The First Rule of Outsourcing to Contractors

piggy_bankA lot has been said on the topic of outsourcing work to others. There are the operational issues, the client management challenges, the trust and rapport factors, and so on.

It’s easy to get into the details of this issue without looking at the one key factor which will affect the success of any outsourcing adventure you might be planning. It’ll affect your reputation, your working relationships, and whether you work with the contractor again. It may even affect your self-respect and esteem.

The First Rule

My first rule for outsourcing work is this:

Don’t outsource if you can’t afford to pay the contractor.

‘Oh, sure,’ you may think. ‘I get paid, s/he gets paid. Simple.’

But that’s not what I mean. What I mean is that if something goes wrong with the job or the client, and you don’t see a cent for all your hard work, you should still pay your contractor for the work he or she has done.

The Challenge

For a small operator or one-person show, this can seem like a big ask. Cashflow isn’t always what it should be, and having to pay out another party for their work when you haven’t seen any inflows for the job yourself can break the ill-prepared freelancer.

The situation is undoubtedly compounded if you’ve been struggling to land work, have managed to snag a decent-sized job, and then find yourself owing money that you didn’t have in the first place.

The Solutions

Making sure you’re in a position to pay a contractor no matter what happens is a challenge, sure, but it doesn’t mean you have to have a small fortune in the bank before you hire a freelancer to help you out. There are a number of preventative and operational strategies you can use to make sure you don’t leave a contractor out of pocket.

1. Arrange periodic invoicing

Have your client agree in writing to pay invoices periodically, perhaps as each stage of the job is completed, or on a regular basis — whatever suits your work and project.

Also arrange to have your contractor invoice you in a similar fashion. This will ensure that your inflow and outflows for the project will be timed appropriately, and should help you avoid the situation where you have an invoice to pay, but no cash with which to pay it.

2. Obtain a deposit in advance

Consider having your client make a project deposit up-front. Explain that you’ll need this payment to retain the skills required to complete the job on time, to a high standard of quality. Once you receive the money, put it aside as a backstop against the first invoice you receive from your contractor.

3. If the client misses a payment, have the contractor stop work

A lot of people in this situation worry more about meeting the deadline of the late-paying client than they do about ensuring they can remunerate the contractor for their work. Your priorities should be the other way around. make it clear to the client up-front that late payment will push out the deadlines, because you’ll need to stop work. Then, if they’re late, ask your contractor to suspend work.

This is the only way to avoid wasting their time and to minimize your own financial exposure on the project. If the client doesn’t pay, you’ll want to have as small a bill as possible to foot for your contractor — don’t make it bigger by keeping them at work on a non-paying client’s project.

4. If the job terminates, arrange payment with the contractor

If the project ends unexpectedly, tell the contractor immediately and have them invoice your for any money outstanding. If you don’t have the money to  pay, discuss your options with them: offer to make periodic payments until the invoice is met, for example.

If you’re on good terms and operate complimentary businesses, you may be able to work off some of your debt to them, but most of us want cold hard cash, so don’t be surprised if an offer of partial remuneration by barter is declined.

5. Be open and honest with your contractor from Day 1

Above all, whichever strategies you decide to put in place, make sure you discuss the possibility — and your preventative tactics — with the contractor. This will build trust and establish an understanding between the two of you, as it lets the contractor know that you respect them and appreciate their needs.

Having discussed how you’ll manage things, you’ll likely be in a better position if something does go wrong to work out a mutually suitable solution with your contractor. There won’t be any surprises for them, and you’ll maintain your professional reputation and the contractor’s respect.

How do you manage contingency plans when contractors are involved in your projects?

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  • http://www.lunadesign.org awasson

    Great article Georgina!

    It sounds simple enough but it happens quite often that small business owners (myself included) get so revved up about getting going on the job that the deposit and frequent invoicing gets put aside because we’re too busy doing the stuff we love (web development).

    Fortunately we’ve only had a few jobs go sideways but last summer when one went off the rails suddenly, I had a healthy deposit in the bank that covered the designer’s work, my work and our other developer’s work with a few dollars to spare. I put a hold on the job and when we get the OK from our client we’ll get back on the job.

    If I hadn’t insisted on getting that deposit, we would have been stuck with several thousand dollars worth of unpaid work and a job dead in the water. It’s a good rule to keep in mind.

    Frequent invoicing is jsut as important as well.