Payment Terms to Watch Out For in a Service Agreement

Unfavourable Payment Windows and Net Terms

The most common issue in any service agreement is the 'Net' term, which specifies the number of days you must wait for payment after submitting an invoice. While Net 30 is a standard industry benchmark in the UK, many larger corporations attempt to push this to Net 60 or even Net 90. This effectively turns you into an interest-free lender for their business.

You should also watch out for terms that trigger the payment countdown from the 'receipt of a valid invoice' rather than the date of service. If the agreement does not clearly define what a 'valid' invoice is, a client can theoretically delay payment indefinitely by claiming a minor administrative error. Ensure the agreement specifies a fixed timeframe for the client to notify you of any issues with an invoice.

Hidden Costs and Scope Creep

A fixed-fee agreement provides certainty, but only if the scope of work is rigidly defined. Watch out for clauses that allow the client to request 'minor' iterations or 'reasonable' adjustments without additional compensation. Without a clear mechanism for charging overages, these requests will quickly erode your hourly rate.

Check for the following common 'red flag' clauses regarding expenses and additional costs:

• Paid on 'pay-when-paid' basis: You only get paid after your client receives payment from their end-customer. This is highly risky.
• Uncapped expenses: Terms that require you to absorb travel or software costs unless pre-approved in writing.
• Set-off rights: Clauses that allow the client to deduct 'damages' or costs they believe you owe them from your pending invoices without a legal ruling.
• Vague milestone triggers: Payments tied to 'satisfaction' rather than objective technical completions.

Late Payment Interest and Collection Costs

In the UK, the Late Payment of Commercial Debts Act provides a statutory right to interest, but many service agreements include clauses that attempt to override this or set the interest rate at a negligible level. If the agreement specifies a rate like '1% per annum', you are losing money against inflation for every day they are late.

Ensure your agreement includes a provision for recovering the costs of debt collection. If a client defaults, the legal and administrative costs of chasing the money can often exceed the value of the invoice itself. A fair contract should allow you to suspend services immediately if an invoice remains unpaid past a certain threshold, providing you with leverage that doesn't involve going to court.

To simplify this process, you can use Jittan's ContractChecker to review contracts and agreements for red flags, fairness issues, and practical points related to payment security before you sign.