Payment provisions: The blur between fixed charges and time and materials when invoicing

Making sure you get paid the right amount at the right time is arguably the most important part of any commercial contract. Here we take a brief look at the difference between fixed charges and being paid for time and materials, with a specific focus on the problems that may arise with payment provisions.

Time of payment is an important consideration when drafting the payment terms of a contract. Section 10 of the Sale of Goods Act 1979 stipulates that the time of payment is not of the essence of a contract of sale, unless a different intention appears in the terms of the contract. A well drafted payment provision is needed to ensure that both parties are clear on the deadlines and payments they must meet.

The time for payment will obviously depend on business needs, so having a consideration for what specific terms you want is essential. Both fixed charges and charges for time and materials can be used within a commercial contract, however being clear on what applies to each will help to guarantee that the correct payment is made.

Fixed charges

Fixed charges specify exactly what the contract will cost and will not depend on resources used or time expended; this is clearly a more straightforward approach, however it may not always be fitting for your contract.

Time and materials

A contract with payment for time and materials will essentially be the actual cost of time spent, often at a specified hourly rate and the actual cost of materials and equipment used. Having payment linked to time and materials can be seen as a fair approach for both parties as it will allow the payments to be adapted to suit the contract.

Clearly both of these payment provisions are needed within a variety of different types of contracts and ensuring that they are drafted clearly will help to avoid any dispute between parties. This will lead to making sure you get paid what you think you are going to get paid.

A dispute over payment can lead to delays in payment and cause a backlog of payments for your business. Encouraging prompt payment will not only ensure deadlines are met but will show what each party believe should be paid, therefore highlighting any issues early on. This is why we recommend a thorough review of payment provisions to deal with this dilemma before it arises.

A way to combat delays is to have a clause specifying that the customer must pay interest on the amount outstanding if the payment is not made on the due date. However when including an interest clause, the interest must not be excessive, otherwise the clause may be void. A standard 2-4% per annum above one of the major banks’ base lending rate is advised in the majority of commercial contracts.

Payment provisions can be drafted and amended to suit your business needs and ensure that both parties are clear on what is owed and when it is due. If you need a review of your payment provisions or are concerned that you may face problems in the future we strongly advise you to get in touch with our team.