a non-paying client is time that could be spent looking for a new contract.

How you can check your client or agency is solvent before starting a contract

It is very rare that a recruitment agency or a large organisation such as a typical contracting client suffers a catastrophic financial collapse. There are usually warning signs months before that happens that will show up in credit checks and accounts.

For as little as £2, a contractor can download company information that can tell them whether their client or agency is in financial trouble, or heading in that direction. Warning signs can include poor credit scores, low cash balances and county court judgments (CCJs).

A more comprehensive credit report that includes a recommended credit limit can cost only a few tens of pounds – contrast this with a contract worth £10,000 a month and it is clearly a modest investment that generates a significant return.

It is very rare that a recruitment agency or a large organisation such as a typical contracting client suffers a catastrophic financial collapse. There are usually warning signs months before that happens that will show up in credit checks and accounts

Based on an assessment of a potential client/agency’s credit risk, a contractor can decide if they want to do business with them, and if the contractor does, on what terms. For example, a client that has a string of CCJs and a low credit score should pay up-front.

How you can paid in advance when contracting direct

When contracting direct, if the client is perceived to be a credit risk, then one approach to try is to secure fees in advance. Although many large organisations might open their negotiating position by saying that they only pay on 30 days or greater, it is surprising how many will change their mind when threatened with the withdrawal of key services.

Contractors can start by requesting their full fees in advance. This is unlikely to be agreed, but it a good opening negotiating position. A good result would be to gain the client’s acceptance to pay 50% up-front and the remaining 50% once the work has been completed.

As long as the contractor is disciplined about their invoicing, this process can significantly minimise non-payment risk. At the end of each month, the contractor needs to invoice for both the remaining balance of the previous month’s work and for 50% of the next month’s work in advance.

What payment terms can be used to reduce the risk of non-payment

Contractors can also propose payment terms that reduce the risk of non-payment. ‘Payment terms’, or ‘terms of business’ are the business phrases commonly used to describe things like within how many days an invoice should be paid and the measure that the business will take if payment is late.

Within the UK business community, the convention is that payment should be made within 28 or 30 days of invoice. Some clients, mostly large corporates, may insist on 60 or even 120 days. It is also not uncommon in the small business arena, particularly with contractors and freelancers, for seven days to be the norm.

Contractors can make two key changes to their terms to reduce the risk of non-payment:

  • Insist that invoices are settled within seven days. If the payment is late, or consistently late, then the contractor can stop work until it is paid. That means the contractor is risking no more than 5-6 weeks of fees
  • Ask to invoice on a weekly basis with payment in seven days. That way, the contractor is only risking 2-3 weeks of fees.

Many clients may say no, as it costs them more to process the contractor’s payments as they may be both more frequent and be outside of the client’s normal supplier payment processes. However, the contractor can always decide not to accept the contract if a credit check reveals that the client is a credit risk and refuses to change their terms.

Once the terms have been agreed, the contractor should ensure that they are included in the contract, using a separate schedule if necessary.

How recruitment agencies can pay invoices on time

The payment experience a contractor will have with a recruitment agency will typically be different from clients. Most agencies will pay within a few days of invoice – that is one of the benefits that agencies claim contractors enjoy by working with them rather than contracting direct.

Agencies will suffer the same 30, 60 or 120 days terms with the clients that a contractor would when contracting direct, but recruiters can pay promptly because they factor this cashflow need into their business models.

They either have a healthy cash balance of working capital, a bank facility or will use invoice finance to secure early payment. Invoice finance can include factoring, when a finance company buys the agency’s debt and then collects it from the client, or invoice discounting, when a finance company loans the agency money against the invoice, using it as collateral.

Reducing the risk of non-payment by recruitment agencies

However, just because recruiters typically pay within 5-7 working days of invoice does not mean that they all do, or that every recruiter is financially sound. In fact, agencies go bust owing contractors money a lot more often than major clients.

Some agencies operate a pay-when-paid policy. This means the contractor won’t be paid until the agency gets paid by the client. Unless desperate for work, contractors should turn down these contracts automatically – that’s one of the reasons that agencies take a margin, so that they can fund paying the contractor before they get paid by the client.

Contractors should adopt a similar strategy to negotiating terms with agencies that don’t automatically commit to paying within 5-7 days of invoice, or that may have a poor credit rating, as they do with clients.

They should insist on weekly invoicing and seven day terms, and stop work if their terms are not met. Once the terms have been agreed, they should be included in the contract, using a separate schedule if required.

Late payment can be a breach of contract

Depending on the precise wording of a contract, if a client or agency pays the contractor late, it can be a breach of contract. This means that the contractor is perfectly entitled to stop providing their services if they have not been paid according to their terms.

If payment fails to materialise within a few days of the due date, then the contractor should contact the client/agency requesting payment within three working days or services will cease. If no money appears, then the contractor should stop working and start debt recovery proceedings.

Late payment rarely occurs once solicitor’s letters before action start flying, unless the client or agency can’t pay rather than won’t pay.

The client’s project manager may be able to expedite payment

It is not unknown for large corporate simply not to pay suppliers until the supplier starts chasing for payment. Another strategy that contractors can adopt in this circumstance, or as a result of any non-payment, is to talk to their client project manager and explain that if they don’t get paid, they have to stop work.

This can result in a very irate manager, possibly a senior manager, contacting their colleagues in the finance department and explaining why their contractor suppliers must be paid on time, otherwise the business grinds to a halt.

Slow, late and non-payment has always been a major issue for small businesses, as large firms consider their supplier base to be an extension of their banking arrangements by providing such generous payment terms.

However, contractors have a range of tools and strategies at their disposal so that they can ensure they get paid, and paid on time, for the work they have delivered.

Updated: 23 January 2015

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