Lesson Seventeen

How to set up payment

Money. After all the fun that comes with building a product and working on something with a group of smart people, we still need to make sure everyone gets paid.

Money isn’t the only thing but it’s an important aspect of leading a project, and one that shouldn’t be overlooked.

For freelancers who often don’t have a steady income or salary to depend on, making sure that money is handled properly is important. If you enjoyed working with a freelancer and want to work with them again, paying on time is a great way to ensure that’ll happen.

Delayed payments can also significantly slow down your project’s timeline. Making sure funds are transferred in a prompt and timely manner helps you keep moving forward and gives your team a chance to hit the deadlines you’ve agreed to.

Payment methods and schedules should always be included in a design or development contractual agreement so both parties know what is expected. This should include:

  • The expected method of payment (ie Check, Paypal, EFT etc)
  • The details for payment (ie office address, paypal account information, bank routing and account number, etc)
  • The schedule of payment

Once you decide on when you’ll be paying the designer or developer you’re working with, the next step is the how you’ll be paying them. Here are a few common ways that payment can be set up:

1. Pay the full or part of the project budget upfront

Paying the full project budget upfront is rare but might be done on projects with budgets less than $1,000.

It’s more common to pay a freelancer a deposit (usually 20-30%) of the project budget before work starts. This helps to build trust between the freelancer designer or developer and yourself. While it might seem risky to put out 20-30% of the project without receiving any work, the professional you’re working with will most likely have the same apprehension to work without being paid.

The idea here is that you reduce your risk by putting up some of the capital needed for your project while setting expectations as to when the majority of the funds will be paid.

Conclusion

Helps to build trust and eliminates funding roadblocks from holding up product development. Works well on small, well-defined projects with budgets typically under 5k USD.

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2. Pay by milestone

Before you start working you might define different parts or phases of your project. Payments can be set up to go along with each milestone as they are completed.

For instance, if you’re designing a mobile app, you could break up payment into 3 parts:

Payment 1 Design of one screen of the app
Payment 2 Design of all remaining app screens
Payment 3 Design of the app icon

Each payment should relatively reflect the amount of work done. In the example above, Payment 2 should be more than Payment 1 and Payment 3 because it requires much more work.

Payment would be made after the completion of each phase and before any future work begins.

This helps align the motivations of the professional you’re working with the goals of the project, as they’ll be paid when your defined milestones are reached.

Conclusion

Helps to keep a pulse on the progress of the project by aligning payments with specific milestones. A good fit for larger projects (10k+ USD) with well-defined phases. The drawback is that it puts all the risk on the freelancer.

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3. Pay by billable retainer

This is a common method when the project scope needs to be easily malleable or you plan on the working relationship to be ongoing. It’s faster to set up than defined milestones and gives you clear check-in points to make sure the project is progressing as expected.

How this typically works is you’d set up an agreed upon hourly rate and an agreed upon retainer amount. To kickoff the project, you would then send the designer or developer an initial retainer amount to begin work.

Let’s look at an example:

The professional’s hourly rate is $100 per hour and you agreed upon a retainer of $10,000 which is 100 hours or 2.5 weeks of fulltime work at 40 hours a week.

You would send the professional $10,000 and they would begin working on your project. Each week they would send you an update on what they’re working on and the amount of time spent on each aspect of the project. To keep track of the time spent, you can use a tool like Toggl and ask them to send you updates on a set schedule.

When they’ve worked 100 hours on your project you would send them $10,000 to re-fill the retainer so the work can resume.

Conclusion

This is often used when you’re looking for flexibility in the project scope but still want to have natural check-in points to make sure everyone is on the same page. Great for larger projects (10k+ USD) and also to help keep progress moving forward in a fluid manner.

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4. Pay on schedule

This isn’t a common method, but it can be handy in some cases where work is expected regularly but the amount varies. Similar to a billable retainer, you’d set up an agreed upon hourly rate and the freelance designer or developer would track their hours and what they spent time on. The difference from a billable retainer is, in this method there is no upfront payment to the professional, all work is paid for after completed.

On an agreed upon timeline—typically weekly or monthly—they would send you an invoice for that time and you would pay them before work continues.

The upside of this format is that it allows for the freelancer to have consistency in their income while giving them flexibility to work as many (or as few) hours as are needed for the project.

Conclusion

Works great for projects that are recurring and have a flexible scope.

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5. Pay monthly retainer

Engagements like a monthly retainer are common when there is ongoing work but it’s not always clear what will be needed month to month. A monthly retainer allows you to reserve a professional’s time each month, and it’s paid whether it’s used or not. This is ideal when you want to ensure that a professional will be available when you need them.

In the agreement you’d lay out what tasks would be included in this retainer and what the expected turnaround times for them would be.

An agreed upon retainer would be paid monthly in a fixed amount and the freelance designer or developer would be paid the same amount for all work that is covered in the agreement.

Conclusion

Works well for maintenance projects to ensure you will have someone to cover those tasks that aren’t clearly defined but are recurring. This also helps to ensure that the professional you’re working with is available when needed.

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6. Pay on delivery

The pay on delivery model puts more risk on freelancers and is less favorable for longer projects that may take months to complete. As the name implies, this arrangement means no income is paid to the freelancer until the project is completed.

Conclusion

For small projects (under 1k USD) this can work well to get started quickly and motivate the freelance designer or developer to finish quickly.

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7. Escrow: Pre-Payment

All methods of payment above require you or the independent professional you’ve hired to take on risk, either doing work or making a payment upfront before any work has been done.

Although we all hope every project goes well, sometimes things might not go according to plan. Yet, a late or missed payment can create major instability in livelihood of an independent professional. And a delay or subpar quality from a project can have a substantial impact on the health of a business.

To help prevent issues with payments and deliverables, there’s a preferred method of payment we created and use for all projects on our site, Crew. It allows clients to deposit funds before work starts in a secure account where funds are held until completion of the project or milestone.

Here’s how it works

  1. The client deposits funds in Crew (Clients from anywhere in the world can deposit funds with a credit card)
  2. Funds are securely held while work is ongoing
  3. Projects are often broken up into milestones, weekly, or hourly and payments are accepted before work starts for each milestone
  4. When deliverables are approved, the funds are released to the independent professional

This method helps to build trust for everyone by ensuring funds are secure and will only be sent when the agreed upon work is completed. And if there happens to be an issue with work that was delivered, which happens on less than 1% of Crew projects, we have a team that will help.

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An overview
Budget Scope Engagement Trust Level Required
Upfront Payment Small Well-defined Couple weeks Medium
By Milestone Large Well-defined Couple months Medium
By Billable Retainer Large Flexible Indefinite Medium
On Schedule Medium Flexible Indefinite Medium
Monthly Retainer Small Loose Indefinite High
On Delivery Small Well-defined Couple Weeks High
Escrow Any Any Any Low

Delayed payments are a common way projects fall off track. Remember to leave enough time for you and any stakeholders on the project to sign off on any work related to payment. Set aside extra time for reviewing the work and any changes that might need to be made before payment is sent.

Whichever payment method you choose, the most important thing is to have a pre-defined plan with clear dates for payment and what should be delivered in order to receive payment. It’s better to go into more detail than less on what you expect to be delivered. If you want a screen in an app to be designed exactly a certain way, then those specifications for the design (i.e. I want the top bar to look just like Twitter, etc.) should be agreed upon before any work starts.