Faegre Baker Daniels partner Brian Clifford authored the following article for the Control System Integrators Association in October 2014.
In a previous CSIA newsletter legal update, we looked at different strategies for using “interest clauses” to ensure prompt payment on your outstanding invoices. This month, we turn to the “payment cycle” provisions that are common in automation and integration contracts. As you are likely seeing in the market, the historic “net 30” terms are becoming harder to obtain. Customers are pushing for longer deadlines for making payment for your completed services and deliverables — sometimes as long as 90 or more days from invoicing. Like using a credit card (and paying it off monthly), this is a way in which customers are essentially using your cash to obtain interest-free loans for their projects. Sometimes long payment cycles are an indication that your customer is experiencing financial difficulties. Other times, such cycles are simply a function of burdensome internal approval processes or of a customer knowing it can use its leverage to obtain very favorable payment deadlines — or both.
Here are a few strategies you can use to get paid for your completed work as quickly as possible:
Negotiate Shorter Payment Deadlines: The most straightforward method to get paid faster, of course, is to shorten the payment deadlines. Often times, customers are willing to consider reducing particularly long payment cycles if the issue is presented to them in the right way. You can explain that you are unable to obtain corresponding payment cycle terms from your own vendors, meaning you would have to “come out of pocket” for the project for long periods of time. Many customers are sensitive to this cash-flow problem.
Carve-Out Portions of the Contract Amount: If a customer is unwilling to shorten the payment deadline in general, you may want to consider “carving-out” certain portions of the contract amount for a shorter payment cycle. For example, if you are required to provide an expensive piece of third-party hardware or equipment for the project, you may be able to get a customer to agree to have the costs for such item invoiced separately on payment terms that are within the deadline established by your agreement with the third-party vendor. This can prevent you from being “caught in between” two large corporations that use their market share to obtain unreasonably favorable payment cycles.
Insert a Down Payment or Mobilization Fee: If you know that long payment cycles will be required, you may want to “front-load” your fees in the agreement. You can use this up-front payment to keep your “out of pocket” expenses to a minimum as work progresses. Such terms also decrease your risk of non-payment for work already completed but not yet billed or paid.
Invoice More Often: Another strategy that has been effective in mitigating the risk of long payment cycles is to invoice more frequently. Instead of your usual monthly invoices, will a customer accept weekly or bi-weekly invoices? While the deadline for your receipt of payment on each of these invoices may still be set out far in advance, more frequent invoicing will increase your cash flows for the project and decrease the amount of payments outstanding at any single time.