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How to avoid losing $40,000

Let me tell you a little story
When I started working for
Moon River Software full time I thought my first consulting job was unbeatable. I was doing subcontracting for a local consulting company (referred to hereafter as " The Company ") and they needed help for 3-6 months for a specific client (referred to hereafter as " The Client ").

The pay was decent, and I felt it would be a great way to get my feet wet. I could also save some money to help me through any rough patches after the gig was finished because the pay rate was higher than what I needed to make ends meet. To top it off, the net payment terms between The Company and The Client were net 15, which I've said in the past are quite unusual. My agreement with The Company was that I'd be paid within 7 days of The Company being paid by The Client. The Company offered The Client discounts for early payment and were billing The Client on a weekly basis. With me so far?

To summarize, billing was done every week, and I was getting paid in under 15 days because The Client accepted the discounts from The Company, who issued me my checks within 24 hours of their payments clearing the bank.

Everything went well for 6 or 7 weeks. The work was difficult, but it was interesting and
I was paid regularly . I worked out of my basement almost the entire time and everyone involved was comfortable with that. Then it all started to come apart.

Less than two months into the start of my new business, The Client made a late payment, thus The Company paid me late. "No big deal." I thought. I'd been saving money for the first few payments, and could meet my payroll for another week. I was in "Catch up mode", but one missed payment wasn't a big deal.

The following week they didn't make a payment either. Two more weeks. No payment. The Company called The Client and were told there were scheduling problems because the CEO had to sign off on checks over a certain size. I wasn't the only consultant whose work was going on the invoice to The Client, so this was understandable but still annoying, as it hadn't been a problem for the first month and a half. Near the end of December, The Company finally wrangled a check from the Accounting department of The Client, nearly five weeks past when I had expected it.

New Years came and went. I did another two days worth of work and received an email late Tuesday night saying The Client had cancelled the project and I was out of a job. Not only that, The Client was disputing the work it had been billed for, stating it was out of scope and they would not pay. "Hello Creek. I've got no paddle."

The situation
It's been six weeks and I've received just one check. The Company isn't going to pay me because our agreement, that seemed fair in the beginning, is that Moon River Software isn't paid until The Company is paid. While they had indicated that they wouldn't mind paying me if they could, The Client owes them a lot of money in addition to what they owe me. In fact, nearly four times what I'm owed. The Client has indicated they have no intentions of paying. Contract terminated, end of story, end of job. I'm in much the same place as when I started the business, except I've gone six weeks without being paid and no longer have a client or income.

What to do?
The first thing I did was network my tail off. I called and emailed everyone I knew to see if I could land another consulting job as quickly as possible. And when I say everyone, I really mean everyone. Fortunately, I had a taker. Two interview sessions and two weeks later, I was working again. Net terms of 15 days, and the accounting department did me favors by getting my first check paid within a week. But the money owed to me lingered out there like an ill favored smell over a rotting swamp.

My legal options were zero. I had never signed anything with The Client directly, and the agreement I had signed with The Company clearly indicated they were not required to pay me anything until they were paid. When I started the job, the risk I thought I had taken was that I might not be paid when I expected to be paid. I hadn't counted on the risk that I might not be paid at all.

With no other options in front of me, I began to slowly dig my way out of the hole in which this job had left me, somewhat poorer and wiser for it. The money owed me was the difference between being solid in the black, or being solid in the red. On paper, I was in the black, in my checking account, I was barely in the black. But if I was never paid, I would need to write all that money off, taking a huge hit to my bottom line.

For the next five months I worked constantly for a couple of different clients, eventually going solid in the black both on paper and in the checking account without that invoice being paid.

Several months later
Sometime in May, I received a phone call from The Company saying that things had started to turn around and it was anticipated that I would be paid shortly. I wasn't going to believe it until I had a check and it cleared the bank, but in early June, I cashed my check for those six weeks of work I did in December. Start to finish, I was paid approximately 180 days after I completed my work.

Morals of the story
1) Leaning too heavily on a single client is asking for trouble. Don't make the same mistake that I did. The more clients you have going at one time, the better. If you're worried about being able to do the work, raise your rates, hire additional help or both. Supply and demand will regulate how much you charge. Keep raising your rates until demand tapers, then drop them a little bit to keep the demand high.

2) I learned that I would never again work in the position of a subcontractor where I would not be paid until the contracting company was paid. It may seem fair, but if things go terribly wrong, you may not have any legal recourse. I had dinner with a colleague of mine who used to run a consulting business. He had agreed to a similar deal and was screwed to the tune of nearly $40,000. He never saw any of it. I was lucky. You might not be.

The fact is that I should have had my attorney thoroughly review the contract I signed with The Company. Although the terms of payment seemed fair to me, an attorney has seen more contracts than we have and can alert you to potential caveats in the contract or terms that are unreasonable. Think of this as contract insurance. For a $250 fee, your attorney can review a three month contract. Assuming the contract is worth $5,000/month, that's only 1.67% of your income for the contract. If the contract is worth more than that or over a longer time period, the percentage is even less.

3) Never burn bridges. I've said this in the past, but I can't stress this enough. No matter how bad things get, do your best to maintain the relationships you have built. Consulting is all about maintaining beneficial relationships between your company and another. And while I did consult with my attorney about the situation, I was told I had no legal recourse against either The Client or The Company. I had initially thought that if I sued The Client as well as The Company that they might be willing to pay instead of face two lawsuits over the same deal. Since I couldn't do that, I maintained regular contact with The Company, offering to help in any way that I could.

Eventually, maintaining this relationship netted me another consulting job with The Company. Of all the ironies, the new consulting job was also for The Client through a relationship that they had rebuilt with them and involved having me provide 8 hours of training on the software that I had written the previous December. This time, I was paid before lunch on the day I provided the training. I was paid before I even got back to the office to print an invoice. Never burn bridges indeed.


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# re: How to avoid losing $40,000

Don't forget that there is a trade-off involved in switching gears from client to client. You may take a hit in performance.

Either way, it's a tradeoff: security for sanity. 10/12/2006 2:56 PM | Ryan Elisei
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# re: How to avoid losing $40,000

Moral #1, is a great way to price your work based on demand. I have seen other advises as slapping the client with your rates. But this one is more professional.

Moral #2, Yes of course I wonder how you accepted a contract with such terms. I always say I am subcontracted to you ... then you paymet or I am subcontracted to your client. I don't like to much chaning hands.

Moral #3, that's the professional way of doing things. Not as some bunch of gangsters.

Thanks for sharing your experience, keep up good articles. 11/28/2006 5:26 PM | Nader Soliman

# The Server Side

The Server Side 3/26/2007 9:22 AM |

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