Getting Paid by Clients
This article, on getting paid, was written for us by James May of top law firm Lawspeed. They specialise in the IT Contractor market. It is worthwhile contractors taking note of it. This has caught out many contractors.
Credit Management for IT contractors
Some have had doubts recently over the financial stability of a few specialist agencies and some clients. On top of this recent events have shaken the confidence of contractors in both IT agencies and clients.
IT Contractors and IT agencies need to be aware of credit management. They need to know what to do if they suspect that their agency or client is in financial trouble.
As always, before entering into an IT contract, approach the transaction like any other commercial deal. Be aware of risk management and cash flow. Ensure that the contract contains suitable terms to allow you to receive prompt payment.
Seeking legal advice at this stage may identify payment liabilities in the IT contract before you agree it.
Getting Paid – Danger Signs
Once in an IT contract the first step in good credit management is to look out for the danger signs.
If agencies or clients delay payment or don’t make payment at all then it is important to take action promptly.
Where an IT contract provides for payments by a certain date, then they should not overlook a failure to receive due payments by that date.
In most ongoing IT contracts a failure to receive payment on the date specified in the contract may not be a sufficiently fundamental breach to justify immediate termination without warning. That’s unless this is an explicit term of the contract.
Enforce Your Rights
However, you can enforce your rights and you should be aware that interest will also accrue.
Clarify the situation with the payer. In a simple letter you should outline the increasing delays in payment. Include the details of the outstanding invoices.
Making reference to the particular payment clauses in the IT contract, you should state that you require payment of all outstanding invoices within 7 days. State, also, that the payment of future invoices will be strictly in accordance with the terms of the contract.
Formal Warning
In order to spell out that this is a formal warning you should also state that failure to comply with your demand will entitle you to accept their termination of the contract without further notice. That’s due to their repudiatory breach of the payment terms.
In the event that you do not receive payment within the 7 days (or any other agreed timescale) then you can decide whether or not to terminate the contract by accepting their breach of contract.
Whilst terminating your IT contract may seem like a severe step to take you should recognise that by continuing to work you may only be increasing the size of your debt. You could be working for nothing.
They may give you all manner of excuses for the delay in payment. However, this is a commercial contract and responsibility for cash flow mismanagement should not rest on your shoulders.
In most cases the best advice would be to cut your losses.
Recouping Your Money
Depending on the circumstances there are a number of options available to recoup the outstanding monies.
If you are an independent IT contractor the law will regard you as an unsecured creditor in the event of your agency‘s insolvency. So, you must take your place behind HMRC and the company‘s employees.
Therefore delay could be disastrous and you should effect rapid action.
If it is your client that is in financial difficulty then the first step is to look at the terms of your contract.
Contractors Rights
Under a normal relationship involving IT contractor, agency and client, the contract obliges the agency to pay the contractor for work done. That’s regardless of receipt of fees from the client.
This should protect most IT contractors from losing out in the event that the client goes into administration or liquidation. However, it could leave the agency holding the baby.
The other factor that will arise if your client goes into administration is that the agency will most likely wish to terminate the arrangement. That’s because they are unlikely to receive further payments.
Again it is important to look at the contract to determine the agency‘s rights of termination and the circumstances under which the contractor is entitled to receive payment during any notice period.
Good Credit Management
Overall good credit management includes:
1. Checking the agency‘s credit rating and reputation.
2. Ensuring that the contract payment terms are clear and unambiguous (and are not reliant on the client).
3. For outstanding payments ensure that concerns are put in writing at the earliest possible time with a timescale for payment.
4. Do not sit back and wait for events to sort themselves out when not getting paid – time is money, your money.
This article, on getting paid, is for general guidance only and is not a substitute for professional advice where specific circumstances can be considered. Whereas the greatest of care is taken in providing this information, neither James May nor Lawspeed can accept any liability for any action taken or not taken in reliance upon the information provided in this article.
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