In this post, we will cover everything you need to know about contractors’ payment terms so you are prepared to work with any new freelancer.
This post is part of our guide on how to pay contractors.
What are the main contractors’ payment terms?
Contractor payment terms define how freelancers expect to be paid by their clients. Freelancers and contractors outline their payment terms in their contracts. By signing a freelancer contract stating those details, your company is agreeing to those terms.
The 4 main aspects are:
1. How a contractor charges for their work
Freelancers use different pricing strategies to charge their customers, such as hourly fees, pricing per deliverables (like cost per word), a fixed price per project, and more complex value-based pricing.
Consider the downside of hourly rate or anything else that is not linked to results or deliverables. It is especially important when working with a new freelancer. In these cases it is advisable to calculate the range of possible amounts for your project and ensure it meets your project. You can also suggest capping the number of hours at a certain amount to ensure the project will not go out of your budgetary control.
2. The Currency
Many hiring managers miss the financial implications of paying international contractors with different currencies as it carries both currency conversion fees and conversion is non-attractive change rates. Not to mention that you will also need to pay a foreign transaction fee depending on your payment method.
3. The Payment Method
There’s a long list of payment methods and with a variety of pros and cons. The main thing to be aware of is that wire or international direct deposit (basically wire transfers) can cost you up to $50 per transfer, while using payments apps like PayPal or Payoneer can save you dozens of dollars per transaction. So the next time a freelancer asks for a wire transfer, check again if they are willing to choose a different payment method.
4. The Payment Schedule
This is usually the most problematic aspect since there are real risks and benefits associated with each billing schedule, which is why we recommend sharing freelancer contracts with your finance and legal teams before signing them.
Contractor payment schedule: risks and benefits
Here are the most common contractor payment terms to know.
Some contractors request a prepayment (such as 50% of the total fee) to be paid before they begin a job. The motivation here is to ensure the company won’t “ghost” them. A prepayment guarantees the freelancer receives a portion of the payment, and ensures the company will stay communicative and accessible throughout the duration of the work relationship.
- Risks: For companies that agree to pay freelancers before they begin a project, there is a risk that the freelancer won’t complete the work, the delivery will be delayed, or they will put in less effort or time since they already received at least a partial payment. However, the freelancer is also beholden to the contract, so they are legally obligated to uphold their end of the deal.
- Benefits: the main benefit of prepayments is that you secure the freelancer for the job. Often, freelancers who are in very high demand because of their skills or expertise demand prepayment as a way to “weed out” less serious clients.
2. Payment upon delivery
This means the hiring company agrees to pay for the products or services rendered within 24 hours of receiving the invoice.
- Risks: There are two main risks associated with this term. One is failing to issue the payment within 24 hours, and therefore breaching the contract. For large companies that work with many freelancers, it can be difficult to approve the invoice, open a PO, and issue the payment all within one day. The other consequence of this (although less of a risk), is having to resort to rapid but expensive freelancer payment methods, such as a wire transfer.
- Benefits: One benefit of payment upon delivery is keeping your contractor happy. Many freelancers face significant payment delays, so successfully paying them within 24 hours can help you establish a strong, long-term relationship.
3. Net 10, 30, and 60
A net payment means that the payment is due within a specified number of days from the date the contractor issued the invoice. Net 10, Net 30, or Net 60 (found on the invoice) simply indicates that the contractor’s payment is due 10, 30, or 60 days from the date of the invoice, respectively.
- Risks: This is the most common payment term for independent contractors, and there are few risks associated with it. The main risk is failing to pay on time. If some of your vendors require payment in 10 days, for example, and others require 60, it’s important to have a process in place for making sure both are paid within their respective time frames.
- Benefits: Because companies have between 10 and 60 days to issue payments, this is generally preferred because it guarantees them enough time to send the payment.
4. End of month
This term means the paying company must issue the payment by the end of the month during which they receive the contractor’s invoice.
- Risks: Unless you have another clause in the contract to guarantee the freelancer will submit their invoice before a certain date, you risk having a very short window of time between when they received the invoice and when the payment is due. For example, if the freelancer submits it on the 28th of the month, that could leave just two days until the end of the month when it’s due.
- Benefits: One benefit of end of month payments is they create consistency. For ongoing freelancer relationships, the company knows the payment is always due at the same time, and the freelancer knows when to expect it.
Negotiate, agree, and stick to contractors’ payment terms
One of the reasons it’s so important to freelancers that companies comply with their contractor payment terms is because too often, freelancers face significant payment delays. According to research published by PYMNTS.com, one-third of freelancers have worked with a company that did not pay them at all.
Freelancers — in particular, those with the greatest expertise and highest demand — are likely to be especially demanding about their payment terms. If you want to retain them, having the ability to meet their terms is essential.
However, before you agree to a contractor’s payment terms and sign their contract, make sure you ask your finance and legal teams to weigh in. This will help you avoid a situation where you’ve agreed to a certain term that your company can’t actually accommodate.