Solve legal and finance before it's too late
Have you done everything possible to protect yourself from undercharging your work?
Never start working on a project before you made sure who pays what, why, and when - and have a backup plan if the project fails.
Once you’ve covered the project scope and collaboration process during the project kickoff meeting, it's time to talk about money.
Finance: Defining When and How You’ll Get Paid
You may be shy when talking about money. But your landlord, electricity provider, ISP, IRS, and your employees - they’re not shy when it comes to money. You provide a valuable service and if you're going to be coy about the payment, don't expect your good manners to be appreciated. If you want to keep the lights on and make the payroll, approach the conversation as a professional and never feel intimidated.
As you iterate the proposal and talk about the project scope, you'll refine the final proposal on which the client will sign off. The budget estimate doesn't have to be the same as the final total you're going to bill because you’ll discover new information during the project and the scope will change. It's normal. You can't predict everything this early. But it's good to have a foundation and then adjust the budget when you revisit the contract as the project unfolds.
The client will try to lower the price. Don’t jump and change your hourly rate - instead, negotiate the scope of the work and payment schedule or ask for concessions and more favorable terms (like extending the deadline, getting your name on the work, or the permission to reuse it). See how the project can be scaled down and where you can cut corners while still fulfilling the client’s goals.
Some clients aren't be comfortable with hourly rates. You can say it'll take you 40 hours to finish something, but it might take more - the client has no guarantee the project won't exceed the budget. You can address this concern by capping your fee. For example, if you estimate 40 hours, cap your fee at 50, and work for 55, the client will only be charged for 50 hours.
An alternative to hourly rate is a fixed fee. Clients prefer fixed fees over hourly rates because there are no surprises and the risk is transferred from them to you. This can, of course, be both good and bad. If you're productive and quickly finish the project, you're rewarded; but if you underestimate the time, you'll end up undercharging your services.
- Choose a fixed fee if project is formulaic and simple, and you've done a lot of similar projects in the past and know exactly how long it'll take you. This way, you can charge more and the client will feel more secure.
- Choose hourly rate if the project is complex and has a lot of moving parts, you don't have much experience, and you can't be 100% sure in your estimate. This way, you're protecting yourself from uncertainty, and also clients who want more work that what they paid for.
Save talking about the payment schedule for the end of the meeting, when you work out the project scope. For a smaller project, aim for 3-4 payments. The bigger the project is, the more often you should get paid. Another benefit of invoicing frequently is that the amounts are smaller and don't need much paperwork. Some companies have strict guidelines when it comes to payments and if the amount is above a certain threshold, the payment has to go through a complicated approval process.
Define when and how you’ll get paid (PayPal, credit card, money transfer). You can use online payments in ActiveCollab so when you send the invoice, the client just has to click the link in the email, enter their PayPal or credit card, and pay with no hassle. This is good for you because it leaves little room for excuses like they didn’t have the chance to go to the bank.
Make it clear that you won’t continue work until you receive the payment after a milestone, as per the agreed payment schedule. You need to overcome your fear of confrontation and look out for your interests too. Have a clear deadline and invoice due date when the client needs to pay or you keep the deposit and aren’t obligated to finish the work. Don’t learn this the hard way.
Tie payments to clear milestones, the ones you can control and measure. “When the client is happy” isn't a milestone, and neither is "when the site is live", especially if you don't control that part. What you should do instead is try and get your client to sign a payment agreement contract.
For example, if you’re working on a website or an app, you should get paid:
- before the kickoff meeting
- after the meeting,
- after doing research but before designing,
- after the comp but before coding,
- after the last presentation.
Don't start working before the client pays you a deposit, which is usually 50% of the total amount. The deposit can be non-refundable or you can use it as a collateral and return it if the project fails minus the amount the client owes you. This also forces you to work out the payment process and the details so there’s no room for stalling and excuses like “bank account blocked”, “limited internet access” or some other “force majeure”. This is your chance to raise red flags and run away before it’s too late. Plus, once the client pays the deposit, they’re more involved because they have skin in the game and would be more likely to meet their appointments and deadlines.
A deposit mitigates the risk in case the client changes their mind but you already spent a good deal of time on research. Deposits are normal in any line of work where you create a custom product that can't be resold to anyone else. You set aside time for the client and can’t take on other work in the meantime. The deposit makes sure both parties have a vested interest in the project.
Don't forget to calculate expenses into the estimate. Expenses don't have anything to do with your work and include everything that you pay for, like stock photos, research incentives, domain registration, and subcontractors. Also, separate the expenses from your hourly rates in invoices and estimates so the client can see how much they pay you and how much for stock images, domain, and other expenses. Then, include both in the total cost of the project. There’s nothing worse than surprising the client with a bigger bill than they were expecting.
You never want to pay expenses yourself and wait for the reimbursement. If you do so, include an interest fee like a bank does because even money has costs. It's best to ask for the funds before you need to pay expenses using the client's money without waiting. You can also instruct the client to make payments themselves but that involves more work, time, and coordination. Before spending money, always get the client’s permission first and then save the receipts/invoices so you can forward them to their accountant.
When it comes to invoice due dates, there are several options: upon receipt, NET 10, NET 15, NET 30, and NET 60. This refers to how many days can pass before the client is legally obliged to pay the invoice in full. The more time they have, the better it is for them and the worse for you. The earlier you can collect the payment, the less you risk missing a payroll or having to ask for a loan to cover overhead costs. This is where you can negotiate (and use it as leverage if you have a healthy cash flow).
You might want to add a late fee to the contract, which specifies what happens if the client misses the payment due date. The standard rate is 1.5% per month. This should be easy to add to the contract because the client doesn’t want to appear flaky and of course they’re going to pay on time. The clause shouldn't scare them, but it’ll give you some protection and leverage in case delays happen.
The next thing you should talk about is the kill fee, which you get in case the client decides to cancel the project and not pay any further. When you take on a client, you invest your short term future in them. In case they cancel, you don't have anything to work on next, don’t have money, and can’t pay your employees. This fee gives you time to find new work but should be proportional to the project's total cost.
You can also add a rush fee if the client decides to move the deadline mid-project. Changing dates can mess up your resource pipeline and jeopardize work for other clients, so make sure this fee is high enough to make it worth your while.
Legal: Covering All Bases With a Contract
Contract won’t mend a broken relationship or help you when things go wrong, but it can prevent bad things by raising red flags before it’s too late. If there’s a misunderstanding, you can always point to the agreement. Signing a contract is a normal business practice and if the client refuses, take it as a warning sign.
Think about having a lawyer on retainer, especially if you have big, high-budget projects. There are a lot of types of lawyers and you need the one who specializes in arts and intellectual property. They cost money but they can save you from financial mishaps further down the road. A lawyer will make sure you get paid for your work and don't trap yourself in a bad contract. Plus, your lawyer can take a complex contract template and simplify it so it won’t be so intimidating to smaller clients.
Some companies will ask you to sign their contract and won't sign yours. Having a lawyer go through it and handle their lawyer will ensure you get the most favorable terms possible and not sign something that can harm you. Never talk to the client’s lawyer, even if it’s a minor thing like changing a words, because even the tiniest changes can have huge impact. Instead, let your lawyer talk with theirs and handle all the minutiae. Your lawyer will protect you from any loopholes and “alternative reading” of the contract.
An alternative to having a lawyer:
- Read books like the “Business and Legal Forms for Graphic Designers” and write your own contract
- Use templates, like the AIGA contract, and adjust it to your needs
- Visit a local university’s business law clinic for a free consultation
In case the client has their own contract, negotiate. Just because something is in their contract, it doesn't mean it's final. Ask them to remove things that don't suit you, add liability clauses, and explain your reasoning. Both you and the client will need to make concessions, so make sure you know on which things you're willing to budge and use them as leverage.
It's best to separate a contract from a statement of work. A contract specifies the relationship terms between two parties. A statements of work, on the other hand, is specific to each project and covers its scope, list of deliverables, number of revisions, etc. You can sign a contract with a client once, which will cover all projects with them, and have a new statement of work each time that client hires you again.
Limit the number of revisions (and additional hours they’ll incur) and be clear that you’ll do only what’s in the statement of work. You don’t want to end up with a client who believes they hired you to get the project done, including anything else needed but which the statement doesn’t cover. In case the client doesn’t accept the work, you should have the opportunity to fix or remake your work.
If there’s more work, you’ll first sign a change order (describing the additional time and money needed) and then start work. If there are substantial changes, it’s cleaner to make a new statement of work instead. A substantial change can be defined as anything that exceeds 10% of the original proposal’s budget or schedule
You must add a limitation of liability, specifying that you aren't responsible in any way if something bad happens. You can't be sued for damages caused by your work and can't be prosecuted for violated copyright issues which you didn't know about while creating your work. People sue people for all sorts of reason and this protects your from frivolous lawsuits and patent trolls. To assure the client of your good faith, add a clause that you won't include anything that might harm them in any way whatsoever.
Sometimes deadlines are missed. This can be either because you miscalculated your resources or the client didn't respond on time. Define what happens if there's a delay in the schedule. If you miss a deadline, agree on what happens next, like whether you guarantee to work harder, give a discount, or renegotiate the contract. Have a contingency plan in place and know what are the repercussions.
This goes both ways. Sometimes projects are late because the client doesn’t respond on time which hurts both their project and your business because it disrupts your resource schedule and commitment to other projects. Negotiate for a delay penalty for those cases or at least find some other way to protect yourself.
If you’re going to access their accounts (servers, Google Analytics, etc.), add a clause to the contract that you won’t use the information any purpose that’s against the company’s goals. Assure that everything you find out during the project is confidential and you won’t share it with anyone. Clients are reluctant with sensitive information so make them feel a bit safer.
Optionally, you can discuss accreditation rights, like including the work in your portfolio, submitting it for competitions, or showcasing it to other clients. Clients don’t understand what these rights mean and will have reservations and fears - after all, they don’t get any benefit out of this. Negotiate about including “made by” on the website because it can bring you new clients, but offer an incentive in a form of a discount.
Add a no solicitation clause so the client can’t make job offers to anyone on the team. These things don’t happen often but they can cost you a lot if your most productive members leave. Companies love to hire good workers - because they’ll collaborate closely, they might like them so much that they’ll offer them a job. In that case, you’re at least entitled to a placement fee, if not damages.
Lastly, talk about the IP rights (intellectual property): who owns all authorship rights to the work and when those rights transfer. Most of the time, all rights should be transferred from you to the client upon full payment. This means a client can't use any part of your work until they settle the last invoice. You can also transfer the rights upon project cancellation but only once they settle the bill and pay the cancellation fee. Be clear that they can't use any part of your app or the design until they pay you (or they risk the lawsuit).
Or you can negotiate and structure the deal differently. In addition to transferring all rights upon full payment, you can retain all copyrights and grant a license for limited usage to the client. This way, they pay a lot less but you can re-purpose your work and re-license it to other clients.
Just like with agenda and services, keep a checklist of the things on which you’re willing to negotiate. On one side keep all the things that would benefit your client, and on the other things that would benefit you. Keep the most important things at the top and weigh the tradeoffs during the negotiations.
Preparing for the Worst Case Scenario
Sometimes the client will take your work, disappear, and never pay. In that case, no contract can help you, especially if you’re working for a foreign client. So you always need to have leverage to protect yourself - and the best leverage is access to assets.
Never give away working files until you’re fully paid for a graphic or a photo. Export a PNG for feedback and send the vector or PSD only after you get paid in full. When you’re collaborating and sharing work files, hide them from the client if you sense risk. Also, consider including a watermark across all the images.
If someone uses your unpaid work, spread the word until they pay you or take it down. Go to their social profiles and sites where they post work ads and share your experience. Warn other people that the client is highly risky and has a habit of not paying. They’ll usually offer to pay you so you stop damaging their reputation.
If you’re building the website, it’s a good idea to offer the client to set up hosting for them. If you want extra security, you can offer to do it for free. This way you control the log-in information and domain name which the client can’t get until you get paid.
When presenting the website for feedback, keep it on your own server and share a link. A client can see how everything works, but can’t access the backend code and database. Making dynamic sites is safer because the client can’t inspect the server-side source code and steal it.
Put copyright information inside code (you can hide a txt file with copyright inside a inconspicuous image, like a favicon). This way, if all else fails and a client starts using your work in production work without paying you, all you need to do is contact the hosting provider, request for the website to be taken down due to copyright infringement, and point them to the proof.
If you don’t have the time or resources to collect the payment, you can sell debt to a collection agency for a fraction of the total due amount and let them collect the payment. This way, you’ll at least get some money out of a bad deal and won’t have to time lose time and productivity on lawsuits.