Get paid on time: 3 steps to a better design contract

This article was originally published by AIGA Blue Ridge.

As the first of the Ask a Lawyer series, AIGA Blue Ridge asked chapter member, Matthew S. Johnston, Esq. Attorney, for legal advice all designers need. If you have a question or topic for Matt to tackle in an upcoming Ask a Lawyer, send an email to [email protected].

At some point in your graphic design business, you will experience the pain and annoyance of not getting paid on time (it happens to lawyers all the time). The problem of getting paid on time rarely starts when the client didn’t pay the invoice. Often, the root cause of the problem is contractual in nature, meaning the client contract does not adequately incentivize on-time payment.

Designers, indeed all business owners, should clearly communicate the expectations regarding payment. Many client contracts I have reviewed and revised will have some version of this invoice clause (this actually comes from the AIGA contract template):

Invoices. All invoices are payable within ________ (__) days of receipt. A monthly service charge of 1.5 percent (or the greatest amount allowed by state law) is payable on all overdue balances. Payments will be credited first to late payment charges and next to the unpaid balance. Client shall be responsible for all collection or legal fees necessitated by lateness or default in payment.

On first reading, most people would shrug and say, “Well what’s wrong with that?” Actually, this short paragraph is riddled with problems from a contractual point of view. The language screams passivity and practically invites collections problems. Here are three simple improvements:

1. Label clause properly

Calling the provision “invoice” does not draw attention to what you, the designer is really worried about—getting paid. So do something very simple and communicate clearly by calling the provision “Invoices and Payment.”

2. Actively impose on the client the obligation to pay by a defined time

Currently, three problems exist within just the first sentence of the provision:

  • The above provision doesn’t name the client as having an obligation to pay (don’t assume this is understood).
  • The word “payable” does not convey any action or imperative to act. The sentence is more of a definition than an obligation.
  • There is the vagueness of “receipt.” How can a business know when a customer “receives” an invoice? A business knows for certain the date of an invoice and nothing else.

Just asking a few questions helps develop a better sentence. Who must pay? The customer must pay. When does the company want to be paid? Within X days of the date of the invoice. Those two answers lead to a simple, better sentence:

Customer shall pay all invoices within ___ calendar days of the invoice date.

The above sentence is short, clear, active, declarative, and easy to measure. So what happens when the client doesn’t fulfill their obligation?

3. Clearly define late payment penalties

Designers should look to incentivize on-time payment. In AIGA’s sample contract, we can see an attempt to incentivize on-time payment (“A monthly service charge of 1.5 percent (or the greatest amount allowed by state law) is payable on all overdue balances”). Again, the sentence is passive to the point of inactivity. The clause contains no escalating penalties. The language creates an ambiguity which may lead to a dispute, such as the difference between a service charge and the undefined late payment charge.

Clearly defined late penalties incentivize early payment or at least punish late payment. Three basic, escalating levels of penalty would be:

  • A late fee for payments received after the due date (with time for the mail to catch up)
  • Interest accruing at a stated (reasonable) interest rate for payments more than 30 days late
  • Attorney or collections agency fees after 90 days late

With these points in mind, a penalty provision might look like this:

If the designer receives payment from the client more than 15 days after the invoice date, the designer may impose a late fee of $50.00. If the designer receives payment from the client more than 30 days after the invoice date, the company may assess interest equal to one percent of the unpaid balance for each month, or a portion of the month the balance is unpaid. Interest accrues retroactively from the due date. If the client has not paid an invoice for more than 90 days, the company may refer collection of the unpaid amount to an attorney or collections agency. If the client’s unpaid invoices are referred to an attorney or collections agency, the client shall pay all reasonable attorney’s fees or collections agency fees in addition to the late fee and accrued interest.

The provision may seems a little wordy, but the three penalties are clearly stated and escalate appropriately. Here is an example of the penalty provision in action.

The designer invoiced the the client for $1,500 on August 1, 2015. The due date is August 11, 2015. In the event the client does not pay until December 15, 2015. the client may be obligated to pay the following:
Invoiced amount: $1,500.00
Late fee assessed on August 16, 2015: $50.00
Interest (1% per month ($15.00) for four months and one partial month): $75.00
Attorney fees (estimated): $125.00
Total owed: $1,750.00

Because the penalties are written as “may,” the designer has the option to assess or not assess any of the penalties.

Always remember to encourage the client to pay on time by clearly stating their obligation—and the consequences for failing to meet their obligation. By clearly spelling out the penalties for late payment in the client contract, you can either incentivize on-time payment or at least punish late behavior.

About the Author: <div><span>Matthew Johnston has been practicing law in Frederick since 2007. After six years as an associate at Gordon &amp; Simmons, LLC as a litigator, Matt formed his own solo practice focusing on serving small businesses. The Law Offices of Matthew S. Johnston provides a spectrum of services to small and medium sized business, including business formation, contract negotiation and drafting, employment law, independent contractor law, trademark, and copyright law. In addition to these specific services, the Law Offices of Matthew S. Johnston, LLC offers outsourced general counsel services and dispute resolution services.</span></div> <div><span><br> </span></div> <div>Married to a marketing and public relations professional, Matt particularly enjoys working with creative professionals and firms to meet their business and legal challenges.</div> <div>After service in the United States Navy, Matt graduated from the University of Maryland-College Park with a B.A. (<em>cum laude</em>) in Government in 1997. While working as a government relations professional, Matt attended Catholic University Law School where he graduated&nbsp;<em>cum laude</em>&nbsp;in 2005.&nbsp;</div> <div>When not practicing law, soccer keeps Matt engaged. He is a rabid fan of D.C. United and U.S. Soccer Teams (Men and Women), a vocal and slightly manic goalkeeper, and a mellow licensed soccer referee. He has eclectic musical tastes and likes jigsaw puzzles, gardening, and sci-fi books. He lives in Frederick with his wife, two&nbsp;daughters, a dog, and two guinea pigs.</div>