Ironclad Contracts: Tougher Than a Pinky Swear

Up-front, Periodic, or Milestone Payment Schedules

Now that you and your client have figured out how you’re going to be paid, let’s figure out when. A couple of these payment plans are easy: If you’re getting paid by the hours you accrue, you won’t get paid up front, so you’re going to want to get paid what you’ve earned periodically. Biweekly payments are typical for salaried employees, but may be difficult to obtain for consultants, because not every company can get you on their payroll. You might have to settle for monthly payments, but I wouldn’t agree to much longer than that.

As I mentioned earlier, retainers typically get paid up front, but it’s up to you to determine how much up-front payment you want to request. If you’re going to stick to 10 hours a week, how many hours are you going to require the client to buy from you at a time? A block of four weeks or a whole year’s worth? I’ve heard of both happening. Every client’s expectations are different, so talk this through with your client, then get it in writing.

Companies can pay for flat-rate projects in all three ways: They can pay for them up front—as I often persuade my clients to do—either in part or in full. They can make payments periodically—for example, in thirds, equally spaced over the duration of a project. Or they can make partial payments as you complete each milestone—for example, 20% after the discovery phase, 30% after wireframes, 30% after visual design, and 20% at project completion. The higher the rate, the more likely a client is going to want to break up the payments over time. As I alluded to earlier, you can encourage your client to pay in bigger chunks by offering a discount on the total rate. Just make sure that the final price isn’t so low you’ll be bitter about it later.

Then, there’s the net question: How soon after you’ve invoiced a company must they pay you? I try to stick to net 30 days, which means I am due payment no more than 30 days after they have received my invoice. Some companies have a net-45 or net-60 policy, and I recently came across a company with a net-53 policy—that boggled my mind! Larger companies who commonly interact with contractors have such policies, so be sure to ask companies about them or ensure they’re willing to accept yours.

And if they don’t pay on time? Will you charge interest? After how long? And how much? I’ve asked around and found that 1.5% per month on the total unpaid amount is pretty typical. That extra amount isn’t going to make you a millionaire, but its being there in the contract will help if and when you need to enforce payment.

More or Different

How are you going to handle it when you end up spending significantly more time working on a project than you had anticipated, and you’re exceeding its budget? How are you going to react when clients change their mind midstream and decide they do want you to do that other thing after all or want another round of revisions on a document or need you to get it all done two months earlier?

You need to have a policy in place for handling changes. Even for a flat-rate agreement, I always make sure to calculate the absolute maximum number of hours I’m willing to work per week, per month, or total, and clearly state that number in the contract. Once a project exceeds that maximum, I charge overtime at a hefty hourly fee, also stating it clearly in the contract. It’s a great deterrent to a client who’s thinking of piling on more work, and it also helps with self-discipline, because you don’t really want to have to go there with your client. Still, it’s good to have the safeguard.

In the case of a client’s asking for additional work outside the original scope of a project, how much newness is enough to consider issuing a change request? How should you tack on the additional cost? In an even worse scenario, how should you remove no-longer-desired phases? Have these conversations with your clients ahead of time to make sure they understand the consequences of change and to avoid their otherwise inevitable assumptions about what’s included under the original contract.

Your Contract or Theirs

Every client is going to have a different policy for handling contracts. If you’re working with a small or a new organization, they may never have dealt with a consulting agreement before, so you’ll need to walk them through the process. On the other hand, if a company regularly works with consultants, they may have a standard independent contractor agreement (ICA) they’ll require you to sign.

I work with startups, small agencies, big agencies, and major corporations. The best generalization I can make is that startups and small agencies will be willing to sign your standard contract, while big agencies and major corporations will ask you to sign theirs. A few times, my clients have been willing to sign both. More often than not, my version of the contract focuses more on what I’m going to deliver, when, and for how much. A client’s contract is more about who owns what once the project is complete—them, of course!

Long or Short Contracts

There are several styles of contracts to consider. Because of my desire to remain casual, while still being professional, I typically use a one-page letter of agreement instead of a massive document like that an agency might require. The boilerplate for this letter of agreement—which I received from a friend who is also an independent consultant in UX—uses clear and formal language that outlines the services I’ll be providing, the start and end dates, the maximum number of hours I’ll spend on a project in total, the flat rate and expected dates of payment, and two signature lines—theirs and mine. For the majority of my projects, this simple contract has worked well in ensuring both of us are in agreement on the terms of the project and ready to commit.

Because of the obvious physical constraints of my one-pager, it doesn’t include a lot of detail. In fact, it doesn’t include some of the details I’ve just recommended. But its length is gradually growing. The breakdowns in communication I’ve had with clients have ultimately led to my adding more and more stuff to my contract. Over the course of a year and a half of consulting, there is one thing I have added that is more important than pretty much anything else in the entire contract: the termination clause.

A Horror Story

To make sure each and every one of you adds a termination clause to your contracts, I’m going to scare you into doing it by telling you the biggest contract failure I’ve had in my professional consulting career.

Last summer, I had an awesome, high-profile client, and I was loving the work I was doing for them. As is the case with many of my projects, a Web design agency subcontracted me to do the work. So in reality, the awesome, high-profile client was really the agency’s client, not mine. The agency was my client, and they had brought me in to supplement their existing team.

The super-cool company is a famous-person’s brand with a whole bunch of different properties across multiple industries. They hired my client, the agency, to redesign three of their Web sites and scheduled the projects to happen one right after the other. When the agency brought me on, we decided to figure out how much time I would be spending across all three projects, so I could charge a single flat rate. This was great for them, because it ensured they would own my time for many months to come. This was great for me, because it ensured I would be employed for many months to come—or so I thought.

Things were going pretty well on the project. I was enjoying what I was doing, and the agency was very happy with my work. However, for reasons I needn’t go into here, the super-cool company’s expectations were not being met, and the day after I had sent in the final version of my last deliverable for project 1, the agency informed me that my services were no longer needed for projects 2 and 3.

Putting aside the emotional distress of the situation, I needed to figure out how much money they owed me. The payment structure we had agreed to was a flat rate across all three projects. Although we had determined that flat rate based on an estimate of total hours and an hourly rate, ours was not an hourly agreement. The payment schedule we had agreed to was payment in equal thirds: one third up front, before the project started; another third paid exactly a third of the way through the project’s total duration; and the last third paid at the two-thirds mark. In other words, despite the three projects’ having different sizes and, consequently, different durations, we had treated all three projects as one in my contract.

My termination came one day after I had handed in the final deliverable for project 1 and exactly one week after I had sent in my invoice for the second payment. The agency informed me that, because the hours I had accrued on project 1 roughly equaled the amount of money they had paid me up front, they were not going to pay the second payment, for which I had just invoiced them. In fact, they weren’t going to pay me anything else at all.

The termination clause in our contract stated only that the contract was valid until 30 days after written termination. What it did not state was what penalty fee they would owe me in case of termination. That was my big mistake.

The agency argued that they had paid me for the hours I had worked. I felt they owed me additional compensation, because I had been expecting another two and a half months on the project—and two-thirds of my flat rate, so consequently, had been turning down dozens of prospective clients who wanted to work with me during that time. I argued that, at a minimum, they owed me payment for the 30 days our contract was still valid, because we had agreed on a project rate structure. They believed it was an hourly rate structure with a periodic payment schedule. Despite my having made the commitment to them, they weren’t willing to meet their commitment to me, and I was out on my ass. This issue still remains unresolved.

The Best Advice

I asked my Twitter followers for the greatest lessons they’ve learned when it comes to contracts, and I wholeheartedly agree with their advice. Here’s what they had to say about contracts:

• The obvious deserves to be stated: “Always have one, and you can never have too much detail,” says Matt Nish-Lapidus, formerly an independent consultant and now at nForm.
• Justin Davis of Madera Labs notes, “Any vagueness will bite you bad.”
• “Read them,” Livia Labate of Comcast Interactive Media quips. “Seriously, all the way through,” adds Jake McKee of Ant’s Eye View.
• “Ask when don’t understand something,” advises Jared Spool, founder and CEO of the consultancy User Interface Engineering.
• Independent consultant Kyle Soucy urges, “Don’t be afraid to push back.”
• Consultant Katherine Gray touched on my initial resistance: “Contracts preserve good relationships. Don’t skip them because you like the person and think nothing could go wrong.”
• And if my nightmare is any indication, Josh Evnin, consultant at ThoughtWorks, is right on: “Get a real lawyer to look over your standard contract. They’ll see all kinds of stuff you wouldn’t have.”