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Payment terms are one of the most important areas to get straight at the beginning of the client/freelancer relationship. After all, even if you’ve got a great client and you’re doing work you love, when payment starts to get sticky, the love dries up pretty quickly.
You need to align your client’s mindset and needs with your own, and come up with something that’s mutually beneficial. If you resent the terms you’re working under, you’ll be unhappy, deliver sub standard work and put in sub standard effort – that’s a fast route to an unhappy client and a dispute.Image Credit (CC)
If your client resents the terms you’re working under, he’ll either become difficult to work with, or just won’t pay.
The Freelancer’s Perspective
- I want to get paid the rates we agree for the work I do.
I want to work on an hourly basis at $40/hr. That means I’m getting paid for every hour of effort I’m putting in for my client.
- I want to get paid on time.
I’d either like to be paid in advance for each block of time we agree, or to use a site like oDesk where I’m guaranteed to be paid for hours worked on a per-hour project.
The Client’s Perspective
- I want to pay on terms that suit my business.
I don’t want money being debited from me automatically – send me an invoice each month and we’ll settle it within 30 days.
- I want to mitigate my risk to as close to 0 as possible. I don’t want to pay anything for a project that’s never completed or doesn’t do what we agreed.
I’d like to work on a fixed-price basis at $50 per article. Once I’ve reviewed and proof read it, you can submit an invoice for the completed work.
- I want to pay for the value the work brings me, not for the effort that went into the work.
The project is to get 10 posts written, accepted and published at http://…. I’d like to work at $60 per accepted and published article (i.e. if your article doesn’t get accepted, then I don’t want to pay for it as it has no value to me).
Depending on the client’s approach when it comes to payment terms, you might sense some red flags, and choose to walk away. If a client’s attitude is clearly that you work for him and therefore do as he says, warning lights should be flashing. If the client is abrupt and inflexible – you might also want to think again.
I’ve also seen examples of where the client is fixated on offloading all his responsibility to the freelancer. “I’m able to pay once your articles have been accepted, published, indexed and brought 1,500 visitors to my site – if your content is as good as you say it is, that shouldn’t be an issue”.
Hold on a minute.. that’s just ridiculous. I’m bring hired to produce you quality content, I’m not guaranteeing what 3rd party webmasters you submit my content to will do with it, or how many people might click through back to your site.
If you were to hire a qualified plumber to replace your hot water pump would you suggest that you only pay him once the pump is fitted, working, your family have enjoyed hot baths for a months and your guests have all positively remarked on the water pressure?!
If this is a client’s mindset – best to stay away.
Why Clients Prefer Fixed Price
For a freelancer, hourly can seem appealing, especially when working through a site like oDesk. I’ve had multiple freelancers I’ve been interviewing there agree a fixed price for a project and then ask me if I can set it up as an hourly contract (promising that they won’t go over the agreed time).
The reason is simple – hourly contracts are guaranteed payment for hours worked, fixed price contracts offer no guarantee of payment.
I usually reject this request which sometimes leaves the freelancer going elsewhere. The reason is, we’ve agreed a fixed price for a fixed job. If the job is never completed, any money I have to pay for the effort that went into it is lost to me as a client, and I’m going to have to hire someone else to start from scratch.
I don’t want the freelancer to run the hourly timer up to the limit we agree for the project, partially complete it, and then get paid the full agreed amount while I have to try and get a half finished project completed by someone else.
How is fixed price fair, when freelancers get no payment guarantee at the end?
Well, for a project that is supposed to be a defined fixed price project, regular milestones should be set up. This can be as often as the freelancer is comfortable with, even if it’s once every day or two.
That way, the freelancer is getting paid regularly along the way as the project gets done, and the client is approving each step along the way. The freelancer also benefits in that it’s hard for a client to turn round and say “this isn’t what I wanted,” when he’s been approving and releasing the milestones along the way.Image Credit (CC)
After the initial few projects, once more trust has been build up, it might make more sense from both sides to extend the time between each milestone.
Of course, if the client turns out to be a dud – the freelancer might be out a couple of hours of work towards the first mini milestone.
You can earn MUCH more on fixed price agreements
What’s the most a top end writer might earn per hour? $60? $80? And a coder? Probably no more than $90. What about a niched technical specialist? Possibly $120 or more. Sure, there are exceptions at the very top ends – many writers earn multiple hundreds per hour I’m sure, but the point is – you have an earning ceiling.
As a freelancer, this has always caused me an issue. Modesty aside, I work fast and I work smart, and even when I’m charging $90/hr – I should be getting at least 2.5x that, because it would take the next guy 2-3 hours to do what I achieve in an hour. It’s going to be significantly harder to win clients by quoting $250 per hour though. So I have two choices – settle for $90/hr, or try to dishonestly stretch the time spent on certain tasks up to what it “should be”.Image Credit (CC)
Enter, fixed price contracts! About 9 months ago I won a fixed price contract where we agreed roughly $9,000 for a project, to be delivered fully tested in 7 weeks time. The price was fair, as that was what it was worth to the client, and he was more than happy to agree and move forward.
The total project took 41 hours – that was broken up into about 35 hours of actual development time, and 6 hours of client interaction, calls, demonstrations and documentation. Milestones were released every week or two. That’s an hourly rate of $220 for the time spent.
If I’d approached the client originally and quoted $220 per hour, he would have said, “that’s ridiculous” before we’d even got on to discussing the project in more detail.
Perhaps in future, a client with similar requirements will approach me, and I can reuse 30% of the knowledge, experience and framework that I used to deliver the first project but still charge a similar amount. In that case, my hourly rate just shot up to $285.
Fixed price contracts are more empowering.
Frankly, if I’m a “hired hand”, the client has every right to count my hours. In this example though, I’m a freelance engineer who has provided significant value to the client, worth far more to him than the $9,000 it cost to have the project built. It’s none of his business how I structure my work and time or what hours I spent on what tasks. This has immediately elevated the relationship to an equal footing as opposed to a “boss to worker” relationship.
When Hourlies Do Work
When a project is not well defined, either in length, workload or scope, an hourly makes more sense. In fact, I’d go further and suggest that you actively avoid fixed price contracts.
If the client doesn’t fully understand what he wants, then a fixed price contract is likely to backfire. You complete the work you’ve based your quote on, whereas the client feels that this is just the start, and there’s plenty more features and tweaks to be done. In this scenario, resentment and disputes are guaranteed.
Side Note: Freelancers sometimes resent working through oDesk and giving them 10% “for nothing”. Having the peace of mind that not only is your hourly billing is handled and guaranteed, but that you also have an endless supply of opportunities is worth significantly more than 10%!
As a freelancer, your primarily selling your time. A client may want to get “priority service”, i.e. guaranteed 6 hour response to new tasks or issues, turnover time of 24 hours or 3 days committed per week.
If you negotiate this right, you can win some much needed stability in your flow of work and future planning. If you handle it wrong, you could end up chained to your desk and committed in ways you weren’t expecting.
Don’t get locked in! Enter the retainer…
When a client wants to retain you for a commitment that’s above and beyond the hourly or fixed price relationship, or wants amount of time or product guaranteed, you should be thinking about a retainer.
If you don’t agree a retainer, you’ll be committed to turning out work in a given time frame, or being available for a certain period each week without any guarantee of if or when the client has any work for you.
If a client wants a commitment from you, he needs to be equally financially committed. If he wants 10 hours per week of your time, you may ask for $400 weekly to be submitted to you via automated bank transfer. That way, if the client doesn’t give you the expected level of work, you’re still covered for the time you’ve committed.Image Credit (CC)
When it comes to a certain response time, your client should also be paying a retainer. “Sure, I can make sure I get to any tasks of yours within 48 hours – can I suggest a monthly retainer of $250 which will also include the first 4 hours spent each month on any tasks?”
Ultimately the finer points come down to the type of client and project you’re dealing with, your relationship, and the type of workload you’re getting.
What types of arrangements have you set up with your clients? What’s worked for you, and what hasn’t worked? What do you agree or disagree with? Let me know in the comments below!