Understanding Payment Terms In Consulting Agreements

My actual New Year’s resolution is to put out more informative content. Let’s start with payment terms in a contract: 1) What is Payment Based on? Why are you paying? “Because they are doing work for me.” Sick, great response. I mean specifically, why are you cutting a check at that very moment? What triggered the need to pay (major project item, a time frame passed, job done, etc)? 2) Payment Structure There are many different ways that payment can be structured. Usually it’s dependent on the type of work (maybe someone is building software for you) and relationship of the parties (person or company is working with you on an ongoing basis). 3) Per Milestone/Project A common structure is payment per stage of a project (or just completion). Think construction: x% up front, x% once you hit some critical path item, and then finally x% when the job’s done. If this is what you’re doing, a clearly defined scope and understanding amongst the partiesis key. If the vendor/contractor gets paid after “kitchen repaired” and you thought that included appliance electrical work (and it doesn’t), it’s a payment dispute. 4) Quarterly/Monthly/Weekly Pay You could be paying for ongoing work that may end on a certain date in the future (or not). Think IT support for your company. Generally, you’re going to get an invoice on a certain day and have to pay within x calendar days (called Net X days). Timing of payment is important here. Can you pay within 15 calendar days (Net 15) of the date of an invoice? Maybe your company does check runs twice a month so that’s fine. Maybe that’s too fast for your accounts payable folks (or you). 5) Bespoke Payment Sometimes payment terms are unique and based on the industry/type of service or product. Like paying a base subscription fee (monthly payment) and an amount in additional once a certain amount of data has been used (milestone). 6) General Considerations A) Make sure there is a mechanism in place to handle disputed payments (like the kitchen example) (if you can hold that payment and pay whatever isn’t in dispute). B) If you’re the vendor, collection language is important (interest + fees). C) What happens to payments made upfront? Is it a deposit? If so, what happens to it? (Applied at the beginning? The end? Returned if work isn’t performed?) D) Can you off-set what you owe by how much you paid to fix the work the vendor did? E) What if we terminate the agreement? Consider language that clearly defines exactly what is owed (and what isn’t) when one party terminates the contract. F) Is payment final or just an estimate? Clarify, clarify, clarify. G) Is there a mechanism in place for when the scope/time/contract price changes? Very important and needed by both parties. H) In the same vein as G), are you approving (in writing) changes to the contract? Just a quick, non-exhaustive list of considerations for payment terms. Consult with an attorney.

Today's contract tip is about the basics of drafting payment terms. Almost all businesses need an invoice to make a vendor payment. The problem is that many contracts don't properly address that requirement. Typical contracts say: “Buyer will pay Seller X within 30 days of the Effective Date.” Or “Buyer will pay Seller X per widget within 30 days of delivery.” These contracts later say, “Seller will send Buyer invoices at [email address].” Notice that the triggering event (here Effective Date or delivery) is a condition for payment, but the invoice submission is not. Every commercial contract should include two conditions for payment: receipt of Seller’s invoice AND the triggering event. So “Buyer will pay Seller the price within 30 days after the later of Buyer’s receipt of the invoice or Seller’s delivery of the widget.” Or “Seller will invoice Buyer no earlier than the delivery of the widget. Buyer will pay the invoice within 30 days.” Make sure the Buyer's obligation to pay does not kick in unless it has an invoice AND the event has occurred. It is in their best interest to make sure payment terms are clear and reflect actual business practices. Do you ever see this provision missing the requirement elements? #HowToContract #contracts #lawyers

As a General Counsel, I’m often surprised at how much confusion and resistance surrounds one of the simplest provisions in a contract: payment terms. More and more, I see companies treating payment terms as if they’re optional, endlessly flexible, or somehow unrelated to the commercial deal we’ve actually made. Payment terms are not a “nice to have.” They are a core part of the pricing. For example, when you agree to net 30 terms, the pricing is built on the expectation that the funds will arrive in 30 days. Push that to 60 or 90, whether by delaying approvals, withholding payment over a minor dispute, or building in “notify me, then give me 30 more days” grace periods, and you’ve rewritten the economics of the contract. Remove interest from the equation, and you’ve removed the incentive to pay on time, turning the agreement into an interest-free loan. Yet I routinely hear familiar refrains: “We don’t agree to penalties, so no interest on late payments.” “We can dispute invoices at any time, even after we’ve paid.” “If we dispute, we’ll pay 30 days after it’s resolved.” “We don’t cover collection costs.” “You have to notify me that I haven’t paid before it’s late.” Here’s the reality: If you don’t want to pay interest, don’t pay late. Vendors are not in the business of financing their clients’ business operations. Disputes should be timely and specific, not a way to hit the pause button indefinitely. The payment of any undisputed portion of an invoice maintains the cash flow assumptions that support pricing and delivery. Holding back the full invoiced amount erodes the economic foundation of the agreement, disrupts revenue recognition, and causes liquidity harm disproportionate to the underlying dispute. And if a vendor has to spend money to get paid, whether through lawyers, collections, or administrative follow-up, those costs belong with the non-paying party. Otherwise, a profitable engagement can become unprofitable overnight, for reasons that have nothing to do with service quality. Late payment terms are not a punishment, they honor the payment discipline that makes the deal sustainable for both sides. If you need extended terms, negotiate them up front and expect the price to reflect the cost of carrying your receivable. In contracts, payment terms are the deal’s cash flow engine. Treat them as optional, and you’re not just delaying a check, you’re breaking the financial logic underlying the transaction.

Do you have cash flow woes? ✨ Today’s Tuesday Tip: CLEAR PAYMENT TERMS IN CONTRACTS = MORE CASH FLOW. When payment terms are too vague, you leave room for misunderstandings, delayed payments, and unnecessary tension. For example, simply saying “payment due upon receipt” doesn’t set clear expectations. What does “upon receipt” mean—immediately, within 24 hours, or within a week? Instead, opt for clear, specific language: “Payment is due within 7 calendar days of the invoice date.” “A late fee of X% will be applied for payments received after 30 days.” Here’s why this matters: 1️⃣ Protects Your Business: Specific terms create a legally sound foundation, ensuring your rights are clear in case of disputes. 2️⃣ Builds Trust: Setting expectations upfront demonstrates professionalism and makes it easier for clients to plan accordingly. 3️⃣ Streamlines Operations: You can better manage your cash flow and forecast income when payment terms are clear. Clarity in payment terms can make or break your client relationships and your cash flow. If you’re unsure how to draft payment terms that are clear and enforceable, let’s chat! Helping businesses create strong agreements is one of my favorite parts of what I do! 💕 Together, we got this!