After Carillion’s recent downfall exposed the precarious position of smaller suppliers, Dave Chaplin, author of The Contractors’ Handbook, explains strategies you can adopt to prevent your challenges escalating into crises.
Media headlines around Carillion’s recent downfall shone another spotlight on late payment and how small businesses have to bear the brunt when things go wrong that are out of their control. But by understanding basic contract law and developing your negotiation skills, you can resolve most disputes quickly and to your advantage.
Small UK businesses, including freelancers, are owed an estimated £14bn in late payments, mostly by large companies. It’s easy to avoid getting into difficulties yourself, as a basic understanding of contract law and late payment processes could secure any cash you’re owed without burning any bridges.
Also, by developing your sales and negotiation skills, you can minimise the chances of payment defaults through better payment terms, and your improved skills will help increase your sales and profitability.
Your business has rights under contract law
Getting to grips with the transition from employment rights to rights under contract law is a key step once you have made the transition from employment to freelancing. Your relationship with customers of your business is governed by contract law, whereas employment law, with all the employment rights that come with it, would have governed your relationship with your former employer.
Contract law can offer your freelance business considerable protection when things go wrong, if you’re careful about only signing mutually beneficial contracts with clients. By gaining a basic understanding of the law, when to apply it and when to seek professional legal advice, you could save yourself considerable time, money and stress. You could even save your freelancing career.
Once you have agreed a contract with a client, assuming you have delivered your product or service according the specifications in the contract, contract law says that your client must pay you according to the terms agreed.
Your client cannot simply decide to ignore the contract or unilaterally change it. If your client does not pay you according to the terms of the contract, it is ‘in breach of contract’ and there are legal steps you can take to secure payment. But often, simply demonstrating that you understand your rights under contract law, and are not afraid to exercise them, can result in prompt payment.
Don’t leave any scope for misunderstanding – negotiate favourable contracts
The best contract disputes are those that never happen. Make sure you use professionally drafted contracts in negotiations from the outset; they should be appropriate to your business and the services you provide.
Resist the temptation to start work on a project unless you have negotiated a deal and the paperwork is in place first. If negotiations have not been resolved and contracts remain incomplete but you start work, you are effectively accepting the most recent set of terms, which may be unfavourable.
If there is a dispute, the first place your client will look is at the contracts, so make sure what you have negotiated is cast iron and covers all eventualities. If you start to trade without contracts or terms and conditions to which your customers have agreed, you are leaving your freelance business open to disputes and yourself open to a lot of stress and expense.
Focusing on developing your sales and negotiation skills can avoid all such problems. And the skills you gain will help you win more lucrative deals, resulting in increased sales and higher profitability.
What you can do when things go wrong
Despite delivering a freelance project on time, to specification and within budget, a difficult client may try to avoid payment or insist you complete additional work before providing sign-off.
Clients may try to change your rates, increase the scope of work, cancel the contract part-way through, threaten termination if you don’t agree to fresh terms, consistently pay late, withhold part of the fee or simply fail to pay at all.
Bear in mind that it may not be your primary client contact who is the root of the problem. You may have fallen foul of procurement or finance department rules, over which your main contact has limited control and influence.
However, don’t be fazed either by bullying clients or unresponsive finance or procurement departments. If you had a well drafted signed contract in place from the outset, there are processes and procedures you can apply to resolve most disputes amicably and without resorting to legal action. The key to dealing with difficult clients is to understand your contractual rights, and make sure the client, procurement manager or finance team knows you know.
Follow due processes correctly and professionally
The courts take a dim view of those that reach for their lawyers without trying to resolve a contractual dispute amicably. It is possible to mistake a client who has simply misunderstood the situation for a client being difficult. So, if the response to an invoice from what you consider to be a job well done is “I’m not paying because you did not complete ‘X'”, then clarify with your client that “X” was not included in the original contract specification.
Similarly, if your invoices are repeatedly paid late, or not at all, be proactive, professional and diplomatic. Your main client project manager may have processed your invoice efficiently, but some large corporates insist on applying much more extended payment terms with all suppliers without their agreement and regardless of what was in the original contract.
If you discover that your invoices remain unpaid after your agreed terms, it can be tempting to chase aggressively or emotionally. Instead, follow established debt recovery processes, which should start by you identifying who is responsible for the payment of invoices within your client’s organisation.
Point out to them that your invoice remains unpaid and give them a reasonable time to pay. If that doesn’t work, let them know that if payment in full is not received in “X” days you will follow the processes laid down by the late payment legislation. That will encourage payment in the majority of cases!
Do get paid, but don’t burn bridges
Taking legal options to resolve a contractual dispute is always a tough judgement call. On the one hand, your project manager may be a great client who pays well and values your work. On the other, if you are not getting paid on time, or at all, it doesn’t matter how lucrative each project might be.
Don’t let your exposure to any one client grow too large, so that your business is strong enough to take the loss of that client. But don’t burn bridges, as your client project manager may move on one day and decide that they want to work with you again.
Remember that there is every chance that your freelance business will continue to thrive and you will experience none or few of the challenges difficult clients can present.
But by developing your business skills to include some basic knowledge about contract law and negotiation, if the worst does happen you will be well equipped to protect your freelance business.
Dave Chaplin is author of The Contractors’ Handbook, which provides advice for freelancers and contractors, whether they are new to freelancing or experienced old-hands
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