Understanding consultant fees: a simple guide to payment terms for consultants

Working as a consultant offers you the flexibility to set your own hours, choose your clients and organise your work in a way that best suits your lifestyle. However, amongst the financial instability and managing work across multiple projects, one of the most challenging aspects of consultancy can be your clients failing to pay your invoices on time. To mitigate this challenge, you should create contract terms that put you in the best contractual position to effectively secure your income. In this guide, we will discuss essential strategies for establishing solid payment terms that safeguard your earnings and maximise success when it comes to your consulting fees.

You can find Docue's template consulting contract template here.

Understanding consultant fees and payment terms

As a consultant, your income solely relies on your ability to secure and complete projects. Without clear payment terms, you may find yourself in situations where clients delay payments or fail to pay altogether. By understanding and implementing proper payment terms that are favourable to you, you can set the stage for a fair and transparent professional relationship with your clients while mitigating financial risks.

Your payment terms should specify:

• The fixed fee payable by the client or your daily/hourly rates;

• The frequency of payments;

• Any upfront payments or deposit requirements;

• Any discounts available for early payments;

• Methods of payment and the currency; and

• What happens in the event of delayed payments.

Clear payment terms with clients are essential for consultants as they assist with revenue forecasting, encourage a healthy cash flow, and safeguard you if your client fails to pay your invoices.

For more information about what to include in your consulting contract template, check out our top tips.

Common payment models for consultant fees

It's important to consider which billing strategy is best suited to you and the nature of the services you provide. There are several payment terms commonly used in consulting that each have their own unique pros and cons, such as:

• Fixed-price: This is where the client pays a set amount for the consulting services. This method is a simple way for consultants to guarantee their income from the project. Fixed fee arrangements are also an attractive option for clients, as they can forecast how much they will spend engaging your services.

• Time-based: This payment model involves billing clients according to the time worked on a project, usually based on the consultant’s hourly or daily rate. With this method, the client will be issued an invoice for the time spent during a specific period at agreed intervals. This method ensures that compensation directly correlates with the consultant's time and effort invested in delivering the service or completing specific tasks.

• Milestone payments: This arrangement involves breaking the project down into specific milestones or stages, where the client will make payments upon completion of each milestone. This model provides both parties with clear checkpoints to track the consultant’s progress of the project.

• Payment upfront: This is probably the most straightforward method, as it requires the client to pay an upfront payment for the full amount before you begin working on a project. This method is favoured by consultants as it serves as a security measure, guaranteeing you will have the agreed consultant fees paid to your account before you start the services.

• 50% upfront and 50% on completion: Under this arrangement, the client will be required to make an initial payment representing half of the agreed-upon fee upfront, with the remaining balance to be paid upon completion of the project. This ensures a fair distribution of payments throughout the duration of the project.

• Retainer agreement: A retainer agreement is a long-term arrangement where the client pays the consultant a fixed fee regularly at the agreed intervals, e.g. monthly, quarterly, etc. This payment term provides stability and a steady income stream for consultants.

Understanding these common payment terms will help you navigate discussions with clients and negotiate terms that work best for both parties involved.

Setting clear payment terms for invoices

Sending invoices to your clients will be an integral part of running your day-to-day operations. An important factor to clarify will be how long the client has to make the payment after you issue an invoice. Although this will typically be stated on each invoice, you should also ensure that terms relating to the payment of invoices are included in your contract to make sure that everyone is on the same page from the outset.

When it comes to invoicing, your contract should specify:

• When you will issue an invoice;

• How many days the client will have to pay the invoice; and

• How they should make the payment (e.g., via bank transfer to the account details set out on the invoice).

If you will be issuing multiple invoices, your consulting contract should also state the frequency of the invoices. For example, you may be sending invoices at the start of the engagement, at certain intervals, after reaching milestones, or upon completion of the entire project.

Tips for negotiating payment terms with clients

Effectively negotiating payment terms is an essential aspect of being a consultant. It allows you to ensure that your financial interests are protected while maintaining a positive relationship with your clients.

Here are our top tips for negotiating payment terms that are favourable to you:

• Evaluate your strengths: Before entering negotiations, evaluate your skills, experience, and the market rates for your services. This knowledge will give you confidence during negotiations and help you set fair payment terms that reflect your experience and industry standards.

• Be clear and professional: Clearly communicate your payment expectations to your clients from the beginning. Outline your rate, anticipated payment schedule, and any additional terms in a professional manner. This clarity will prevent misunderstandings and potential disputes later on.

• Be realistic and consider your client’s preferences: While it's important to advocate for your own payment terms, it's also crucial to consider the preferences of your clients. Often larger companies will have specific payment processes, terms, or limitations that you may need to accommodate. It's essential to be pragmatic with the payment terms that you agree to on a case-by-case basis. A good question to ask yourself is “can I survive with [60] day payment terms with this client?”, and assess your financial position before accepting their terms. You may have much shorter payment terms with another client which balances out the risk, making acceptance of the longer payment terms feasible.

By approaching payment term negotiations with professionalism, clarity, and openness, you can establish mutually beneficial agreements with your clients that safeguard both of your interests.

Dealing with late payments and non-payment

In an ideal world, every client would pay your invoice on time. However, from time to time you may find yourself chasing clients to pay invoices after patiently waiting up until the specified due date. To effectively deal with these situations, consider the following steps:

• Include a robust consequence of late payment clause: This clause should clearly define the consequences of delayed payments by the client, such as the right to charge interest on outstanding amounts or suspend the services until the payment is made.

• Send reminders: If a payment is overdue, politely send a reminder to the client. It's possible that they may have simply forgotten or overlooked the payment - in a lot of cases, a gentle nudge will get results.

• Follow up with a phone call: If you're sending reminders to no avail, consider making a phone call to discuss the overdue payment. Sometimes, a personal conversation can help resolve the issue more efficiently before more serious litigious routes are explored.

Charging interest on late payments

It's important to know your contractual and statutory rights in the event that your client delays or defaults on a payment.

If a client misses a payment, you're entitled to claim interest under The Late Payment of Commercial Debts (Interest) Act 1998.

The current statutory rate of default interest that you're entitled to claim is 8%, plus the Bank of England Base Rate. However, this can be amended in your contract terms. To demonstrate reasonableness with clients, businesses often include a lower interest rate in commercial contracts, usually 4% over the Bank of England Base Rate. There is no statutory limit on default interest rates.

If no provision on default interest is included in the contract, the interest rate will automatically be the statutory 8%.

Conclusion

Navigating consultant fees and payment terms can be challenging, but with the right knowledge and strategies, you can protect yourself and your revenue with robust payment terms. By understanding and implementing these practices, you can negotiate clear, fair, and transparent agreements with your clients.

Why choose to use Docue?

Simplicity: Docue offers an intuitive and user-friendly interface, making it easy for you to a create high-quality consulting contract that looks professional and safeguards your interests.

Secure: Once you've customised the template to suit your needs, you can safely send it to your clients via the platform for e-signature. With Docue's robust security measures, you can rest assured that your contracts are protected throughout the signing process. Additionally, storing your consulting contracts with Docue Drive, ensures quick and easy access to your documents whenever you need them.

Organisation: With Docue, you'll never miss a contract deadline again. The platform offers convenient reminders that keep you informed of upcoming deadlines, ensuring that you stay on top of your contractual obligations. Docue alleviates the stress of tracking and managing important contract deadlines manually, so you can focus on providing top-quality consultancy services.

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