Define the payment terms

As we mentioned at the beginning of the playbook, contracts help you get paid on time, and in full. In this step, we are going to review terms that address common pain points that relate to payment.‍

Part 9: Define the payment terms

In most cases, the freelancer and the client will agree on a set of payment terms: how often the freelancer will get paid, and by what payment method. It's important to be clear about payment deadlines before you start working on a project. Deadlines will depend on the payment terms, so we address payment deadlines in each section below. 

In the last step, we addressed how you can create deadlines around reaching certain milestones. Even if you’ve addressed this in the Milestones section, you should include terms related to getting paid for those milestones in this section.‍

The most common payment terms are hourly, per project, or on retainer. Another important piece of payment terms is deposits. 

Billing terms: Hourly

Hourly rates are best when the scope of work is undefined or subject to change. This could be the case with hourly consulting, for example. If you're working on a project with a set scope of work, it's generally better to charge a per-project rate. This will give the client a clear idea of what they're paying for, and avoid any confusion about hourly rates. 

When setting your hourly rate, be sure to factor in your experience, skill set, and the market rate for your services. We can learn more about this in our playbook: Set an Hourly Rate You’re Confident In.

‍Hourly rate contacts should also specify whether a freelancer should round up or down on partial hours. For example, if a freelancer bills by the hour but only works 44 minutes, there may be confusion about the amount owed. 

‍Deadlines: If the freelancer is being paid hourly, it's important to specify the intervals at which hours will be payable. A freelancer working on an hourly basis might want to invoice each week for hours worked and specify a payment due date. Seven days is a common lead time to give a client between when you submit an invoice and the date after which client payment will be considered late. ‍

Billing terms: Project-based or fixed-price payment

The most common form of payment — project-based payment, also known as fixed-price payment — is best when the scope of work is relatively easy to define in advance. This method is popular among freelancers working in fields like web design and graphic arts. It can also work well for software development projects, as long as both party's expectations are reasonable.‍

When you and your client have a project with a clear scope and timeline, it's usually best to invoice on a fixed-price basis. That way, you can agree on a price upfront, and neither of you will be surprised by the final cost of the project.

If you're not sure how much work the project will entail, or if the scope may change during the course of the project, hourly billing terms may be a better option. That way, you can avoid under or over-billing for your work.

It may also be helpful to include estimated and maximum hours expected under a project-based payment. Otherwise, if a freelancer charges a fee for a project but takes longer than expected to get the job done, there can be disagreement over whether the freelancer should be paid for their overtime or not.‍

Deadlines: Make sure to specify when project fees will be paid. If the contract covers a longer period of time, you might want to specify that project fees be paid within a week or two of deliverable acceptance.

Billing terms: Retainer

When deciding if retainer billing terms are the best option for your project, consider these key indicators:‍

• You have an ongoing project with a clear scope of work: this type of project is typically well suited for a retainer arrangement because it's easy to determine how much work will be required and when deliverables are due.

• The project is expected to last more than six weeks: if the project will take considerable time to complete, then a retainer fee may be the best way to ensure you're compensated for your time and effort.

• You want to establish a working relationship with the client and have confidence in your ability to complete the project: if you're looking to develop a long-term relationship with a client, then a retainer agreement can be a great way to do that. This type of arrangement also demonstrates your confidence in your ability to complete the project successfully.

It's important to specify in the contract whether and under what circumstances the retainer fees may be refundable, so make sure you're comfortable with the project before agreeing to any refund terms. It's often preferable to define the retainer fee as non-refundable. ‍

Deadlines: Common deadlines under retainer fees include payment by the end of the month, or under whatever terms you specify in the contract. 

Deposits help you get paid

Many freelancers use a deposit model. This might be a good idea if a project has a long timeline, or if you rely on your freelancing business for your primary income. ‍

Common freelancer deposit models include:

• A deposit on booking, for example, a 50% deposit within seven days of signing the contract and 50% upon completion or invoicing.

• Payment in full upfront.

• Multiple deposits are due. Ex. in a contract covering six months, a deposit for the month’s retainer is to be paid on the first day of the month and the remainder on the last day of the month 

Forms of payment

There are a number of different payment methods that can be used, such as PayPal or direct deposit.‍

In your workbook identify the payment terms for each of the services you listed.