Contracts are important to your business. Some contracts help you describe to your clients what you will do and what they will pay you. Some contracts explain to your customer what you are giving them (or more specifically what you are not giving them) when they purchase your products.
One of the most common times a business need to enforce a contract is when the client fails to pay. Too often though this is the part of the contract that is ignored before it is needed. Don’t let that happen to you. Make sure you pay as much attention to the collection paragraphs of your contract as you do to the payment and scope of work. Remember contracts are enforced when things do not go properly. You need to make sure your payment terms are clear, but you also need to make sure you can get the money if the client does not pay.
This is a list of the top five reasons your contracts won’t help you collect your unpaid fees:
1. You Didn’t Get it in Writing
Whether you are just getting started, really busy, or in a tight spot financially it is too easy to forget to have someone sign that customer agreement. You may even think the agreement would kill the deal. The problem is, if you don’t have that contract in writing, it will be your word against theirs when it comes to the agreement you had with the customer.
No matter what the agreement is, you won’t be able to get your cost of collection or any interest out of your customer because the court can’t give it to you if it isn’t in the contract.
At least put the agreement in an email or a letter and make sure you get a written confirmation of the terms. That will help you prove there was an agreement and some of the terms involved.
2. Your Contract is Ambiguous
Even if you do put it in writing, your contract may be written in such a way that there are two or more equally plausible interpretations of a deal. This is an ambiguity. To avoid ambiguities, you need to make sure every part of you contract is in agreement with every other part. For a contract to work, anyone should be able to read your contract and know exactly what all of the parties were supposed to do under the contract.
If you are supposed to be paid every 15 days, make sure there is nothing that can be interpreted to mean that the client may have an option to withhold payment. If payment is not contingent on completion of certain work, make sure your contract can’t be read to say it is.
3. You Don’t Make Your Client Agree to Pay Collection Costs
This is a big one. You never want to throw good money after bad. What is worse is you don’t want to have to pay $500 to get $750. Having a paragraph that requires your client to pay all costs if collection negates that risk. With this paragraph, if you can prove your case, you can win all of the money you are owed and the money you have to spend to get it.
Having this terms helps make the decision to collect much easier. Also, as a bonus, make sure you include something about paying for attorneys’ fees. This will go a long way to helping you collect.
If you have an entity for your business, you cannot represent yourself in court. So, after you have sent all your mean emails and letters, you have to turn it over to a lawyer to file the case in court. If your contract says he can get his own money, you will have a better relationship with your lawyer. Also, knowing the other side has to pay, you can be very selective with the lawyer you use to collect for you.
4. You Don’t Make Your Client Agree to Interest on Late Payments
Another commonly ignored term in contracts is the paragraph outlining interest charged on unpaid invoices. If you want to charge interest to your client when they don’t pay, make sure you spell it out. What is the interest charge? When is it accrued? When does it start? The court can’t create these terms for you. You need to put them in your agreement before you have to enforce it.
Courts can’t just give you interest. If you don’t put it in the contract, the only way you will get the interest from your customer who isn’t paying is on the interest the state charges once you have won the case. But that interest is only after you win. If you don’t include interest charges in your contract, you will lose out on a lot of money if it takes a long time to collect!
5. You Didn’t Get it Signed
Maybe, just maybe, your contract is perfect and you covered all your bases. None of that matters if you don’t have proof that the customer agreed to it before you started working. Most of the time that proof is a signature. Sometimes it is an email confirming receipt and review of the contract and agreeing to the terms. Whatever it is, you better have unequivocal proof of agreement to the contract or you may be out of luck.
In the types of agreements we are talking about, you are normally sending out a form that is simply signed by your client. When that is the case, anything missing from your contract is going to be read in favor of the customer because you had the benefit of time to draft the contract. That means if you leave any of these parts out, the court will not give you the benefit of the doubt. They cannot. They have to assume you knew what you wrote in your contract.
Have you ever learned a major business lesson when your contract did not help you out? Let me know in the comments!
Want to ask me a question more directly? Join the conversation! We can really dig deep in the email newsletter.