KEY POINTS:
- Payment provisions are about much more than an amount and date.
- Customers should pay close attention to what triggers a payment due date and how frequently payments are due.
- Customers should seek the right to dispute invoices in good faith and withhold funds in the event of a dispute.
As one would expect, the first provision reviewed in most contracts is the payment clause. More specifically, the dollar amount and payment due dates. However, other contract provisions impacting payment also deserve attention, including boilerplate clauses related to payment disputes, withholding payments, remedies for late payments, and more.
As one would expect, the first provision reviewed in most contracts is the payment clause. More specifically, the dollar amount and payment due dates. However, other contract provisions impacting payment also deserve attention, including boilerplate clauses related to payment disputes, withholding payments, remedies for late payments, and more.
Below is a list of payment provisions found in most commercial contracts, highlighting key issues to be considered during contract review, written from the customer’s perspective (the party primarily making the payments).
1. Payment Due Dates
In most situations, payments are due within 30 to 60 calendar days (referred to as net-30 or-60 days). Vendors tend to prefer net-30 because they get paid faster. Customers usually prefer net-60 or more to allow for flexible cash flow management, extra time for administrative tasks to confirm invoices and remit payment, and a buffer to help avoid any incidental late payment fees. Net-45 is a fair and common compromise.
But, what many customers miss in the boilerplate is when the countdown clock begins. Depending on how the language is drafted, the countdown could begin:
- When the vendor sends the invoice (even if sent snail mail, or even if it sits in your SPAM folder unnoticed)?
- On the invoice date (i.e., the date listed on the top of the invoice – even if the invoice is backdated)?
- When it is confirmed you have received the invoice (e.g., e-mail read/open receipt, confirmation of delivery, etc.). This is the preferred option for customers.
2. Overall Payment Schedule
Customers should pay close attention to when payment must be made: in advance or in arrears as well as annually, quarterly, or monthly? When paying in advance, more frequent payments are typically preferred (e.g., monthly or quarterly in advance instead of yearly). Payment in cash can serve as leverage in the event of a dispute.
For instance, if the vendor has a full year of payments “banked,” you have no leverage if they fail to deliver. In contrast, if you pay monthly or quarterly, you will have something to withhold, if and when, there is a dispute. When in arrears, less frequent payments works to the customer’s benefit, and you’ll want to ensure you get adequate reporting to justify payment obligations.
3. Payment Disputes
Customers should seek the right to dispute invoices in good faith and withhold funds in the event of a dispute. Consider qualifying the payment obligation so that payment is only required on “undisputed” or “correct” invoices (or portions thereof). Also think about adding that withheld funds will not be considered late and will not accrue interest or penalties.
The exact amount of time you have to resolve payment disputes is less important than ensuring that you can continue to withhold without any penalty (no interest, no suspension of services, you are not in breach) until the dispute is mutually resolved. Holding back the payment is your leverage to get the vendor to the table to negotiate, and to fix problems.
This same process should apply to all disputes over calculations of variable fees (such as if there is a dispute over how many hours can or should be charged at an hourly rate).
4. Dispute Notice Deadlines
Some contracts impose a deadline on sending notices to dispute invoices. For example, a customer may lose the right to dispute invoices and withhold funds if they don’t object in writing by the due date (e.g., within 30-45 days of receipt of the invoice). Discovering an invoicing error can take longer than one payment cycle, so you should seek to eliminate this deadline or at least extend it (e.g., to 90 days).
The timing for calling out a dispute does not have to match the timing for making payment. For example, you might pay a monthly invoice on time, then discover the error, then withhold from the following month’s invoice.
Think strategically about how long it might take your organization to discover a dispute and then how long it might take for your internal teams to review and decide on an approach to address it. If you are a large organization, you will likely need 90 or more days to ensure you don’t end up waiving your right to claim a dispute simply due to the passage of time.
You should also consider adding a provision stating the vendor is responsible for all billing errors and service issues it has any knowledge of, whether or not you report them on time.
5. Payment of Overages or Extras
Customers often overlook the mirror image of the issue above. Just like vendors want to give you a finite deadline to raise disputes, you should also give vendors a finite deadline for charging for overages and extras. Imagine receiving an unexpected invoice for alleged extra charges from six months ago.
To avoid this, customers should seek to include a provision that prevents vendors from charging overages if they fail to first invoice you for the charge within 30 days of it being incurred.
6. Interest or Penalties
Vendors often seek to impose interest on late payments. Customers should first try to delete this provision, especially for larger companies that are not credit risks.
As a fallback, ask for notice and a longer deadline before the interest accrual period begins. For example, the provision might permit the vendor to collect interest only if payment is past due over 90 days, and only after notice and cure period. Also, a customer should try to reduce the applicable interest rate. They are typically written to be the lesser of amounts permitted by law or X%. Vendors will often ask for this percentage to be 1.5% per month. It is fair, reasonable, and common to lower this to 0.5% per month instead (if you are unable to delete this interest payment altogether).
Whether you can eliminate these penalties and how much you can reduce them is ultimately an issue of leverage and how big and creditworthy you are as a customer.
7. Expenses
Each party should be responsible for its own expenses related to the agreement (travel, lawyers, etc.). However, if the vendor insists on charging you for certain travel expenses (e.g., to come to your facility for in-person services), ensure this only applies to expenses that are: (i) reasonable and necessary; (ii) evidenced by receipts; (iii) pre-approved by you in writing in advance; (iv) passed through at-cost, without markup; and (v) in compliance with your own applicable travel policies.
8. Payment Amount
Many customers focus on negotiating the total dollar amount, while overlooking the vendor’s proposed payment structure. When reviewing this provision, consider the following questions:
- Are fees fixed or variable? If variable, is it crystal clear how they will be calculated?
- If fees are variable, is this based on a percentage of something? If so, the “something” should be clearly defined. For example, if based on a percentage of revenues, the customer should negotiate not only (i) the actual percentage; but also (ii) the scope of allowable revenues (e.g., only revenues collected & recognized that are directly attributable to the vendor); and (iii) deductions (not paid to the extent of refunds, chargebacks, taxes, shipping costs, sales commissions, cost of sales, etc.).
- Are there tiered volume discounts as you buy more?
- Is there an absolute cap on any variable fees (e.g., hourly consulting)?
- Are fees fixed for the entire initial term of the contract?
- Can fees be increased on renewal? If so, ask for a cap on the increase (e.g., no more than 3%, or the increase in the CPI index); and require advanced written notice of the increase from the vendor, far enough in advance of your renewal decision.
Payment provisions are about much more than an amount and due date. Push back on the vendor when any of the above issues are unclear. You’ll be glad you did in the event an issue arises down the road.
