When the economy is tight, your agency’s contract negotiation strategies should change to fit the times. You can’t assume the payment terms you use in normal times will work for you when the economy is down. In a more challenging climate, your goals are to minimize your receivables and set up early warning indicators for client payment problems.
Consider these five strategies when negotiating a new Statement of Work in a down economy.
Get the Money Up Front
This is the best strategy for negotiating in a bad economy. Structure your payment terms to include a bigger deposit. The client can’t stiff you on your invoices if you already have the money in hand. The ideal case is both a big deposit coupled with payments in advance (like rent) rather than after services have been provided.
And this is a completely reasonable thing to ask for in a down economy, especially with a new client with no payment history. If the client objects, you can reply that you are happy to discuss payment terms after the client has built up some payment history on the first project.
Invoice More Frequently
This one is pretty straightforward. Instead of invoicing monthly, negotiate to invoice every two weeks, or better yet, weekly. Assuming the client has 30 days to pay invoices, you’ll have cash in hand much sooner than if you only invoice monthly. This also helps detect problems sooner since the client’s ability to pay is being tested more frequently.
Shorten your Contract’s Payment Terms
Payment problems usually don’t get better with time and in a bad economy, early identification of a problem is critical. The best way to do this is to simply shorten the time the client has to pay an invoice.
Ideally, you’ve structured payments so they are due in advance of work (like rent). But if you are invoicing after work has been performed, try to negotiate for payment being due in 10 – 15 days instead of the usual 30 – 60 days. This effectively becomes an early warning indicator for payment problems. Knowing there is a problem in 10 – 15 days is much better than finding out in 30 – 60 days. And once you know there is a problem, you can take steps like stopping work or terminating the agreement.
Create Price Incentives for Favorable Payment Terms
You can use the first three strategies in tandem with pricing adjustments to create incentives for your client to pick favorable payment terms (or to compensate you if they insist on unfavorable payment terms). Imagine a project that you’d price at $100,000 if you knew you were guaranteed payment. Offer your client different fees to go along with different payment structures:
Create the Ability to Stop Work Sooner
One of your agency’s most powerful leverage points is in how you control workflow.
Missing a payment is possibly a canary in the coal mine for bigger problems in the client’s business. Remember, if the economy is down for you, it is likely also down for the client. Money may be tight for them.
To that end, this tip is probably the most powerful: if a client is slow to pay or misses a payment, the agency should stop work immediately. This has two benefits.
First, stopping work is enormously motivating to a client. If the payment problem is some hangup in accounting or some approval that is needed, stopping work will incentivize the client to get the problem sorted quickly.
Second, stopping work helps ensure that a small problem doesn’t turn into a bigger one. If you continue to work after a client has missed a payment, the initial receivable from that client is just getting bigger. And if the worst happens, the client simply stops making all payments, you want that news to hit when your receivable is as small as possible.
In order to stop work, you should have some specific language in your Master Services Agreement. We recommend something like the following:
Stopping Work. If Client fails to make any payment when due, Agency may stop work until Client pays all outstanding invoices. Stopping work does not limit Agency’s right to terminate this agreement.
When you stop work, you should immediately reach out to the client to talk about the problem. Is nonpayment a technical problem in the accounting department? Is the client’s business suffering? Or is the client not paying because they have a problem with the work? Talking after pausing work may help you identify whether this is a problem that can be solved or if more aggressive steps are necessary, like termination.
Shorten the Notice Periods for Termination
Stopping work is a good remedy when you think the problem can be fixed or there might just be a momentary hiccup. But sometimes there are bigger problems on the horizon. If a client has missed more than one payment or if a project has gone off the rails in terms of scope management or profitability, the best step might be to end the relationship. Promptly.
Almost every Master Services Agreement has a paragraph describing the parties right to terminate following a material breach. That clause usually reads something like this:
Termination. Either party may terminate this agreement if the other party materially breaches this agreement and does not cure the breach within X days of receiving written notice of the breach from the non-breaching party.
The material breach that an agency is concerned about is nonpayment by the client. Typically, the notice period is 30 or even 45 days. But in a down economy, you want those notice periods to be shorter. Like stopping work, the goal here is to prevent a small problem from becoming a big one. So a shorter notice period will either (i) motivate faster payment by the client once you’ve given notice of termination, or (ii) allow you to get out sooner and stop a small problem from becoming a big one.
I know what you might be thinking. “But if I terminate, how will I ever collect the amounts that they owe me? I feel like I need to keep working and keep the client happy to even have the hopes of collecting.” This is the definition of an abusive relationship. And going down this road is in turn abusive of your agency. Terminating quickly is the best way to prevent a $20,000 problem from becoming a $60,000 problem.
And realize that giving notice of termination doesn’t mean you stop communicating. Just like with stopping work, you should ideally be talking to your client about the problem during the notice period. Maybe nonpayment is due to a down economy and the client simply won’t have the money. In that case, termination is probably the right outcome.
But maybe nonpayment is because the client doesn’t like the work and stopping payment is their passive-aggressive way of voicing their displeasure. Communicating during the notice period will help you identify and solve that problem. But if a client can’t truly talk about what they need, then the relationship is probably not going to get better. Termination is likely best for everyone involved.
Use These Negotiation Strategies Together
It’s perfectly OK to name the elephant in the room during negotiations: you are asking for these things because the economy is weak and it is good for both parties to detect problems and respond to them early. These provisions are designed to either avoid payment problems, to help minimize them, or to create prompts for problem-solving.
