What To Do If A Client Cancels A Project Halfway

A client cancelling halfway through a project can throw your whole week, cash flow and resourcing plan out of balance. You might have already booked contractors, turned away other work, bought materials or spent hours on strategy that the client now says they no longer need.

The first question is usually: what can I still charge? The answer depends on your contract, what work has been done, whether the fee is reasonable, and how the cancellation happened.

If a client has cancelled a project under an Australian contract, the good news is there are practical steps you can take now, and even better ways to set up your future service agreements and statements of work so you aren't left carrying the loss.

What Should You Do First When A Client Cancels A Project?

You should first pause the work, check the contract and collect your records before sending any final invoice or agreeing to a refund.

When a client cancels, it's easy to react quickly because you want to protect the relationship or because you're frustrated. A calm paper trail will help you work out what you can charge and reduce the chance of a payment dispute later.

Start With These Steps

1. Confirm the cancellation in writing: Ask the client to confirm whether they're terminating the project, pausing it, changing the scope or cancelling only part of the work.
2. Check your service agreement: Look for clauses on termination, cancellation, deposits, milestones, expenses, intellectual property, confidentiality and handover obligations.
3. Work out what has been done: List completed work, work in progress, booked time, third party costs and any materials already purchased.
4. Stop avoidable costs: Cancel contractors, subscriptions, ad bookings, production days or suppliers where you reasonably can.
5. Keep records: Save emails, approvals, timesheets, invoices, briefs, purchase orders, project plans and messages showing the client approved the work or changed direction.
6. Prepare a clear final position: Set out what you're charging, why you're charging it and what deliverables or handover items the client will receive, if any.

If there's no written contract, don't assume you have no rights. Emails, proposals, purchase orders, invoices and conduct can still help show what was agreed. The practical issue is proof. Without a clear written agreement, you may struggle to recover unpaid amounts if the client pushes back.

Can You Keep The Deposit If The Client Cancels?

Yes, you may be able to keep the deposit if your contract allows it and the amount is reasonable in the circumstances.

Deposits are common for agencies, consultants, designers, developers, photographers and other service providers because they help cover early work and secure your time. But calling a payment a non-refundable deposit doesn't automatically make it safe to keep in every situation.

In Australia, a deposit can be challenged if it operates like a penalty, isn't properly explained, or is unfair in a standard form contract with a small business or consumer. Under the Australian Consumer Law, unfair contract terms in standard form small business and consumer contracts can lead to penalties and other court orders for contracts made, renewed or varied from 9 November 2023. A small business generally means a business with fewer than 100 employees or annual turnover under $10 million.

A safer deposit clause usually connects the deposit to a real commercial reason, such as:

• initial planning, strategy or briefing work
• blocking out your team calendar
• turning away other work
• pre-production or onboarding
• third party booking costs
• administration and project set-up

For example, if you charge a 30% deposit on a $12,000 website project under an IT services agreement, you should be able to explain what that $3,600 covers if the client cancels after you have completed discovery, wireframes and project planning. If the client cancels before you have done anything at all, keeping the whole amount may be harder to justify unless your contract clearly says the deposit secures your availability and you actually reserved time for them.

Can You Charge A Termination Fee Or Kill Fee?

Yes, you can charge a termination fee or kill fee if it's clearly set out in your contract and isn't out of proportion to the loss or inconvenience caused by the cancellation.

A kill fee is a pre-agreed amount the client pays if they cancel after work has started. It's especially useful for creative, marketing, consulting, events and production work, where a lot of value is created before the final deliverable is finished.

The key is reasonableness. Australian contract law may treat a fee as an unenforceable penalty if it's extravagant or out of proportion to your legitimate business interests. Your legitimate interests might include staff time, opportunity cost, contractor bookings, project management, scheduling disruption and costs you can't recover from suppliers.

Ways To Structure A Cancellation Fee

• Milestone-based fee: The client pays for all completed milestones, plus any work in progress and approved expenses.
• Percentage-based kill fee: The client pays a percentage of the remaining project fee depending on when they cancel.
• Notice-based fee: The client can cancel with written notice, but must pay for work done up to the notice date and any unavoidable costs.
• Fixed cancellation fee: The client pays a set amount if they cancel after a certain point, such as after strategy approval or production booking.

Say Mia runs a brand studio in Melbourne. She signs a $20,000 rebrand project with four milestones of $5,000 each. The client pays a $5,000 deposit, Mia completes discovery and strategy, and she has booked a freelance illustrator for $2,200. The client cancels before visual design begins.

If Mia's service agreement says the deposit covers discovery and project set-up, and the client must pay approved third party costs on cancellation, she may invoice for the $5,000 already paid plus the $2,200 illustrator booking if it can't be cancelled. If her contract also has a reasonable kill fee of 20% of the remaining fee after strategy approval, she may be able to charge an extra $3,000. Without those clauses, she would need to rely on proving her actual loss and the value of work performed, which can be messier.

What If Your Service Agreement Gives The Client Termination Rights?

If your service agreement gives the client termination rights, you need to follow the clause closely and charge only what the contract allows.

Many service agreements let a client terminate in certain situations, such as:

• for convenience, meaning they can cancel without you doing anything wrong
• if you breach the contract and don't fix it within a set cure period
• if the project is delayed beyond an agreed date
• if the parties can't agree on scope changes or fees
• if the client becomes insolvent or stops operating

A termination for convenience clause isn't automatically a problem. It can be fair and commercially sensible, especially for longer projects. But from your perspective, it shouldn't mean the client can walk away at any time without paying for committed time, completed work or locked-in costs.

A balanced cancellation clause in a service agreement often says the client must:

• give written notice, for example 14 or 30 days if the project is ongoing
• pay all unpaid invoices issued before termination
• pay for work performed up to the termination date
• pay for approved expenses and unavoidable third party costs
• pay any agreed cancellation fee or minimum commitment
• return or stop using confidential information and unpaid work product

Be careful with your own obligations too. If your contract says you must hand over files, transfer intellectual property or provide a final report after termination, check whether that obligation depends on payment first. For many service providers, IP should only transfer once the client has paid all amounts owing.

How Do You Recover Costs From A Cancelled Project?

You recover costs by linking each amount to the contract, the client's approvals and a clear record of work or expenses.

The strongest invoices aren't just a total figure. They show how the amount was calculated. This is particularly useful if the client says the project wasn't finished, because you can separate completed work, work in progress and cancellation-related costs.

What You May Be Able To Charge

• Completed milestones: Work that was finished under the agreed scope, even if the client no longer wants to use it.
• Work in progress: Partly completed work, usually charged on an hourly, daily or percentage basis if your contract allows it.
• Approved expenses: Costs the client agreed to, such as software, travel, printing, venue hire, talent, stock or production costs.
• Unavoidable third party costs: Supplier or contractor costs you're committed to paying and can't reasonably cancel.
• Cancellation or kill fee: A fee stated in the contract that reflects your lost time, opportunity cost and disruption.
• Late payment costs: Interest or debt recovery costs, if your contract includes them and they're enforceable.

You also need to reduce avoidable loss where you reasonably can. For example, if you can cancel a venue booking and receive a partial credit, you should factor that into the amount you ask the client to pay.

Be careful if the client is unhappy because they say your services didn't meet the agreed standard. Under the Australian Consumer Law, services supplied to consumers and many small businesses come with consumer guarantees, including that services will be provided with due care and skill and within a reasonable time if no time is agreed. If there's a genuine quality issue, the client may have rights that affect what you can charge.

What Should Your Cancellation Clause Say Next Time?

Your cancellation clause should spell out when the client can cancel, how much notice they need to give and exactly what they must pay.

This doesn't have to be complicated, but it does need to be specific. A vague line saying fees are non-refundable often creates more arguments than it solves.

Here is a practical outline you can use when preparing a clause for your service agreement. A lawyer should tailor it before you use it, because the right wording depends on your pricing model, industry, client type and risk profile.

1. When cancellation is allowed: State whether the client can cancel for convenience, only for breach, or at particular project stages.
2. How notice must be given: Say that cancellation must be in writing and specify the email address or notice method.
3. Notice period: Set a period that matches your resourcing, such as immediate cancellation for fixed projects or 14 to 30 days for ongoing retainers.
4. Deposits: Explain what the deposit covers and whether it's credited to the final invoice or retained on cancellation.
5. Milestones: State that completed milestones are payable even if the client cancels before the final deliverable.
6. Work in progress: Explain how unfinished work will be valued, such as hourly rates, day rates or a percentage of the milestone.
7. Third party costs: Make the client responsible for approved or unavoidable external costs.
8. Kill fee: Include any cancellation fee and connect it to your likely loss, reserved capacity or opportunity cost.
9. Handover: Say what files, reports or materials you'll provide after cancellation, and whether payment is required first.
10. Intellectual property: State when IP transfers and what happens to drafts, concepts and unpaid work.

If you use templates, review them carefully. Templates often miss the commercial detail that matters most, like whether your deposit is for set-up work, reserved capacity or both.

How Do You Prevent Future Cancellation Losses?

You prevent future cancellation losses by designing your pricing, payment schedule and contract around the way your work is actually delivered.

Your contract shouldn't sit separately from your workflow. If you do most of the thinking in the first two weeks, your payment structure shouldn't leave most of the fee until final delivery. If you book contractors early, your contract should let you recover those costs if the client changes their mind.

Practical Ways To Protect Your Cash Flow

• Use staged payments: Split the project into deposits, milestones and final payment instead of one large invoice at the end.
• Invoice before high-cost stages: Get payment before production days, ad spend, development sprints or major supplier bookings.
• Set minimum commitments: For retainers, require a minimum term or notice period so you can plan resourcing.
• Get approvals in writing: Confirm briefs, scope changes, expenses and milestone sign-offs by email.
• Define scope tightly: State what is included, what is excluded and how extra work is charged.
• Hold IP until payment: Make sure clients don't receive ownership of final work until all amounts are paid.
• Use a change request process: Treat major pivots as a variation, not informal goodwill.

There are a few ways to put this in place. A free template can be a starting point, but it may not deal with your exact milestones, kill fees, IP position or cancellation risk. An online fixed-fee legal service can give you a tailored document with the price confirmed up front. A traditional firm billing by the hour may suit more complex negotiations or higher-risk commercial arrangements, but the final cost can depend on how long the work takes.

The right option depends on the size of your projects, the clients you work with and how often cancellations happen. If project cancellations could materially affect your cash flow, it's worth getting your agreement tightened before the next proposal goes out.

Key Takeaways

• If a client cancels halfway, check your contract first and keep a clear record of work done, costs incurred and approvals given.
• You may be able to keep a deposit, charge a kill fee or recover costs, but the amount needs to be reasonable and supported by the contract.
• Milestone payments are often safer than waiting until final delivery, especially for agencies and consultants who do valuable work early.
• Australian Consumer Law rules, including unfair contract term laws, can affect cancellation clauses in standard form contracts.
• Your service agreement should clearly cover termination rights, notice, deposits, work in progress, third party costs, IP and handover.
• A tailored contract can help you protect cash flow without making your client terms feel heavy or unfair.

If you'd like help with your service agreement cancellation clauses, deposits, milestone payments or project termination process, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.