The Perils of Compensation Loss
Consultants, practice your craft with confidence and avoid unnecessary risk.
So here’s an interesting and possibly familiar scenario: You’ve landed your next opportunity to consult for a new client. Contracts are executed and work has begun. The vibe is positive, interactions are lively, and deliverables are starting to take shape. You submit your first invoice for services rendered and are promptly paid. Terrific! Life is good. But then, the next invoice is followed by…crickets and owls. Silence. Nothing. No payment. Both parties have worked in good faith, so what’s the hold up?
Welcome to risk management and assessing the value of financial and personal loss. Your consulting contract can be ironclad, with all sorts of clauses for compensation, payment terms, late fees, etc. But what happens when no payment occurs? Come on, this doesn’t really happen, or does it? I’m afraid it does, likely everyday around the globe. So what’s your recourse?
Perhaps your contract has language covering disputes or claims; if so, congratulations, but the work is far from over. Are you ready to file a small claims case? How about submittal to arbitration? Do you have the time and resources to devote to attorneys and courts? Chances are reasonably good that you will win, especially with a good paper trail of supporting documents and a clear case for payment.
Perhaps you decide to suspend work. Stopping the clock affords both parties time to work out an amicable solution. You aren’t devoting additional resources to the scope of work, and there is a good chance to still get paid. But what happens to the momentum of the work product? What about the reputation of your personal brand? After all, you were representing a client and likely were making one or more commitments to a third party, and now you won’t be honoring them. How is that party going to perceive the client? How are they going to perceive you? Remember, bad news travels fast, especially over social media.
Perhaps you decide to terminate the contract. How much is at stake? Can you afford to cut your losses and move on? How quickly can you find new work, and what are the odds that the replacement compensation will be equal or better than that of the previous contract?
Here’s an experience I had that touches on almost all of these factors. Many years back, I contracted with a vendor to build a website. The vendor subcontracted the work to a third party. Life was grand until, suddenly, work halted on the website and credentials were locked. Why? Turns out that the vendor and third party were in their own financial dispute, so the third party took it out on me with a work stoppage to gain leverage. How did this end? No website. No one got paid. Losses were cut. Reputations were damaged. Wounds were licked, and everyone moved on. Not the highest visibility of projects, and I found a way to get that website running, but if the stakes were higher, then what?
So, dear followers, how can you be proactive against these types of business losses?
Ensure that the non-payment clause in your contracts are concise and clear. No need for an additional page of ALL-CAPS liability and risk language. Let the client know what the penalties are for non-compliance. Select a jurisdiction where you know your claims can be resolved, typically your state in which the business resides, but sometimes, the client prefers their home state. Discuss this in advance with your attorney for proper guidance. One extra paragraph, but a vital one.
Vet your prospective client. Not sure about financial health? Spider sense active? Then request payments in advance until a clean record is established and trust is earned.
Include an initial payment provision regardless of the monthly compensation. Puts skin in the game and establishes early trust.
Be creative with recovery of losses. Consider the value of the book of business you’ve built for your client, including future commissions.
Add firm termination language so that your risk exposure to the client can be minimized. Be prepared to trigger this at the first instance of uncertainty.
Need to know more about risk management of contracts and agreements? Have a similar vendor/customer dilemma? Reach out for a free initial consultation today.