Contractor Payment Terms - Newbie advice
Discussion
After a little contractor newbie advice here. Since going solo, I’ve mainly been doing scraps of free-lance type work and just invoicing for my time but now I’m commencing some work on a bigger project for a client. The exact deliverables, milestones and time scales etc are not yet defined to me, partly because I haven’t signed an NDA yet and I guess partly because it’s not fully understood by the client either until someone gets stuck into it. They estimate a minimum of 6 months of work on it and have agreed to my hourly rate.
I’m obviously keen to make sure this firmly stays outside of IR35. IMO it is outside IR35 and I will be working on other projects at the same time but I'm aware it might raise questions so I want to make sure I've done all I can to properly define it.
I’ve drawn up a contract covering control, substitutes, place of work, equipment etc. Where I’m struggling is on the payment side of things. In an ideal world, I’d submit monthly invoices based on hours worked but my accountant suggests I try to break it down into payments that match project milestones and therefore invoice at irregular intervals relating to those instead. Trouble is, neither me nor the client could realistically define a workable schedule from the outset so I do not how to cover this contractually.
So, should I stick to plan A and invoice monthly or agree with client that we agree milestones on the fly as things progress? Or is there a far better plan C that I should be aware of?
I’m obviously keen to make sure this firmly stays outside of IR35. IMO it is outside IR35 and I will be working on other projects at the same time but I'm aware it might raise questions so I want to make sure I've done all I can to properly define it.
I’ve drawn up a contract covering control, substitutes, place of work, equipment etc. Where I’m struggling is on the payment side of things. In an ideal world, I’d submit monthly invoices based on hours worked but my accountant suggests I try to break it down into payments that match project milestones and therefore invoice at irregular intervals relating to those instead. Trouble is, neither me nor the client could realistically define a workable schedule from the outset so I do not how to cover this contractually.
So, should I stick to plan A and invoice monthly or agree with client that we agree milestones on the fly as things progress? Or is there a far better plan C that I should be aware of?
Hi
I assume from your post that you will be working direct to the client, rather than via an agent/agency?
I've been contracting for almost 20 years now, and have only gone down the "invoicing on contract milestone/deliverables" route a couple of times. The key thing in nailing down precise deliverables (i.e production of first draft of XYZ spec etc.) or milestones (per development sprint, say); and ensuring the client signs up to them. The issue comes when you raise the invoice against the milestone/deliverable and there is a disagreement - this could/can delay payment, and if the milestone was time-based then you could be in the situation where you have worked4/6/8 weeks or more without payment.
For a lot of my gigs now (especially those that are direct to the client), they tend to be finance-led anyway, so usually have an auto-invoice system tied to approved timesheet submission. This makes writing up a statement of work (to append to the initial contract) tricky, as you get into the realms of trying to describe the work that is to be done.
If it is a genuinely hourly-based contract, then another way to break up the regular routine is to work a variable work pattern. So break away from the traditional 8-hour day/40-hour week. Providing you and the client agree a limit of the total cost (in my line it tends to be a bundle of hours on a call-off contract), then that could be a viable alternative. 30 hours one week, 45/50 hours the next etc.
Regards
I assume from your post that you will be working direct to the client, rather than via an agent/agency?
I've been contracting for almost 20 years now, and have only gone down the "invoicing on contract milestone/deliverables" route a couple of times. The key thing in nailing down precise deliverables (i.e production of first draft of XYZ spec etc.) or milestones (per development sprint, say); and ensuring the client signs up to them. The issue comes when you raise the invoice against the milestone/deliverable and there is a disagreement - this could/can delay payment, and if the milestone was time-based then you could be in the situation where you have worked4/6/8 weeks or more without payment.
For a lot of my gigs now (especially those that are direct to the client), they tend to be finance-led anyway, so usually have an auto-invoice system tied to approved timesheet submission. This makes writing up a statement of work (to append to the initial contract) tricky, as you get into the realms of trying to describe the work that is to be done.
If it is a genuinely hourly-based contract, then another way to break up the regular routine is to work a variable work pattern. So break away from the traditional 8-hour day/40-hour week. Providing you and the client agree a limit of the total cost (in my line it tends to be a bundle of hours on a call-off contract), then that could be a viable alternative. 30 hours one week, 45/50 hours the next etc.
Regards
I would also not agree a wholly milestone based template - it can be too subjective.
Where appropriate I have set up a split fee agreement where the hourly rate was reduced but with a success fee on top (at a premium to reflect the discount and risk) - but only where I trust the client through working with them before and where there are unambiguous milestones. However, from the content of your post I would presume the most appropriate basis is simple hourly charging, billed weekly./monthly and payable on x day terms.
Note - not intending to get into a discussion on whether this is captured by IR35 or not but this project could be while your other concurrent projects are outside. The existence of multiple contracts might help but does not guarantee a route out of the net - each contract is assessed on it's own merits.
Where appropriate I have set up a split fee agreement where the hourly rate was reduced but with a success fee on top (at a premium to reflect the discount and risk) - but only where I trust the client through working with them before and where there are unambiguous milestones. However, from the content of your post I would presume the most appropriate basis is simple hourly charging, billed weekly./monthly and payable on x day terms.
Note - not intending to get into a discussion on whether this is captured by IR35 or not but this project could be while your other concurrent projects are outside. The existence of multiple contracts might help but does not guarantee a route out of the net - each contract is assessed on it's own merits.
Thanks all. I think you've persuaded me to keep it simple and bill monthly. Amounts will vary quite a bit to answer one question asked. I am slightly concerned about IR35 coming to bite me on this but maybe its paranoia. I guess there is a practical limit to what I can do to cover myself.
I have yet to meet anyone who has been "caught" under IR35.
I know of people who have had contracts terminated because HMRC put pressure on their industry and then their "client" offers perm roles, and I know of people who self declare they are in IR35 because they are super paranoid and use £40k pension conts as a buffer.... to give them best VFM so to speak. But actually caught, none, and I know a lot.
The last I heard HMRC are investigating about 500 or so cases per year and out of those 500 only a handful ever actually go to court. I suspect we are talking big fish.
I think HMRC have found an easier way to get money into the system... div tax. HTH!
I know of people who have had contracts terminated because HMRC put pressure on their industry and then their "client" offers perm roles, and I know of people who self declare they are in IR35 because they are super paranoid and use £40k pension conts as a buffer.... to give them best VFM so to speak. But actually caught, none, and I know a lot.
The last I heard HMRC are investigating about 500 or so cases per year and out of those 500 only a handful ever actually go to court. I suspect we are talking big fish.
I think HMRC have found an easier way to get money into the system... div tax. HTH!
red_slr said:
I have yet to meet anyone who has been "caught" under IR35.
I've met one, ever.As above, I invoice monthly with 30 days payment terms. I've once, maybe twice, done a stint invoicing on milestones but you need the scope locked down and above all a relationship with a client where there's a lot of trust. With neither, forget it.
I had a general supply of services contract once and then got POs for each project based on estimates. I would invoice each month against typically up to 10 projects. All went into a spreadsheet, just need to make sure the estimate was on track otherwise would have to re-estimate with the reason. Invoicing each month was against current projects, not milestone based. Payment terms can be a pain.
Worked well at the time, early days of ir35 when nobody knew what the rules were. You could say not much has changed.
Worked well at the time, early days of ir35 when nobody knew what the rules were. You could say not much has changed.
Edited by AndrewO on Tuesday 16th October 21:34
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