How To Draft Payment Terms For Service Contracts

Chasing unpaid invoices is one of those jobs no one starts a business to do. If you run a consulting business, agency, trade service or professional services firm, your contract should make payment feel clear from the very beginning.

Good payment terms won't guarantee every client pays on time, but they do give you a much stronger position. They set expectations, reduce awkward conversations and help you act quickly if a client goes quiet after you've done the work.

If you're looking for payment terms for a service contract in Australia, the aim is simple: make it easy for a client to know what they owe, when they owe it and what happens if they don't pay.

What Payment Terms Should I Put In A Service Contract?

Your service contract or terms of trade should say exactly when and how you get paid, not just what your fee is. A vague line like payment due on invoice often leaves too much room for delay.

For most service businesses, strong payment terms usually cover:

• Your fees: fixed fee, hourly rate, day rate, retainer, project fee or milestone pricing.
• When invoices are issued: before work starts, weekly, monthly, at milestones or on completion.
• When payment is due: for example, 7, 14 or 30 days from the invoice date.
• Deposits: whether the client must pay an upfront amount before you begin.
• Expenses: what costs the client reimburses and whether approval is needed first.
• Late payment: interest, admin fees, recovery costs and what happens if payment is overdue.
• Disputed invoices: how the client must raise concerns and what they still need to pay.
• Suspension rights: when you can pause services until overdue amounts are paid.

A useful way to draft your payment clause is to imagine a new client reading it without you there to explain it. Would they know the amount, the due date and the consequence of paying late?

Australian contract law generally allows you to set your own commercial payment terms, as long as they're clear, lawful and not unfair in the context. If your agreement is a standard form contract with a small business, the unfair contract terms regime under the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 can also matter. Since 9 November 2023, unfair terms in many standard form small business contracts can attract penalties, not just be declared void.

Can I Ask For An Upfront Deposit?

Yes, you can usually ask for an upfront deposit before you start work, and for many service businesses it's a sensible way to manage cash flow and commitment. The key is to explain what the deposit covers and when, if ever, it's refundable.

An upfront deposit clause can work well where you'll be:

• setting aside time or staff for the client
• buying materials, booking subcontractors or paying third-party costs
• doing planning, strategy or discovery work before a final deliverable is produced
• taking on a project where late cancellation would leave you out of pocket

Common options include:

• Fixed deposit: the client pays a set amount, such as $1,000, before work begins.
• Percentage deposit: the client pays a percentage of the total fee, such as 30% or 50%.
• Retainer: the client pays an amount in advance each month for ongoing services.
• Prepaid block: the client buys a block of hours or services upfront.

Be careful with wording that says a deposit is automatically non-refundable in every situation. That can be risky if it's out of proportion to the loss your business would suffer, or if the contract is a standard form contract. A better approach is often to say the deposit is applied to your fees and may be retained to cover work performed, expenses incurred and time reserved if the client cancels.

For example, Mia runs a branding studio in Melbourne. She charges $6,000 for a rebrand and asks for a 40% deposit before starting. Her contract says the $2,400 deposit is credited against the total fee, and if the client cancels after the strategy session, Mia can retain an amount for work already completed and booked studio time. That gives her a fairer position than a blanket non-refundable clause.

How Should Milestone And Invoice Payment Terms Work?

Milestone payment terms should connect payment to clear project stages, so you aren't waiting until the very end to be paid for all your work. This is especially helpful for longer projects, custom work and jobs with several deliverables.

A simple milestone structure might look like this:

• 40% deposit: payable when the client signs the contract.
• 30% midway payment: payable when the first draft, design concept or stage of works is delivered.
• 30% final payment: payable before final files, handover, installation or launch.

The more specific your milestones are, the easier they are to enforce. Instead of saying payment due halfway through the project, say what halfway means. For example, on delivery of the first draft website designs or after completion of rough-in plumbing works.

Your invoice payment terms should also answer a few practical questions:

• Do you invoice on the invoice date, completion date or approval date?
• Is payment due within 7, 14 or 30 days?
• Do you accept bank transfer, card payment or another method?
• Does the client need to quote the invoice number?
• Are prices GST-inclusive or GST-exclusive, if your business is registered for GST?

If you work in the construction industry or provide trade services, be extra careful. Security of payment laws apply across Australian states and territories, and they can give contractors and subcontractors specific rights around progress claims, payment schedules and adjudication. The process and deadlines differ between states and territories, so your service agreement payment terms should line up with the rules that apply to the project location.

For non-construction service providers, there usually isn't one mandatory invoice due date. That's why it's worth choosing terms that suit your business model. A small agency carrying contractor costs may choose 7-day terms, while an enterprise consulting project may use 14 or 30-day terms.

Can I Charge Interest Or Late Fees In Australia?

Yes, you can charge interest or late fees in Australia if your contract clearly allows it and the amount is reasonable in the circumstances. The risk is that an excessive late fee may be treated as a penalty or an unfair contract term.

A late payment clause in Australia often includes one or more of these options:

• Interest on overdue amounts: a monthly or annual rate that applies after the due date.
• Reasonable recovery costs: costs you reasonably incur trying to recover the debt.
• Admin fee: a modest fee for extra administration caused by late payment.
• Suspension right: the right to pause services if the invoice remains unpaid after notice.

Try to avoid late fees that are designed to punish the client. Your clause should be aimed at compensating your business for the delay and extra work caused by non-payment.

Here's a worked example. Ben runs an IT support business in Sydney. His IT services agreement says invoices are due within 14 days, and overdue amounts accrue interest at 1% per month, calculated daily. A client pays a $8,000 invoice 30 days late. The interest for that month is $80. Ben's contract also lets him recover reasonable debt collection costs if the invoice remains unpaid after written notice.

That type of clause is easier to justify than a clause saying the client must pay a $1,000 late fee on any overdue invoice, even if the invoice is only a few days late.

If your clients are consumers or small businesses and you use the same standard terms with little room for negotiation, fairness matters even more. Under the Australian Consumer Law, a term is more likely to be a problem if it creates a significant imbalance, isn't reasonably necessary to protect your legitimate interests and would cause detriment to the other party.

What Can I Do If A Client Disputes Or Delays Payment?

If a client disputes or delays payment, your contract should give you a clear process to follow before things escalate. The best payment clauses don't just say what the client owes - they tell both sides what happens when there's a disagreement.

A practical disputed invoice clause can say:

• the client must notify you of any dispute within a set period, such as 7 days after receiving the invoice
• the notice must explain which part of the invoice is disputed and why
• the client must still pay any undisputed amount by the due date
• both parties will try to resolve the issue promptly and in good faith
• late payment rights still apply to amounts that aren't genuinely disputed

This helps stop a client from withholding an entire invoice because they have a concern about one small item.

What To Do First

If a payment issue comes up, work through it in this order:

1. Check the contract and invoice: confirm the due date, amount, scope and any approval process.
2. Send a polite reminder: include the invoice number, due date and payment details.
3. Ask if there's a genuine issue: if there is, ask the client to identify the disputed amount in writing.
4. Keep records: save emails, signed approvals, delivery notes, timesheets, call notes and copies of the work delivered.
5. Send a firmer notice: refer to the late payment, interest or suspension clause if the invoice remains unpaid.
6. Get help early: if the amount is significant or the relationship is breaking down, tailored advice can help you avoid making the situation harder to resolve.

Can You Suspend Services?

Yes, you can usually suspend services for non-payment if your contract gives you that right and you use it fairly. A suspension clause should say when you can pause work, whether you need to give notice and what happens to deadlines while services are suspended.

For example, your clause might say you can suspend work if an invoice is more than 7 days overdue and you have given written notice. It should also say project timelines extend for the period of suspension, so you aren't blamed for missing a deadline caused by the client's non-payment.

What Should A Payment Terms Clause Include?

A payment terms clause in your business terms and conditions should include the full payment journey, from deposit to final invoice. Templates can be a useful starting point, but they often miss the details that make the clause work for your actual business.

Here's a fill-in outline you can use when briefing a lawyer or preparing your contract. This isn't a finished legal document, and it should be tailored and signed properly before you use it with clients.

1. Fees: state whether your fees are fixed, hourly, daily, retainer-based or milestone-based.
2. Deposit or upfront payment: set the amount or percentage, due date and how it's credited or retained.
3. Invoicing schedule: explain when invoices are issued, such as upfront, monthly, on milestones or on completion.
4. Payment due date: choose a clear timeframe, such as 7, 14 or 30 days from the invoice date.
5. Payment method: list accepted methods and any reference details the client must use.
6. GST and other charges: say whether fees are GST-inclusive or GST-exclusive where relevant.
7. Expenses and disbursements: explain which costs are reimbursable, whether approval is needed and when they're invoiced.
8. Variations and extra work: require written approval before work outside the agreed scope is charged.
9. Late payment: set out any interest, reasonable recovery costs and notice process.
10. Disputed invoices: require the client to identify disputed amounts and pay undisputed amounts on time.
11. Suspension: state when you can pause services and how that affects deadlines.
12. Final handover: explain whether final files, reports, access credentials or deliverables are released after payment.

Common Drafting Mistakes To Avoid

A few small drafting choices can cause big headaches later. Watch out for:

• Unclear due dates:payable immediately can be less useful than a specific number of days.
• No process for extra work: scope creep becomes harder to charge for if variations aren't approved in writing.
• No expense clause: travel, materials, software, stock images and subcontractor costs should be dealt with upfront.
• Overly harsh late fees: these can be harder to enforce and may raise unfair contract term concerns.
• No suspension right: without one, you may feel pressured to keep working while invoices remain unpaid.

Key Takeaways

• Good payment terms make your fees, invoices, due dates and consequences clear before work starts.
• Deposits, retainers and milestone payments can help you manage cash flow, but they should be drafted fairly.
• Late interest and fees can be used in Australia if they're reasonable and clearly written into the contract.
• A disputed invoice clause should require the client to explain the dispute and pay any undisputed amount on time.
• Suspension rights can protect you from continuing work while invoices are overdue.
• Your payment terms should be tailored to your business, especially if you work in construction or use standard form contracts with small businesses.

If you'd like help with your service agreement payment terms, upfront deposit clauses, late payment clauses or invoice dispute process, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.