Payment Strategies

It's the nature of working in a creative industry; each job and client has unique characteristics, requirements, and needs. Although the professional flexibility can be rewarding, devising a consistent payment strategy can be another matter altogether. What may work for one client, may not be quite right for another. Your best strategy is to approach your payment schedule as you would any design project, personalizing your methodology with forethought, research, and creativity.

Several proactive measures and precautions to define your payment schedule can help prevent future obstacles to a successful relationship with your client.

Start with the Paperwork

Before starting a project, provide your client with all necessary project documentation. This includes proposals, estimates, letters of agreement, contracts, schedules, and change orders. Where applicable, get your client's signed approval. Although oral agreements are legally binding, they are harder to prove. If all written documentation is clear and appropriately detailed, you'll establish a professional relationship from the start, allowing for any potential disagreements and stumbling blocks to be ironed out beforehand.

Up-Front Payment

Establish a standard policy that requires partial payment from clients prior to the start of the project and before any billable work is incurred. This strategy, termed up-front payment, is becoming a common procedure within our industry and is usually based on a percentage of the total project fee or estimate. For this up-front payment strategy to work effectively, it is crucial that you enforce it consistently, firmly, and without apology for all of your clients.

Be cautioned. This simple request can often become a time-consuming struggle. Clients may give you objections ranging from the reasonable, “Our corporate procedures preclude me from processing any up-front payment without either receipt of work or an approved, internal purchase order,” to the plausible, “As a small business, our cash flow is tight and overhead payments, such as rent and utilities, may need to take priority,” to the red-flag, “Why should I pay for work I haven't seen yet?” or “We don't have any money right now, but are expecting a large check in soon.” Respond to these scenarios calmly and creatively.

First, emphasize that up-front payment is a reasonable request and a common procedure within the design industry. If you do not receive any up-front payment, then you are, in effect, incurring billable hours and extending the client credit. This reasoning can also apply to asking for a deposit or retainer against out-of-pocket expenses.

Also, without up-front money, it may appear that you are working on spec with payment promised only upon acceptance. Like other professionals, such as architects and lawyers, you're hired based on experience. This means that you're entitled to be paid regardless of whether your work is accepted or approved—provided, of course, that your services follow the client's initial creative direction and are of the same quality and creativity you were initially hired for.

Managing Invoices

Familiarize yourself with your client's payment policy and keep your invoices in manageable increments. Many corporations and businesses will not pay unless an approved purchase order (PO) has been processed; the absence of a PO at the time of invoicing will delay payment.

For large expenditures, your client may have to go through several rounds of time consuming approvals, often involving upper management and accounts payable, before a PO will be issued or an invoice processed. As a rule of thumb, smaller invoices are often easierto process. Ask your client how much is too much before an invoice or PO gets delayed because of internal processing and approval procedures. Once you know the cutoff amount for a large expenditure, you can adjust your progress payments accordingly.

When you do receive a PO, read it carefully. Clients will often include special, standard conditions or descriptions that may or may not be applicable to your project and relationship.

Typically, a client will compensate you for only up to 10 percent of the PO; check with your client for the exact percentage he or she can pay. If the scope of the project changes and additional fees are incurred that exceed 10 percent of the PO, inform the client and request a revised or additional PO.

Many clients have an established policy for how soon they pay invoices and have timetables that range from thirty to ninety days. It is important to find this out in advance and invoice accordingly. For example, if a client pays all in “net 60,” and the project can be completed within two or three weeks, you may want to issue all invoices at the start of the project. This will help shorten the approval and processing time, and ensure payments are made closer to the project's completion, rather than three months later. If this isn't possible, you can ask for a large percentage of your total costs to be paid up front, thereby reducing your financial liability later in the project.

Get It in Writing

When establishing a job contract, negotiate a written and equitable payment schedule, including a due date for each payment and your specific responsibility or presentation to be delivered or completed by that date. Don't use vague terminology that can be misinterpreted such as, “Payment due midway through the project.” Another important strategy is to indicate that payment is due upon completion and delivery of the specified presentation or responsibility, not upon client approval. Such approvals can get delayed by several days or weeks for reasons beyond your control, or the project can get put on unlimited hiatus.

Don't rely on client-defined target dates that reflect client objectives since these may get delayed for reasons beyond your control. For example, one designer I know who was responsible for a comprehensive identity project for a store opening was asked to delay the last invoice until the store opened. Unfortunately, the opening was delayed several months after the target date. Luckily, the designer based the final payment on the date when her client first anticipated the store was to open, rather than agreeing to a too general statement, “Payment to coincide with the opening of the store.”

Check It Out

During the negotiation process, ask the client for credit references, three names are standard, and call the references to confirm credit history. The references should include, if available, a contact within a related industry like a photographer, copywriter, or illustrator. Then run a credit check on your client through a company like Dun & Bradstreet. Keep in mind that a credit report can't predict either your client's continued dependability, reliability, or ethics. The report simply provides a useful credit history on the client.

Include a termination or cancellation clause in your agreement or estimate like, “In the event of the cancellation of this assignment, a cancellation fee will be paid by the client and will include full payment for all work completed, expenses incurred, and hours expended.The cancellation fee will be based on the prices outlined in the estimate/proposal. Any initialpayments that have been received will be credited against any amounts due.”

Trust your instincts. Gut reactions to a client or project can often guide you in the right direction in formulating a payment plan—or working with the client in the first place.

Establishing Your Schedule

Once you complete your research and fully evaluate the unique needs of each client and project, you can develop an effective payment schedule that includes several progress payments. Progress payments are based on a percentage or portion of your estimated costs. As mentioned earlier, each payment should be due at a specified, defined project phase and encompass defined deliverables and responsibilities.

An advantage to receiving incremental payments throughout a project versus one lump-sum payment at the end of a job is that your financial liability throughout the project will be greatly reduced, especially if the client delays payment later on. Of course this advantage is contingent upon you effectively managing and enforcing the payment schedule.

The following payment schedule is commonly followed: the first third of the estimated project total due prior to the start of the project, a second third due midway through the project, and the final third due upon delivery and completion of all responsibilities. Typically, out-of-pocket expenses and unanticipated costs, like additional responsibilities and client revisions or AAs, are either billed upon completion or billed incrementally throughout the project.

Each project or client may require different solutions and options. For smaller projects with quick turnaround, two payments of one-half of the estimated project total may be more appropriate. However, a lengthy, multileveled project will require several payments due either on a monthly basis or at specified dates for each project phase. Progress payment can be the same amount (determined by a percentage of the project total) or can be different amounts (determined by the specific costs estimated for each project phase).

Depending on your business goals and cash flow, you may be able to negotiate less common, but sometimes viable, alternative arrangements. Although it's less popular, bartering can be an acceptable alternative for a cash-starved client offering an exciting creative opportunity. First check with your accountant, barter arrangements may be taxable. When bartering, make sure you negotiate, in writing, an equal value exchange. For pro bono and nonprofit work, or for projects you accept at a reduced rate, you can also ask for full creative control and compensation for all out-of-pocket expenses. If you decide to negotiate such nontraditional agreements, treat them like your other professional relationships and have them approved, in writing, by the client. Also, always emphasize that you're posing a nontraditional, onetime agreement that may or may not be applicable for the next project. The downside is that you risk establishing a reputation for these types of arrangements, possibly lessening the perceived value of your services.

Once you've negotiated a payment schedule, don't assume the client will follow through. After you mail an invoice, follow up with a friendly phone call to confirm its receipt and then, a few days before it is due, call the client to remind them of the upcoming payment deadline. This last call may be more effective if you can couch it within a project-related conversation. Most importantly, discuss payment and collections in a win-win scenario, maintaining a proactive position. For example, ask if there's something you can do to expedite payment. You can also offer a discount to clients for invoices that are paid early, although this option may not be advantageous for firms with tight cash flow and should be first discussed with your accountant. Once you have received payment, follow through with a note or phone call to show your appreciation.

If All Else Fails

Even if you follow every precaution, there will be clients who won't pay for various reasons. In those cases, you have several choices. You can accept the loss as part of doing business and learn from the experience, or seek help through arbitration, collection agencies, claims court, or, at last resort, civil court. A clause in your project documentation clarifying how potential conflicts will be handled can help. For example, if you prefer arbitration, the American Arbitration Association recommends including the following clause in your contract: “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof.”

In general, payment strategies, and the processes you go through to develop, negotiate, schedule, and collect payments should be flexible and adapted to the needs of you and your client. Just because you're in a creative business doesn't mean that your finances can't be straight forward.