Independent consultants – how to make sure you get paid in full and on time

One of the commonest problems I hear talked about within the community of independent consultants is that of “payment troubles” – or at least fear of the same.

We should be clear that there is no universal solution to the problem. Each individual client relationship will need to be considered on its own merits and a payment protection or recovery strategy developed accordingly.

Even so, there are some common themes and approaches that are well worth considering.

Being proactive

It is always better to avoid problems rather than deal with their consequences. That means having a payment protection strategy.

Having said that, keep in mind that some balance is required between taking legitimate steps in advance to protect your payment interests and effectively “going to war” with your client before you have even undertaken the work. Issuing threats of potential retribution downstream should they transgress or demanding unrealistic guarantees, are not approaches likely to build a sound relationship!

However, you can make your position clear and protect your interests by taking some of the following largely common-sense steps:

• Undertake a credit-risk reference check on the company concerned. This is confidential and easily done online at low-cost. It can be very effective in highlighting whether or not they have, for example, issues relating to late or non-payment of bills. Beware many credit reports are based on company accounts filed up to 18 months prior, a lot can change in a company during that time frame. 
• Look to find out exactly how their internal business processes work for the cycle running from contact approval, through to milestone delivery and through that to invoice approval and finally payment. Check with all parties involved just how things work and how your invoice will be paid. Note - your individual client contact might not be the person that has to approve your invoice and/or sign the cheque. Relying on assumptions that your sponsor alone has all those authorities might be a costly mistake.
• Examine their annual accounts, assuming they publish full versions. If you don’t know how to read a P&L or balance sheet, research it online.
• Do some standard Internet searches on their reputation. These can be eye-opening, even if it isn’t always directly related to their performance in paying accounts.
• Include detailed payment terms and conditions in your contract. True, in itself this doesn’t always guarantee prompt payment of your invoices but it is better than nothing. At least nobody can claim “they didn’t know” and it might give you a basis for legal action in the future (should the worst happen).
• As part of the above, include late payment penalty clauses, stating the interest percentage to be applied for late payment. In practice, most consultants do not enforce late penalty charges for fear of damaging the relationship with the client but they might provide you with some leverage if you need it.
• Watch out for clients including extended credit takes in their conditions, such as asking for 60 or 90 days to pay. Push back if you can’t live with that and remember, the longer the payment delays you agree, the greater the cumulative debt risk for you probably becomes.
• Define your deliverables on a frequent milestone basis, thereby giving you some leverage in terms of matching future milestone deliveries to the payment of proceeding milestone achievements (which is why you should be cautious about offering extended credit terms). This probably means front-loading your invoicing position.
• If the funds were sufficiently large and your position with your proposal confident, you could ask your client to consider escrow. This can be controversial with some clients – plus cost and qualifying condition complexity are involved. However, if the client genuinely has the budget and have no intention of delaying your payments, it is difficult to see where they should see this as a show-stopper.
• As a variation on the above, you could ask for an up-front deposit on the total contract cost.

In the context of problems

In today’s world, whatever you do in advance, there is a strong possibility that you will occasionally encounter late payment.

Your first step here should be the traditional polite reminder. Some organisations have extremely inefficient Accounts Payable (Bought Ledger) operations and on the whole, I have probably seen far more cases of late payment due to administrative error than a deliberate intention to avoid signing a cheque.

If that polite reminder yields nothing, consider taking some of the following steps:

• Contact the Accounts Payable section directly and speak to someone in authority. 
• Write formally to the client notifying them that the payment is late.
• At some point, assuming your right to do so is supported by your delivery schedule in the contract, you may need to escalate things to the stage of withholding the next milestone delivery until your existing account is settled.

Ultimately, if the above steps fail to secure the payment you need, you may need to consider further recovery actions. It is difficult to give specific advice here because your timings and approach will vary from one situation to another. Keep in mind though there once you hit this button, there is a fair chance your relationship with your client will cease immediately.

Validate your own position

In the interests of objectivity though, I need to state that I have also seen cases where consultants have experienced lengthy payment delays due, in part at least, to their own errors.

At the risk is stating the obvious, before walking down the escalation path, check to be sure:

• Your client is in agreement that you have reached the appropriate acceptance criteria sufficient to justify the payment of your invoice.
• Did your invoice contains all of the required identifiers that would enable your client’s accounts department to process it?
• Are you in any form of dispute with the client over your performance or related issues? If so, this may be affecting their approach to your invoices, even if they should have had the courtesy to notify you of such.
• Is the client waiting for some form of “credit note” from you? If they are, they or their accounting people may be holding your invoice pending their reception of that.

In quite a few cases, delayed payment arises from miss-communications between the consultant and their client. There may be faults on both sides and it’s worth checking that you have done everything required of you before jumping to the conclusion that is it is their fault.

Summary

This is a notoriously difficult area in terms of avoiding problems arising and then dealing with them if they do.

It’s probably worth trying to analyse your total financial risk and exposure to any of your clients and making sure that the total sums involved at any one time do not become excessive.

That is why slightly more frequent invoices of relatively modest amounts, might enable you to manage your total exposure more easily than submitting one large invoice towards the end of the project.

Assuming that your client is financially viable, avoiding and dealing with these problems is often a question of having an excellent relationship between both parties. Remember too that if you’re a valuable asset adding value to the client’s operations, they will wish to take steps to ensure you’re also happy with the relationship. That will include making certain that your invoices are paid promptly!

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