Recently, I engaged in a discussion with another freelancer about requiring payment in advance. She recommended always asking for advance payment, preferably in full, but no less than 25 percent of the project total. She continued to say that she insists on receiving payment in full prior to final delivery. She was trying to prevent cases of an unscrupulous client refusing to pay after delivery, claiming the product was not what s/he asked for.
Why Requiring Advance Payment in Full Is a Bad Idea
In my opinion, requiring advance payment in full before you even start working on a client’s project raises some significant problems such as:
- It sends the client a clear message, “I don’t trust you to pay me,” potentially making the client think that if you’re not willing to trust, it may be because you’re not trustworthy yourself
- After you get paid, your natural inclination as a freelancer will be to concentrate on marketing to the next client rather than on delivering the product to the client who already paid in full
Based on my own experience as a client, requiring payment upfront is unwise, and may well cost you jobs with clients who don’t want to risk paying for something sight-unseen. This is especially true when you don’t have an established relationship with the client, and even more so when you don’t have an established reputation.
A Better Solution to the Trust Problem
If you’re working through an online platform such as Elance or Upwork (formerly Odesk), their escrow service offers a solution. If the client funds escrow before you begin work, it provides assurance to both sides – you know you’ll be paid for work done and delivered, and your client knows she’ll receive the promised deliverables. She also knows that if you don’t deliver, she’ll be reimbursed without resorting to lawsuits. Requiring escrow still sends a message of limited trust, but it establishes a parity of risk between you and your client, reducing the fallout. Another advantage of escrow is that it demonstrates the client’s commitment to the project, and increases the likelihood she’ll be responsive to your requests for information, guidance, and feedback.
If Escrow Is Unavailable
In some cases, if you found the client offline for example, escrow is unavailable or impractical. While some industries (e.g., real estate agents) use escrow extensively, this is not the case for most businesses in the bricks-and-mortar world. In such cases, you can consider several factors when deciding on a course of action.
- Is the client a well-known entity with a good reputation?
- Does the project provide deliverables to the client’s client, and if so, would contacting that ultimate client likely result in your getting paid?
- Do you have a long-term contract with the client, and is the project one where you can expect ongoing work? If so, are your services unique enough that the prospect of losing access to your talent will dissuade the client from withholding payment?
If you’re still not sure your prospective client will pay, you should request partial payment in advance. For example, most building and renovation contractors require an upfront payment of 25-33 percent, enough to cover upfront expenses, so they don’t lose money if the client changes his mind. Such businesses typically deliver the final product after being paid 90 percent of the project total, invoicing the final 10 percent once the client agrees all punch-list items have been satisfied. This limits the contractor’s risk without imposing excessive risk on the client.
For larger projects, it’s best to divide the work into milestones, with the client paying (or releasing escrow) for each deliverable in turn, and (where escrow is available) funding the next milestone.
Some generic milestones I tailor for each project include:
- Review client materials
- Prepare outline
- Draft chapter/section X (times the number of chapters/sections)
- Implement initial client comments
- Implement final client comments
Where understanding the client’s requirements and desires is a large fraction of the anticipated time investment, I require a significant payment for that first milestone. This makes “Review client materials” milestone a de-facto “kill fee” for the project if the client decides to cancel the project in midstream for reasons unrelated to my work.
A well-worded contract offers another reasonable protection. This includes specifying that rights in the deliverables pass to the client only after payment in full. The contract should also make clear that the milestones serve to split the project cost into timed payments, but even if the client declines to make use of included revisions, he’s still on the hook for the full agreed amount.
Takeaway
In retail, store owners assume shoplifters will cause losses. They know that instituting draconian security measures would reduce these losses, but such measures would make honest clients feel the business doubts their honesty. The loss of revenue from offending honest customers would far outweigh the reduction in theft losses, so retailers consider shoplifting as part of their cost of doing business, baking them into their prices.
Similarly, requiring advance payment in full is likely to cost you projects you would otherwise win, a far greater loss than what the occasional dishonest “client” will cost you. Taking reasonable steps, such as escrow and milestone payments, minimizes your losses. If your market includes too many unscrupulous clients, learn from retailers and price your services to account for those as another business cost.
