I’ve been working as a Freelancer/Subcontractor for about 3 years. While I’ve had some direct clients, about 90% of the work I’ve done has been as a Subcontractor. During this time I’ve learned some painful lessons but in all, I’ve been very fortunate to subcontract for mostly descent companies.
That said, I have a question about what is considered standard procedure for subcontractors; and of course it deals with pay. While I’ve been fortunate to not work for anyone who pulls the “pay if paid” routine, the companies I’ve worked for have differing subcontractor payment policies. For instance, Company A wanted invoices on the first and third Thursday of the month and checks were cut and mailed the next day. Company B operated on a “pay when paid” policy but if the originating client hadn’t paid by the 120th day the company would pay the invoice out of pocket.
While both way have their merits, the reasons for the differing approaches had more to do with the individual company’s structure than philosophy. Company A is a web development company that has a more steady cash flow, so we could get paid more consistently albeit it at a lower rate. Company B is a 1 - man operation that does software development. So, while Company B pays more irregularly, they pay at an hourly rate that is almost 3X higher than Company A.
So, is there an industry standard or is the rest of the industry much like these 2 companies in that each Primary Contractor determines what works best for them? I ask because I’ve recently been approached by a larger company to do some subcontract work them. I just received a copy of their subcontractor agreement (for review, not signature) and though the wording is a little vague it appears that they too “pay when paid”. If the industry standard is each company chooses for themselves then I don’t want to press the issue. However, if there are some generally accepted standards that result in me getting paid sooner, I would like to suggest that route. I should note that this is a company that I’ve irrationally admired for a long time. So I definitely don’t want to burn any bridges.
When it comes to general business practices, the web development industry has no standards, so you tend to have to work to your own. If you find it acceptable at this time, then go with your gut.
But IMO, a ‘pay-when-paid’ policy appears to lay all the risk on your lap, for an event you have no control over (i.e. whether the client pays the agency). It’s a wonderful deal for the agency of course, and no doubt they probably get paid more than you do by the client.
Better off sticking with the agencies who pay you regardless of the client paying. These are the more professional people to work for, who clearly respect your time and also clearly pick their clients more carefully.
Or bite the bullet and find clients yourself and take all the money
the industry standard is what you make it. Of course 1 day payment is better than 120 days, but 30 days in advance is even better. Here are some ideas that you can combine:
- How much better is Company B paying? If its a hassle and pays maybe 20% better, consider debt factoring, which I think should cost about 9% of total invoice value.
- Or, if you are disciplined and have good savings, maybe consider becoming that bank yourself. Then I would want a really significantly higher rate, and you maybe need to take some legal control over your output, ie it is now owned by Company B or their client if unpaid. Maybe Company B is charging much higher to a large corporate, because of what their payment behaviour is. Maybe your cut is just too small.
- Offer payment discounts for early payment to Company B. If they just use their payment terms as policy and have no problems with 120 days themselves, this may reduce your risk and troubles significantly.
- How stressed is Company B? Are payment terms sometimes good, sometimes bad? Other stresses in their live, such as new babies, family illness? Consider that they may also go bust, for example if the “1 man band” gets seriously ill. A credit limit may be good risk management.
- How replaceable are you, psychologically. Does Company B really like to work with you? Do they introduce or mention you to their clients? Consider articifically lowering your credit limit, so that “stop credit” becomes a regular occurrence. Maybe you’ll get bumped up the payment priorities and someone else down.
- Why are you mainly a subcontractor? Don’t want end users? Because the sales overhead is lower? Having your own control over clients payment terms is obviously best, if payment terms are the only problem you are looking at.
So in summary, this is not the problem of how someone else does it, its your problem. It may be an opportunity to deepen the relationship with Company B or an opportunity to find someone to replace them.