Clause Guide #4 – Charges and Payment
The next clause in our guide is one of the more ‘commercial’ sections of a contract – charges and payment.
The price payable under the contract and when payment falls due is one of the most important factors for both supplier and customer.
We have briefly described key considerations relating to charges and payment below:
Charges
It is important for both parties to understand what the price is, or how it will be calculated. For example, is it a fixed price, or based on time and materials, and is it inclusive of all costs, such as packaging and delivery? The contract should be clear on this, so there is no scope for disagreement over what is included or how the final price will be calculated.
If the price is calculated based on time and material rates, the customer will want to know what the rate(s) are and should consider having the right to request time records and receive updates, to avoid unexpected bills.
A third consideration is price adjustment. Does the contract allow for price adjustments? If so, when, how often and by how much. The customer will generally want to fix the price as much as possible, whereas a supplier will typically want the flexibility to respond to cost changes.
Payment
Payment terms within a contract dictate when and how payment is made. Payments may be due in advance, for example by way of payment upfront or a deposit, or in arrears, after the goods or services have been supplied. For longer term or subscription-based contracts, payments may be due at regular intervals, for example monthly or annually. The contract should be clear on the trigger for payment and when it is due.
What is the trigger for invoicing/payment? Is it upfront, on delivery, or subject to acceptance? The supplier will typically want payment as quickly as possible, and without conditionality, whereas a customer may try to push all or part of the payment until after delivery/acceptance, so they don’t lose leverage if things go wrong.
What is the payment term? Suppliers will typically start with 14-30 day terms, whereas customers will look for more time to pay.
Remedies. A late payment or failure to make payment may result in a number of remedies. The most common remedy is interest on late payment - the statutory amount is currently set at 8% above the Bank of England base rate but parties will frequently negotiate a lower rate than this. Non-payment may also result in withholding of deliveries, suspension of services or even termination of the agreement. Also, for the supply of goods, many supplier terms will say that the supplier retains ownership of the goods until full payment has been made.
If you have any questions on clauses or other contract points, please contact us.