What do you do when you don't get paid?

[Chris Maxwell]

I consult, and in all my years of consulting I have never had this
problem. This year, back-to-back, the companies I have worked for have
not paid me for my services.

I realize it happens, such is business, but what do you do when it does
happen? I had contracts, but is that enough? What can you include in the
contract to protect you? If I were running a development practice, I
would ask for deposits, this is not uncommon. As a consultant though you
really don't. At least I don't think you do.

The situation:

The first company, the moment they sensed problems pulled the plug on my
contract, and paid me what they could then, and a little bit here and
there since - without me ever asking. All in all I think this company
has behaved honorably. I mean it stinks that it happened, but it seems
like they are doing their best. I'm wondering how could I have better
protected myself from the get-go? Sure they are paying, but it's not a
situation you want to be in.

The second company, unlike the first, was slow to pay in the beginning,
blamed vacations and a bad controller, and gave a ton of apologies. As
things progressed they dragged me along with promises and agreements to
pay on such and such a date, etc. Call me naive, or perhaps because both
stakeholders are active members of this mailing list (and one I know
personally), I trusted them and took the bait hook line and sinker and
continued to work. I'm still waiting to get paid for July invoices, and
what really stinks is that I needed the money, especially after the
first default. I mean I love what I do, but we work for money right?

So I have a household to run, a child to support, and all the apologies
and promises in the world are not going to help. There is no one else to
pick up the financial slack. I'm a single father. Sitting here on this
end of the stick I can't help but feel @#%T^@. I think you get it.

I'm now looking for a new opportunity, and one will come, but moving
forward I want to do it right. Here are some of the things I'm thinking
about:

- What kind of questions are appropriate to ask when performing due
diligence on a new opportunity?
- What provisions should you include in a contract to protect yourself
from default, or extended nonpayments?
- What kind of recourse is available to you in the event of a default?
- What can you do that would be acceptable in exposing individuals who
practice unethical/unfair business practices, purposefully or not, that
do not seem petty or damage your own reputation?

I'm wondering if anyone on this list has any ideas, suggestions, or
advice on what would be acceptable and professional for a consultant to
do in this community?

Sincerely,
Chris Maxwell

[Jeremy Weiskotten]

Sorry to hear you're in this situation. I've been there. Oddly, the guy who owes me some money occasionally emails me for more help. Unbelievable.

Obvious question: have you discussed any of this with a lawyer?

If not, you should, to (a) discuss what recourse options are available and (b) to draft a contract to better defend against these scenarios and potentially give yourself more recourse options. It will cost you a bit but think of it like insurance -- a necessary cost of doing business. See http://vimeo.com/22053820 (a great talk called "Fuck You. Pay Me").

- What kind of questions are appropriate to ask when performing due diligence on a new opportunity?

Pretty much anything that removes risk for you is fair game. Trust your instincts. Be open and honest about any concerns and give the potential client an opportunity to clarify or make adjustments. Communication is key. Better to ask early and get a bad answer than to find out later.

- What provisions should you include in a contract to protect yourself from default, or extended nonpayments?

I don't think it's uncommon or that there's anything wrong with asking for a deposit as a consultant, especially if it's a client you haven't worked with before. You should get paid regularly over the duration of the project -- if not, stop work, the client is already in breach of the contract. Also late fees, arbitration, etc. Who owns the work in the event of non-payment (hint: it should be you).

- What kind of recourse is available to you in the event of a default?

Probably not much but I'd love to hear if anyone else has any good ideas. I think the trick is to dig as small a hole as possible to minimize your exposure. Be firm, don't buy into excuses, and make it clear that you expect to be compensated per your contract -- before it gets to the point of default. Basically, get what you can when you can.

- What can you do that would be acceptable in exposing individuals who practice unethical/unfair business practices, purposefully or not, that do not seem petty or damage your own reputation?

This is tricky. If you've exhausted all other options, you could flame them (accurately and professionally) in a blog post or tweet. It probably won't get you the compensation, and there's a risk of being sued for defamation/libel or damaging your own reputation as you suggested. It's possible that your post would save someone else from getting into the same situation with them, but that's probably unlikely. I'd discuss the risk/value with a lawyer.

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[Barun Singh]

I am assuming in this response that there wasn't any relevant information omitted from the initial message. That is, of course, a dangerous thing to assume. So, major caveat -- if my assumption is false, the comments below are likely incorrect or irrelevant.

Chris: the situation you outlined is very unpleasant, and I'm sorry you're going through it. The second company you  describe seems, to me, to be engaging in highly unethical behavior. Personally, I have no patience for this sort of thing -- it is upsetting that a member of this community would behave in such a way.

To whoever is on the other end of this:

If something goes unexpectedly wrong and you simply have no money to pay, that may be understandable. Sometimes you end up on the wrong end of things, even through no fault of your own. More likely, this indicates poor financial planning, and processes ought to be reevaluated to not repeat the mistake. It sounds like the first company may be in this situation, and is trying to do the right thing by paying you as soon as they are able.

* But if you are purposely misleading people by not informing them of the risk your are bringing on them (for example, you know you are unlikely to have money to pay a consultant and aren't honest about it), then this is very clearly unethical.

* Additionally, if you have money to pay yourself, and you're skipping out on paying your contractors or employees, you are spreading risk to others and keeping rewards for yourself -- also clearly unethical. (Despite how common this practice is in finance)

Even if you have no concern for the others involved, you ought to at least value your own reputation. Nobody wants to work with or for individuals or organizations that behave in such a manner.

All that aside, a few possibly helpful practical responses:

Chris, if you structured your contract in a reasonable manner there are legal options. Of course, those options involve time, money, and headache as well so I imagine that at the end of the day it would be more about a moral victory than anything tangible. (I'm no expert on these legal matters, though)

Having been on both sides of contracting, I have found the following guidelines to be helpful:

(1) Be very clear about expectations on both ends. Ambiguity is a gamble, and you can think of it like gambling at a casino -- there are good reasons you may want to do it, but you should accept that there's no guarantees you'll come out on top from it.

(2) Try to find out about their reputation and past experiences; basically, is this a person or organization you trust? It seems like you did your best with that already; this isn't foolproof (but usually peoples' reputations follow them around, so it's a decent indicator).

(3) Very importantly, structure contracts with regular payments. I always prefer monthly payments. It's a good balance of not having a lot of overhead (invoicing and cutting checks once a month isn't hard), and getting paid regularly enough to mitigate risk to a reasonable extent. It's also helpful for the organization paying you to make sure they're forced to assess the contracting costs regularly.

(4) Stick to your agreement: Every contracting agreement I've ever signed included a clause stating that payment is required within X days of an invoice. If that doesn't happen, then you should stop until the issue is resolved. It's easy for people to just get very busy and overlook things, and bank errors and such do happen, so if something is a day or two late, a bit of polite nagging is appropriate. But if you at all sense a pattern of non-payment, you shouldn't put up with it.

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[Wyatt Greene]

So I've been contracting in earnest for three years now and have been lucky to avoid major non-payment issues.  Note that my services are mostly coding, not consulting (although I do that, too).  Here's what I know:

• If you are a web developer, and are skilled, you have the power of economic scarcity on your side.  This means you have a lot of flexibility to define how you interact with your customers, so you shouldn't need to stick with arrangements that are financially uncomfortable for you.
• It sounds like you are taking on more financial risk than you are comfortable with.  Therefore, change your business arrangements so that you accept less of this risk.
• Your customers, especially entrepreneurs, will push financial risk onto you.  This is not done out of ill will, but out of overconfidence in the success of their venture.  You should protect yourself from their unrealistic optimism.
• Your contract is not your best defense.  Once you get into legal territory, you have automatically lost.  That's because if you have to enforce your contract, you are losing billable time and also paying high lawyers fees.  Even if you "win" and get your money back, you will have lost and also spent your time on one of the least enjoyable activities humans can participate in in our short, precious lives: fighting in court.  So don't think your contract provides legal protection as much as it provides an opportunity to very clearly define expectations with your clients.
• Your best defense is to avoid clients that don't pay or don't pay promptly.

This is what I do to protect myself from financial risk:

• I bill hourly, never at a flat rate.
• I ask for an up-front deposit before starting work.  This provides you with a ton of information about how they approach payment.  If they balk at the amount of the deposit or have any trouble whatsoever getting it to you promptly, move on.  Clients that have money to pay you and are organized enough to pay you on time will get this money to you quickly without balking.
• I ask about or otherwise research their financial situation.  Are they funded?  How much runway do they have?  Are they bootstrapped, have angel investment, VC investment?  This gives you a sense for how much capital the client has and how fragile their economic future is.
• I charge a decent hourly rate.  If you charge too low, you will have a greater chance of attracting clients that have issues paying.  Charge higher (and make sure your services are top-notch and skilled so that it fits with a higher rate) and you will attract clients who are able to pay.  If you are charging less than $100/hour, you are not charging enough.  Up your skills and up your rate.
• This is perhaps the most crucial advice: set up your invoicing schedule to provide you with *quick* feedback about payment.  If you have a schedule where you bill every 30 days and the client has 30 days to pay invoices, you can go an entire two months without getting feedback that the client will actually pay in good faith and on time.  Opt with a weekly or biweekly invoicing schedule, and give clients one or two weeks to pay you.  That way you find out very quickly that a client doesn't pay and can move on.
• The other nice thing about quick invoicing cycles is that if a client doesn't pay, the amount of lost money is low enough that you can easily just walk away from it, or you have the option to pursue payment in small claims court (less than about $7k in Massachusetts, I believe).  If you go a long time without the client paying, then you may lose the opportunity to take it to small claims court.  (I've never had to go to small claims court, though, because so far my clients have all been faithful in paying me).
• Make sure you have the ability to be picky about your clients and not feel forced to take a risky client because that's your only option.  If you are a skilled developer and your potential clients know about you or can easily find out about you, you should be getting a steady stream of client requests.  Also, make sure your consulting business has a "cushion" to hold you over between clients so that you never feel like you have to take a risky client because you are desperate for the next paycheck.
• Set very clear boundaries: if you don't get paid, you don't continue working for them.  Make non-payment their problem.  Never work on trust.  And you can still do this in a way that is respectful, friendly and professional.  It's amazing how clients suddenly can find the money to pay you quickly when you make it clear that your services are ending because of non-payment.

Also, I wouldn't worry about trying to expose people who have not behaved ethically or did not pay you.  That's a common reaction, but it's often not skillful.  You have to ask yourself what's important to you and what you want to accomplish in your business and in your life.  What will be the effects of exposing them?  Will this get your money back?  Will you feel better?  Are you acting from your best self?  What's the opportunity cost?  This kind of drama can really suck out a lot of your creative energy and focus that you could have otherwise put into a good client or your own projects.  Sometimes these things are worth fighting for, but sometimes it's not worth the hit to your peace of mind and creative energy.  Sometimes it's best to move on.  It probably depends on how much money we're talking about.

Sorry that this doesn't help you in your current dilemma, but hopefully you may find something helpful to avoid future problems.  There is also a lot of good advice here: http://rubyfreelancers.com/

Cheers,

Wyatt

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[Brian Cardarella]

Mike Monteiro likes to talk about this subject a lot. I highly recommend

his video Fuck You, Pay Me: https://vimeo.com/22053820
his book: Design is a Job http://www.abookapart.com/products/design-is-a-job

----------------------
Brian Cardarella
Principal at DockYard
Visit us: http://dockyard.com
Call us: (855) DOCK-YRD
Follow me on Twitter: http://twitter.com/bcardarella
Follow us on Twitter: http://twitter.com/DockYard

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[John Norman]

Chris (& all),

God I hate to hear this.

I had a customer sign off on some work and then, essentially, go "bankrupt" (I put it in quotes because I know he had money) and tell me he wasn't paying me. It was $10,000. I had no solution. What I did do was call him once/month for about a year. Then I gave up.

What I didn't do -- and what I regret now -- was not calling up his investors. One was Esther Dyson - quite a big shot. I should have talked about the situation with such people, and promised some means to embarrass them. I'm not sure I would have been capable of that without getting sued, but I should have at least made some hostile calls. The trouble was that $10K was just too little to engage a lawyer, and I wasn't in a good situation to attempt small claims court or the like.

I also thought about taking the baseball bat over to his office.

I am still steamed about it.

I have also experienced the usual thing where work was completely as stipulated and signed off by the customer, but for some reason they wanted to withhold or delay payment. In general there were good reasons or things I could honorably help them with -- and then they paid. I had to be polite, persistent, give a little bit. But except for that one scurrilous asshat, I have always gotten paid.

John

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[John Norman]

This, specifically, was a big problem in my case. I should have been collected smaller payments all along.

[John Norman]

Having personally consulted with companies ranging from 1 employee to 10,000, I have NOT ONCE been paid within the time stipulated on an invoice. Not once.

For a company I co-founded, I vividly remember Microsoft never paying on time, even though they browbeat us into allowing an extremely long amount of time in the invoice.

(Do I sound bitter?)

[Wyatt Greene]

I've also had trouble with late payment.  The problem can be organizational inefficiency, especially with larger organizations.  They have their own internal payment processes and schedules, and there are various people involved with the payment of your invoice. You can very easily have late payment problems on your first invoice not because the client is acting in bad faith but because of miscommunication or internal disorganization.

So I started asking for a deposit up-front, which would "prime the pump" so that all of the organizational miscommunications and disorganization would be dealt with before I started coding.  I've only recently started asking for deposits, so I don't have a large enough sample size to say how effective it is yet, though.

And as an aside, late payments generally don't bother me (within reason).  But for the first few invoices, it's impossible to distinguish late payments from non-payments so I'm generally pretty strict with new clients until they establish a solid financial reputation with me.

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[Susan McM. Tucker]

Chris,

First off, I am really sorry to hear your news. I have been self-employed
for many years, and have had only had one client that didn't pay a final
invoice. I was out $1,000 at the end of it all.

You have gotten some great responses, but I want to stress several things:

Bill early and often. My rule of thumb is that new clients are billed every
two weeks. When they have a good history with me, I move them to monthly.
Back when I had to accept clients that I didn't trust, I asked for 30% of
the anticipated work as a deposit, but ran the risk that the clients thought
I was guaranteeing that the estimate was a project budget. My preference is
now not to ask for a deposit.

The minute a client gets behind on payments, I stop working on their files.
Only I choose who gets my pro bono time.

I do offer a non-profit discount, but only if they pay me within 15 days.
This has helped speed up payments from this community. The few who doubted
my resolve learned quickly that they were expect to pay the full amount.

Generally, my clients have FAR more resources than I do, including access to
lawyers. A goal is to never have lawyers as part of my relationship with a
client. They will always win.

Posting the client name or details of their payment history in a public
forum would be a mistake. The risk to you is far greater than the risk to
them. One can, however, tell your colleagues that if "xyz contacts you, you
might want to chat offline with me."

I never have just one client at a time. I juggle the work, stay up late, but
it is not in my best interests to rely on just one income source at any
given time.

And finally, as a single parent, I can't stress how important it is to have
at least 9 months of overhead in a liquid account. It isn't easy to do, but
stuff happens over which you have no control. I know that 6 months is the
rule of thumb, but my experience has taught me that more is better.

All the best,

*susan*

[Dan Pickett]

Hey Chris,

Sorry to hear about your situation.

To reiterate Wyatt's point (and to add on to his awesome suggestions), I can't stress the importance of getting the first scope of work's deposit (at least 25%, but we require 40%). It's a great qualifier, and we've been fortunate in that it's been a deterrant against anyone that wasn't planning on or couldn't pay. I can think of at least 3 "qualified" inquiries we didn't engage with in the past 2 years because they didn't want to make that upfront commitment. When this happens, I'm happy because it could have ended so much worse. Two important questions we always ask during our intial phone calls are "What's your budget?" and "How are you funding this project?"

I'm a big fan of vetting clients socially, too. Talk to others - ask for other vendor references and ask around (maybe they're working with a designer or a sales consultant). Chances are this company's reputation would have preceded itself. I looked into running credit checks on companies, but D&B is kind of a raquet in and of itself. Vendor references are often tremendously candid and accurate about payment I've found.

I've had one delinquent payer outside of our community, and we eventually settled on a number significantly reduced from what was originally owed. It's a painful experience that I think every consultant/freelancer unfortunately goes through. 

I like to believe that what goes around comes around. Good luck - I hope you get your money! 

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Dan Pickett

Principal at LaunchWare, Inc.

launchware.com | twitter.com/dpickett | twitter.com/launchware

[Mark Chang]

Chris,

While I have never been not paid at all, I have definitely been in the "string you along and delay" boat a few times. Part of the reason for some of these instances, in my case, was bad communication channels between those that contracted me for the work, and those in charge of issuing payments.

Somehow, their commitment to me was not communicated, and I was not treated as a first-class vendor. I felt bad pressing on these folks because my contacts honestly wanted me paid, but the people signing checks just didn't get the memo, I guess. I got much faster response when I was more pro-active pointing fingers and letting people in charge know that their people were dropping the ball, and that it was going to affect the work I was delivering to them *by a certain date*.

So, something like, "your payroll people haven't managed to fulfill my invoice in time, therefore I will be forced to focus my energies on other client work effective [date]". Curt, professional, and puts the ball squarely in their court, which it is. Nothing angry, just making it clear that I don't work for free, and  *they* need to figure out how to turn the screws on payroll.

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Mark L. Chang

[Wyatt Greene]

Yes, and [date] can often be "today", depending on the context.  It doesn't mean that you necessarily are completing ending your relationship with them, but it means that their delay in payment translates to a delay in services, which seems fair (as long as this is in harmony with the expectations up front when you signed a contract).

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[Wyatt Greene]

And let me add that this assumes you are normally gracious and tolerant of the fact that everyone is human and makes mistakes and invoices will be paid a few days late now and then.  This is assuming that the late payment has escalated beyond the expectations set in the initial contract and no longer can be explained as a mistake made in good faith by the client.  In other words, your client shouldn't feel like they are walking on eggshells and that their services are in jeopardy if they happen to be a day or two late.

[Chris Maxwell]

Wow, what an amazing group. This is some great advice. Thank you so much
for your comments and support both here and off-line. I'm going to take
some time and digest your collective wisdom as I move forward, but briefly:

Late for me is 5 months in one case, and closing on 2 months in the
other. I most definitely will not publicly humiliate or expose anyone. I
find myself in this financial situation in regards to how it is
affecting my household in part because of a near death experience I had
at the end of last year that depleted my just-in-case savings (and
time); I'm pretty responsible when it comes to my son. The other part is
because I didn't get paid twice in a row! These two jobs were my first
two jobs after I recovered from the accident ( when it rains it pours ).
I bill biweekly, but moving forward I'm going to not let things slide
when they start to. Normally I do let things slide a couple of weeks -
this kind of late payment has never happened to me in 10 years of
consulting, and normally I do have that 9-month cushion. I think most
people want to do the right thing when given the opportunity, and I
agree, involving lawyers is a no-win situation. I also agree that what
goes around comes around. This is a small community, but an important
one in what we do. Reputations will follow you. I almost didn't want to
post this question just to avoid any negative impact on my own
reputation, but I'm glad I did. Usually I just accept contracts as
written unless noncompete and IP clauses are too restrictive, but moving
forward I will spell out some provisions that do address what will be
done in the case of a default in payment. There are definitely some good
ideas and strategies here, and a couple resources that I should look
into, and my thinking that as an individual consultant I should NOT ask
for money up front (like I would if I were a practice) is absolutely
wrong. I'll most definitely change this, and again there are some good
ideas on how to go about that here.

Thank you everyone for your excellent responses and ideas.

Sincerely,
Chris Maxwell

[Wyatt Greene]

Wow, what a run of bad luck. I'm so sorry to hear you've had such a year.

One more tip: I have a clause in my contract that I sometimes use that states that late invoices can accrue interest. So that gives an added incentive for the client to pay you: they will also be paying 5 months of interest.

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[Melitta]

Chris, 

One option for you is small claims court. In Massachusetts the claim has to be under 7,000.00. 

http://www.mass.gov/courts/courtsandjudges/courts/districtcourt/smallclaims.html#6

Melitta

[Jay McGaffigan]

I'm not a consultant but I work with some. As part of a larger
organization I've had to push on our accounts payable department as I
absolutely HATE missing payment deadlines. I realize that folk are
working to make a living and want to ensure a good relationship with
my contractors. You never know down the road when the tables could be
turn etc.

It seems to me that in one case some money dribbled in over time so I
am assuming you have at least had communication with your client and
that some level of expectation has been set with you?
But it sounds like in the other one there is no communication
happening ? and that you are being left hung out to dry?

In the later case I really don't have any sympathy for them if you
outed them. If you kept your "outing" professional and above the
board how would that be different than filing a complaint with the
BBB? Maybe we should start a BBB of folk hiring contractors or
something? In doing something like that aren't you helping protect the
'next' contractor that these folk try to engage with?

As for recouping your money... any chances you can use a collection
agency? Maybe even use on of those agencies that you see on TV shows?
I'm not trying to make light of your situation here but my Dad always
taught me that my word was sacred and that even if I can't fulfill my
promise, I should be forthright and honest about it.

Jay

[Dale Bertrand]

On Wednesday, September 26, 2012 7:48:41 PM UTC-4, Melitta wrote:

Chris, 

One option for you is small claims court. In Massachusetts the claim has to be under 7,000.00. 

http://www.mass.gov/courts/courtsandjudges/courts/districtcourt/smallclaims.html#6

Keep in mind I'm not a lawyer...   My understanding of the law is that you can still sue in small claims court if you are owed more than 7k, BUT the most you can sue for is 7k.  So small claims court is always an option.

[Dale Bertrand]

Thank you for all the insights and experiences.  This is a great thread.

I learned the hard way to require a deposit up front to qualify clients.

Question:  How do you guys treat deposits you charge up front?  Do you deduct it from the first invoice or hold it in escrow until the end of the project?

Quick story:  I had a client who could not pay me.  They were a week from missing payroll when I found out what was going on.  The client operated a chain of preschools in the Boston area.  Instead of paying the amount they owed me, they offered my son a year of free preschool (worth about twice what he owed me).  It was a stressful negotiation and I had to pay a couple of subcontractors out of pocket.  But, I was happy with the resolution.  Now my son is in his 3rd year at this school, even though I have to pay the full rate now.

- Dale Bertrand

On Wednesday, September 26, 2012 12:58:17 PM UTC-4, Chris Maxwell wrote:

[Jeremy Weiskotten]

We (Terrible Labs) typically reduce each invoice by deposit_amount / num_invoices based on our estimated project duration.

So if we invoice bi-weekly on an 8-week project, there are 4 invoices. Given a $10,000 deposit, we'd deduct $2500 (10k/4) from each invoice, where the invoiced amount is based on our weekly rate.

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