Payment terms in contracts: what’s fair and what isn’t

What are payment terms in a contract?

Payment terms in a contract are the clauses that decide when you’re paid, what has to happen before the money moves, and how much of your invoice actually arrives. They cover the payment period, invoicing rules, disputes, deductions, late payment and price changes. Two contracts can quote the same fee and pay it one month or four months after the work is done, which is why payment is one of the first places to look for contract red flags.

What do net 30 and net 60 mean?

“Net 30” means the full invoice amount is due 30 days after the invoice date, and “net 60” means 60 days. Other wording moves the start of the clock:

People often use “30 day payment terms” to mean net 30, but the exact wording decides what starts the clock. Many large organisations present their standard supplier payment terms as fixed, but they’re a starting position.

How long is “60 days from the end of the month”?

“60 days from the end of the month” usually means waiting 60 to about 90 days, and more if your invoice is rejected, because the clock starts only at the end of the month in which the customer receives an invoice it accepts as valid.

5.2 Each valid invoice shall be due for payment sixty (60) days after the end of the month in which it is received and shall be paid in the Customer’s first scheduled payment run after its due date.

1. You email your invoice on 2 March.
2. The month of receipt ends on 31 March. Sixty days later is 30 May, 89 days after you invoiced.
3. If the invoice is rejected for a missing purchase order number and you resubmit on 3 April, the due date moves to 29 June, nearly four months after your first invoice.
4. A monthly payment run can add up to another month.

Invoicing conditions that delay payment

Many contracts start the payment period only once you’ve sent a “valid” invoice, then define valid in ways that give the customer grounds to reject it, so a small slip can reset the clock. Look for:

• Purchase order (PO) numbers. Get the PO before you start work.
• Supplier portals. Registering on a customer’s procurement system can take weeks, and until then you may not be able to invoice.
• “Valid invoice” definitions. A long list of requirements, or a policy the customer can change, gives more grounds for rejection.
• Approval or acceptance. A period that runs from approval of the invoice, or acceptance of the work, puts the start date in the customer’s hands.

6.3 An invoice shall be valid only if it quotes a current purchase order number and complies with the Customer’s Supplier Invoicing Policy, as amended from time to time. The Customer shall have no obligation to pay any invoice received more than ninety (90) days after the Services to which it relates were performed.

Can a customer withhold payment of a disputed invoice?

Whether a customer can withhold payment of a disputed invoice depends mainly on the contract. Balanced clauses let the customer withhold only the part it genuinely disputes, as long as it says so promptly and gives reasons, and require it to pay the rest on time. One-sided clauses let it hold back the whole invoice:

5.6 If the Customer disputes any invoice or part of an invoice, it may withhold payment of the entire invoice until the dispute has been resolved, and no interest shall accrue on any sum withheld.

Fairer versions also set a short window for raising disputes, after which the invoice counts as accepted, and a time limit for settling them, so disputed invoices don’t drift.

Set-off and deductions

Set-off is a right to reduce what you’re paid by an amount the customer says you owe it. Deductions are sums taken off every invoice, such as rebates or fees.

Set-off clauses

A set-off clause limited to undisputed sums under the same contract is fairly standard. The red flag is a broad, one-way version:

9.4 The Customer may set off any amount it claims the Supplier owes it, under this or any other agreement, against sums payable to the Supplier. The Supplier shall pay all sums due without set-off or deduction.

Rebates, supplier contributions and administration fees

Some large customers deduct a volume rebate, a “supplier contribution” to their procurement costs or administration fees from what they pay you. Each is a price cut: fine if you agreed it and priced it in, a problem if it’s buried in the small print.

7.2 The Customer may deduct from any payment to the Supplier a retrospective rebate of 2.5% of all Charges and an administration fee of £75 for each invoice rejected under clause 6.3.

Late-payment interest and compensation

If a business customer pays late, you may be able to claim interest and fixed compensation: by law in the UK and EU, and mainly under the contract in the US.

In the UK: the Late Payment Act

Under the Late Payment of Commercial Debts (Interest) Act 1998, a business owed money by another business for goods or services can claim statutory interest at 8% a year above the Bank of England base rate. It can also claim fixed compensation, plus reasonable recovery costs where the fixed sum doesn’t cover them:

If no payment date is agreed, interest can run from 30 days after the invoice or delivery, whichever is later. A contract can set its own remedy instead, but a term that removes or reduces statutory interest is void unless the contract provides a “substantial remedy” for late payment. Whether a remedy counts as substantial depends on the circumstances:

5.8 The Customer shall pay interest on overdue sums at 0.5% per annum above the Bank of England base rate, in full and final settlement of any claim for late payment.

The government’s guidance on late commercial payments explains how to claim. The government has also announced plans to reform the late-payment rules, so check the current position before relying on the details here.

In the EU and the US

The EU’s Late Payment Directive (2011/7/EU) sets minimum rules that each country puts into its own law, including interest of at least 8 percentage points above the European Central Bank’s reference rate. The US has no general federal late-payment law between private businesses, so interest and late fees depend mainly on the contract.

What is a pay-when-paid clause?

A pay-when-paid clause says you’ll be paid only after the customer has itself been paid, usually by its own client. A “pay-if-paid” clause goes further: if the customer is never paid, neither are you. Both are common in construction and other subcontracted work.

8.1 The Contractor shall pay the Subcontractor within seven (7) days of receiving payment from the Client for the relevant work. The Contractor shall have no obligation to pay any sum it has not itself received from the Client.

In the UK, the Housing Grants, Construction and Regeneration Act 1996, and equivalent rules in Northern Ireland, mean construction contracts can’t make payment conditional on the payer being paid by someone else, except where a party further up the chain is insolvent. Outside UK construction contracts, the effect depends on the wording and the local law, and in the US it varies from state to state. Ask what happens if the end client never pays, and whether there’s a long-stop date for payment regardless.

What is retention?

Retention is money held back from each payment, usually a small percentage, as security against defects, and released later: for example, half on completion and half at the end of a defects period. It’s common in construction and some other project work.

10.2 The Contractor shall retain 5% of each payment, to be released on final completion of the Main Contract Works and the Contractor’s receipt of its own retention from the Employer.

Look for a fixed release date tied to your own work, and a cap on the total held.

Price changes, tax and currency

Payment terms also decide whether your price can change, and who bears tax, currency and bank costs:

• Fixed prices. On a contract lasting several years, with no annual review or link to an inflation index, rising costs come out of your margin.
• Tax. “Inclusive of all taxes” means VAT or sales tax comes out of your price. In the UK, if a contract doesn’t mention VAT, the price may be treated as including it.
• Currency. If you’re paid in another currency, exchange-rate movements are your risk unless the contract says otherwise. Check who pays international transfer charges.

Payment rules in the UK, EU and US compared

The biggest difference between the three is how much the law fills in when a contract is silent or one-sided.

Which rules apply usually depends on the law that governs the contract, so check the governing law and jurisdiction clause too.

What to ask for when you negotiate payment terms

You’re unlikely to win every point, so start with what affects your cash flow most:

• A payment period that runs from receipt of your invoice, such as 30 days, not from month end or approval.
• A deposit, or milestone payments, on longer projects.
• The PO number and invoice requirements before work starts, and a corrected invoice keeping its original date.
• Payment of the undisputed part of any invoice by the due date.
• Set-off limited to undisputed sums under this contract, and available to both sides.
• No rebates, fees or deductions beyond the agreed price.
• Late-payment interest left in place.
• A right to suspend work if undisputed invoices are overdue, and to end the contract if they stay unpaid (see termination and auto-renewal clauses).
• A long-stop date for payment under any pay-when-paid or retention clause.
• A price review on contracts lasting more than a year.

For a large or long contract, or one where payment depends on a third party, a lawyer’s view is worth having. Here’s how to brief a lawyer on a contract, and how LegalSling helps small businesses and suppliers.

How LegalSling helps with payment terms

LegalSling reads the contract you’ve been sent and explains each clause in plain English, with a note on what it means for each side and which way it leans. Terms like the ones above are flagged in the document itself, with the exact words highlighted, and every quote it shows is checked against the contract’s text. It takes the governing law from the contract’s own wording, or says it isn’t stated. You can ask questions such as “when is this invoice due?” and get answers from the contract alone, with paragraph references, then turn the flags, your notes and suggested questions into a brief for your lawyer. It explains; it doesn’t tell you whether to sign. See how it works.