Payment Strategies for Freelance Designers and Design Firms

Emily Ruth Cohen is a leading consultant, advising design firms on how to be more effective, profitable, and fun to work at. She is the author of Brutally Honest: No Bullshit Strategies To Evolve Your Creative Business. You can find her on Twitter @EmilyRuthCohen or on Instagram @EmilyRuthCohen.

It's the nature of working in a creative industry – each job and client has unique characteristics, requirements, and needs. 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, fortitude, and creativity. That said, several proactive measures and precautions taken to define your payment schedule can help prevent future obstacles and ensure a successful, mutually-beneficial relationship with your client.

Start with the Paperwork

Before starting a project and throughout its duration, provide your client with all necessary project documentation on a timely, proactive basis and, where applicable, get signed approval. This includes proposals, estimates, letters of agreement or contracts, schedules, and change orders. No matter what your relationship with the client is, without established, agreed-upon and approved ground rules, getting paid will be more difficult. While 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 before work commences.

Do Your Due Diligence

During the negotiation process, especially for the higher-priced projects or those that appear a bit risky (like startups), ask the client for credit references – three names are standard – and call the references to confirm credit history. The references should include, if available, another agency or a contact within a related industry such as a stock agency, photographer, or printer. You should also run a credit check on the client through a company like Experian or Dun & Bradstreet. Keep in mind that a credit report can't predict either your client's continued dependability, reliability, or ethics. But, if they have a good redit history, chances are higher that they will pay you on time as well.

Establish a Payment 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. Each payment should be due at a specified, defined project phase and encompass defined deliverables and responsibilities. This is discussed in more detail later on in this article.

Each project or client may require different payment schedules. Typically, for low-budget projects (those under $20,000-50,000, depending on your firm’s size and fees) or projects with a quick turnaround, you may want to keep it simple with the first 50% due upfront prior to the start of the project and the final 50% due upon delivery of the final files/project. However, a lengthy, multi-component engagement will require several payments due either on a monthly basis or at specified dates for each phase of the relationship.

A side note that, typically, out-of-pocket expenses and unanticipated costs, like additional services and client revisions, are either billed upon completion or billed incrementally throughout the project.

An advantage of receiving incremental payments throughout the duration of a project is that your financial liability throughout the relationship will be greatly reduced, especially if the client delays payments later on. Of course, this advantage is contingent upon you effectively managing and enforcing the payment schedule. This last point is critical. In order to ensure timely payment, creatives must manage and enforce their own policies. This includes invoicing on time, staying abreast of scope creep, issuing timely change orders and obtaining the client’s approval for any additional fees before they are incurred (not afterward, when you have less leverage).

One common misconception is that a modified or extended payment schedule is not the same as a retainer. A modified or extended payment schedule is usually when the total project/relationship fee is divided into equal monthly payments extended over several months. This scenario is just a relationship with a rolled-out payment schedule, not a true or ideal retainer. A retainer is when the client provides a guarantee of an ongoing, consistent and long-term relationship, sometimes in exchange for a slightly discounted fee, for typically a minimum period of 6-12 months. The guarantee is the critical factor that differentiates retainers from extended payment schedules. With consistent, monthly income based on a promise or trust (but no written guarantee), you may begin to become overly comfortable with the monthly income and will adjust your workload and resources accordingly. Your new business development efforts will likely get neglected and the account may become all-encompassing. As a result, you may not be prepared if the relationship unexpectedly stops, which it can if the client doesn’t agree to guarantee it. This leaves you with an unexpected loss of income and often leads to unplanned and disruptive belt-tightening measures (e.g., lay off staff, reduce overhead) to accommodate for the loss as well as a desperation to win new business at any cost.

Obtain Up-Front Payment

An important part of your payment schedule – and common practice within our industry – is requesting an initial or up-front payment, which is due prior to the start of the project and before any billable work is incurred. This first payment is usually based on a percentage of the total project fee or estimate. For an up-front payment strategy to work effectively, it is crucial that you enforce it consistently, firmly, and without apology for all of your clients. With some rare exceptions (government projects, for example), avoid relationships that don’t agree to some sort of up-front payment and don’t begin to work on a project until you get the payment. Too many of us start to work on a project with the promise that the check is being “processed”, but 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, “Our company usually cuts checks on the 15th of every month” 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.” Your job is to determine which responses are unreasonable and which you can accommodate or compromise on.

When encountering these situations, try to push back. Emphasize that up-front payment is a reasonable request and a common procedure within the design industry. If you do not receive an up-front payment, then you are, in effect, incurring billable hours and extending the client credit.

Also, without up-front money, you are essentially working on spec with only a promise of future payment. The up-front payment is a good faith strategy on behalf of the client that implies they are committed to working with you and trust you. 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. However, you really should honor your part of the arrangement and make sure your services follow the client's initial creative direction and are of the same quality and creativity you were initially hired for.

Be Creative With Your Payment Strategies

Depending on your business goals and cash flow, you may also want to consider negotiating less common, but sometimes viable, alternative payment arrangements. Although it's less popular, bartering can be an acceptable alternative for a cash-starved client that offers an exciting creative opportunity. First, check with your accountant as barter arrangements may be taxable. When bartering, make sure you negotiate, in writing, an equal value exchange. For pro bono work or for projects you accept at a reduced rate, you can also ask for full creative control or full payment upfront (thus saving you time from having to manage invoicing and collections). 

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, one-time 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.

Get It in Writing

When establishing a written agreement or contract, negotiate an equitable payment schedule that includes a due date for each payment and your specific responsibility or presentation to be delivered or completed by that date. Some recommendations to this point:

Don't use vague terminology that can be misinterpreted such as, “Payment due midway through the project.” And, be sure 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 also 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 had negotiated, in writing, that the final payment was due on the date when her client first anticipated the store was to open, rather than agreeing to a much more amorphous statement like, “Payment to coincide with the opening of the store.”

You should also include a termination or cancellation clause in your agreement 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 initial payments that have been received will be credited against any amounts due.”

Manage Client Requirements

You also should make sure you are doing your part to understand the client’s accounting and payment policies. Many corporations and businesses will not pay unless an approved purchase order (PO) has been processed. That is, 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. 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. As a rule of thumb, smaller invoices are often easier to process.

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

If the scope of the project changes, some POs have a clause that will restrict you from charging any additional fees that exceed 10 percent of the PO. Thus, you must be diligent in monitoring scope creep carefully and notify the client, in advance, if the project is tracking to exceed 10 percent of the PO and request a revised or additional PO accordingly.

Many clients have an established policy for how soon they pay invoices and have timetables that range from 30- to 90-days. If you’re a small business, 90-, and even 60-, day payment policies can be a drain on your cash flow. Therefore, it’s critical that you build a trust-based, personal one-on-one relationship with your client so that they become your advocate. If you have a client that advocates for you, it will be much easier to push back on unreasonable payment terms (as well as other unreasonable terms). Another way to push back on 60- or 90-day policies is to say you will then need to increase your fee to accommodate the challenges these delayed payments will have on your cash flow. More than likely, the client won’t agree to this, but just by asking you may convince the client to compromise a bit more on their terms.

All said, it is important to ask about your client’s payment terms in advance so that you can negotiate and invoice accordingly. For projects that may be completed within 60 days, you may want to send all your incremental invoices up-front and in advance. This will help shorten the approval and processing time, and ensure payments are made closer to the project's completion, rather than several months later. If they won’t process all invoices at once or insist on 60- or 90-day payment policies, then you can ask for a larger percentage of your total costs to be paid up-front, thereby reducing your financial liability later in the project.

Manage Collections

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, frame payment and collections as a win-win scenario, maintaining a proactive position by asking if there's something you can do to expedite payment. For example, you can offer a discount to clients for invoices that are paid early, although this option is not always a strong enough incentive and may not be advantageous for firms with tight cash flow. Or, you can offer, as discussed earlier, to issue all the invoices upfront, so that they get processed through their accounting team all at once.

If payment is extremely delayed, you may have to remind the client (or passive-aggressively threaten) that they don’t have the rights to use your work until all payments are received. 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: “If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.” That said, arbitration often still involves hiring lawyers, thus it can still be very expensive.

If all else fails, Scott Hunzinger, an accountant and colleague, suggests threatening to have your kids come over and kick them in the shins :).

Trust Your Gut

Ultimately, you should trust your instincts. Gut reactions to a client or project can often guide you in the right direction in formulating the best payment strategy or working with the client in the first place.

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. Don't be afraid to push back and stand your ground, be creative in how you negotiate and, most important of all, don't be afraid. After a while, you'll have it down to a science. I promise.