What are the typical payment terms and schedules for contractors?

Mike Renaldi

Working with contractors is a great way to grow your business across different functions.

However, it can often be challenging to define and establish the best payment terms for contractors and find the right payment method for contractors.

This article will explore some typical payment terms for contractors to help you identify the best financial solutions for your business.

Table of Contents

What are the main contractors’ payment terms?

Once you have decided to work with a contractor, it’s essential to have a discussion in the very beginning to understand what their payment terms are. The payment terms will define much of your working relationship and your business cash flow.

That is why it is crucial to have that conversation about contractor payment terms initially. You should have this conversation before any contracts are signed, as You will need to abide by the payment terms once you begin working with the contractor.

The main component of contractor payment terms will include the following:

1. How a contractor charges for their work

Contractors will have different ways of charging for their work. This can include the types of terms they have for payments. Payment terms will vary from contractor to contractor as well as the type of work being done. For example, some contractors may charge per hour they work for you and invoice at the end of the month that needs to be paid within the week.

Another contractor may charge you a flat rate or a task and bill half at the beginning and half upon task completion. If you have steady work, you can work with the contractor to establish payment terms and schedules that make sense long-term.

2. Currencies they use

Another factor that will play a role in contractor payment terms is the currency in which they would like to receive payment and the currency you usually work in.

Others may prefer to be paid in your currency via bank transfer. For example, you may have a contractor that lives abroad – they may prefer to be paid in their local currency, while you might usually pay contractors in USD. When working with contractors, this can often be a challenge, as currency conversions can be very costly.

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3. The Payment Method or Types

Contractors will differ in how they want to be paid for their work or invoice. Some prefer bank transfers, while others prefer using an app or solution. You may need to pay some via bank transfer, direct deposit, or other methods. When working with contractors, it is also important to look at payment methods or types of payments.

For some contractors, you can also use platforms like Upwork or Fiverr to manage payments or invoices. The payment method and type will be dictated by the contractor to an extent, but also what makes the most sense for your business.

4. The Payment Schedule

The final component of contractor payments is the payment schedule, i.e., when contractors would like to be paid. Again, this will vary based on the contractor and what works for your business, so it can usually be decided together. Many contractors may prefer to be paid once a month once they submit their invoice if it is recurring work or a long-term task.

Contractors may also want a certain percentage upfront before work starts and the remainder after they deliver the completed project. Others may prefer to be paid once your business receives and approves the work.

Payment schedules can also be weekly or bi-weekly based on the number of hours worked. The payment schedule will very much depend on the length of time you’re working with the contractor and the kinds of tasks being done.

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Contractor payment schedule

Depending on your business needs and cash flow, having a payment schedule with contractors can be beneficial. A schedule lets you plan finances better, including earmarking when contractors need payment. It also helps contractors understand when they can expect to receive payment for their services.

There are a few different types of schedules that you may come across in contractor invoicing, such as:

1. Prepayment

Prepayment refers to contractor schedules where they are paid their fees upfront before work commences. The prepayment is typically a percentage of the total fee, also known as an advance.

Prepayment may also be part of the contractor payment terms to cover any initial expenses that may come up during their work for your business in some instances. However, any prepayment to contractors should be discussed beforehand to ensure you understand what they are charging for, how much you are prepaying, and the schedule for making the remainder of the payment.

2. Payment upon delivery

Another payment schedule you might see from contractors is payment upon delivery. This means that contractors are paid after they have completed a task or deliverable. Their payment depends on your approval, as you will need to verify that they have successfully completed the task or deliverable. Payments to contractors upon delivery are usually after they have completed a task or some kind of deliverable such as graphic design, copywriting, or other services.

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3. Net Payment Terms (10,30, 60):

One type of payment schedule that may come up when working with contractors is net payment terms. This means that contractors will send you an invoice that will need to be paid within a certain amount of time (i.e., 10 days, 30 days, or 60 days upon invoice receipt).

Net payment terms will vary depending on contractors and their preferences, but payments must be paid to the contractor for services or tasks rendered within the time period specified in their invoice.

4. End of month

Lastly, contractor payment schedules may also look like monthly payments, similar to employees on payroll or salaried employees. This means that you and the contractor will agree to a payment schedule wherein you pay them once a month on a mutually decided date. The payment is based on an invoice the contractor creates for all the work completed in the month, or it can be an agreed-upon flat fee negotiated before working together.

Learn More: US Company Paying Foreign Contractor: Taxes, Payments, and More

Negotiate and agree to contractor payment terms

There is a lot of variance with contractor payment schedules and how to make payments to contractors, making working with contractors challenging for businesses. However, by negotiating beforehand, there is a lot of room to explore payment terms, understand what the contractor offers, and how you can work together with them.

Form a contract

Once you have negotiated and agreed upon the services or tasks, the contractor will provide the payment and terms and schedules, the next step is to sign a contract.

Having a signed contract in place is essential to have all of the working terms in one place, and it makes it legally enforceable on both sides to protect your business and the contractor. If you’re not sure what kind of contract to provide, you can find independent contractor agreement templates that you can modify and send to contractors.

Contactor invoicing

Generally, contractors will send an invoice with the services or tasks completed, the rate, and the total amount to be paid. The invoicing terms may differ based on the payment terms and schedule the contractor has discussed, but the invoice is usually a standard process. The contractor invoice will also outline the payment method they prefer and any other details.

It serves as a record that they have completed tasks or services and the payment amount. If your contractors are unsure how to create invoices for your business, different options are available. You can provide them with an invoice template they can complete and send to your business for payment.

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Learn more:

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