Briefly

TRANSCRIPT

00:07
Adam Stofsky
David, I want to ask you about a very important aspect of contracts, which is payment. It's pretty important, right? I mean, one reason why people sign contracts is they want to get paid for their goods or services. Now, I do a lot of contracts myself, and there's a lot of like, payment jargon. Can you kind of walk us through some of the most common aspects of payment or payment terms in contracts?

00:32
David Tollen
Sure. So the payment clause doesn't have to be very complicated. Sometimes it says something really simple like, you know, for this product, we're going to pay X dollars and that's it. Maybe it'll go into things like how quickly it has to come. But you often see some. You often see A, more complicated structures and B, even in a simple structure, some sort of unfamiliar vocabulary. So, for instance, you see things like net 30 and net 60. Sometimes people just write that language in their contract. Payments are due net 30 and don't say what that means. Net 30 means that it's 30 days after probably receipt of the invoice. But if the contract isn't clear, you could get into an argument about whether it's 30 days from the date the invoice was sent or received. Nowadays, usually the same day. Oh, so it's.

01:28
David Tollen
Or it's net 60 or net 90. 90 days or 60 days.

01:32
Adam Stofsky
Why net 30? Why don't you say payment should be received within 30 days of receiving the invoice?

01:38
David Tollen
It doesn't make a lot of sense, but it's. I think, I'd say it's probably widely enough used that it's likely to be enforceable. I don't usually say things that clipped in a contract. I will say very specifically, payment is due 30 days from dispatch of the invoice. Something along those lines. But if you're using net 30, I don't know, people are probably going to know what you mean.

02:04
Adam Stofsky
Does it mean. Usually means calendar days, right?

02:06
David Tollen
That's right. Although sometimes you do have payment terms that cite business days, which, particularly if it's a short timeframe, there's some real logic to that. It's, you know, if your payments like net six and two of those days are a weekend and one's a holiday, you're actually not giving yourself very much time. And sometimes we'll Pay, you know, 10 business days kind of means two weeks, you know, unless there's some holidays. So sometimes you see terms like that, but not as common.

02:36
Adam Stofsky
Right. Okay, so this is like how long a customer has to pay. That's what we're talking about here.

02:42
David Tollen
That's right.

02:43
Adam Stofsky
So what else? What other kind of payment or common payment structures or payment terms? You see?

02:48
David Tollen
So a lot of payment terms, a lot of payment clauses, use some additional, not necessarily familiar terms like time and materials, often just abbreviated T and M or fixed fee. So time and materials means that instead of paying an amount for a product or a service, you've agreed in advance what it costs. You're paying probably hourly for the time the vendor's people put into it. So this is going to be a service by people. It doesn't make a lot of sense to say time and materials for a product unless it's people building a product for you. So you're paying $50 an hour for the vendor's staff. Maybe they break that into tenths of an hour, quarters of an hour, or maybe they just count it as an hour. That's the time part and then the materials part.

03:43
David Tollen
Usually what they mean is you're going to reimburse them. You're going to reimburse the vendor for the cost of the materials that they need to purchase. And that can get a little complicated. It's often not very clear to just say time and materials. What materials was the vendor supposed to provide? What materials was the vendor supposed to buy? The vendors, you know, we're not buying laptops for the vendor. We think they should already have them. Maybe we're going to buy, you know, some other equipment. They've got a. They've got to have bunch of tools for maintenance. And it's their unique to our building. Maybe that's in the materials cost, but that's the concept of time and materials. And sometimes that gets highly articulated. You have, you know, seven different rates listed in a contract, depending on which vendor staff has to get involved.

04:32
Adam Stofsky
So the contract will specify different staff ranks or different, you know, different titles and what their hourly rate is or daily rate, and then base it on that.

04:43
David Tollen
Yeah, that's right. This is, by the way, the main. The main tool that lawyers use to charge for their services, too. Usually a higher number, same kind of deal. Although there are alternatives for both lawyers and others. Like you could agree, even for a product that involves services provided by people, you could still agree on a fixed amount. Say it's gonna, you know, this whole thing is gonna cost $40,000 done. And then what the vendor is basically doing is saying, well, we're gonna take the risk we took, you know, takes longer than we expect and it'll be a little less profitable. Or we're, you know, we might take Less time than we expect. We find a way to do it efficiently and makes a little more profitable. Either way, the customer doesn't have to worry about it.

05:27
David Tollen
They've agreed to an amount and they've budgeted it and it's done.

05:30
Adam Stofsky
Okay, so we've talked about, so the issues of time and when the buyer pays and also kind of what they're paying for, if it's a fixed fee or if it's time, materials or hourly. Any other like very important aspects of payments.

05:45
David Tollen
Yeah. So there's another term that you'll often hear that's really important and it's milestones. So sometimes you have a kind of complicated project, the vendors building something or whatever and the customer wants. The customer doesn't want to just pay money. The customer wants to pay as things get done. The customer wants to use payment as an incentive for the vendor to keep going. And so no payments are due or few payments are due without a milestone. So what's a milestone? Milestone means the vendor finishes some element of the project. Let's say it's a building project and the first milestone is laying the foundation when that's done. And usually there's some approval process that's a milestone and a payment kicks in, or you're, you know, building software. There's eight modules in the software you're ultimately building.

06:44
David Tollen
Each time the vendor finishes a module, it sends it to the customer for approval. And if it's approved, that's a milestone and a payment is due. It's a way that the vendor can agree to get paid, you know, just what the customer wants. Just when you achieve something, we'll pay you. We're not just paying forever. But also it doesn't have to wait until the end of the whole project to get paid. You might call that one milestone. But if it's a long project, that's pretty bad for the vendor. And you want more milestones.

07:15
Adam Stofsky
Right. As opposed to time materials. Under a milestone based payment system, it doesn't really matter how much time the vendor is taking. They just get paid based on what they accomplish.

07:27
David Tollen
That's right. And it's a worry for customers to have pure time and materials because there isn't a particular incentive. I mean, technically the financial incentive is for it to take longer and to do everything to the nth degree. You know, an honest vendor won't do that, but customers worry about that. And sometimes you have sort of a compromise deal where you have time and materials, but the vendor agrees that the fees won't go Above X dollars, you have some kind of mechanism to address the customer's worry that time and materials creates an incentive to work slowly.

08:00
Adam Stofsky
Any other main types of payment term that are really common? I can think of one. How about subscriptions or recurring payments?

08:09
David Tollen
Yeah, subscriptions or. The other one I was going to mention is royalty. So subscription is a. Is a kind of loose term, but you think of it most naturally in a magazine subscription you've got a subscription to. You know, get a copy of a magazine every month and you have agreed to pay every year. Subscription is a term often used for software as a service. You've got ongoing use of some remote hosted system and you pay every subscription term, which might be again a year, it could be even shorter, it could be a month. The term that sometimes goes with that is evergreen renewal, which basically means when you come to the end of your subscription period or whatever the other term might be, you automatically go into a new term. Vendors like this, they just.

08:58
David Tollen
The customer is always rolling over into a new term under the same contract. The usual system is if the customer decides they don't want to renew, they've got to give the vendor notice of non renewal 30 days before the end of the term or 45 days or something like that. And if you miss that deadline, you've renewed and you owe for that, time is very nice for the vendor. And then the other concept I mentioned is royalties. You know, sometimes this particularly goes with intellectual property, like someone's redistributing someone else's software or videos or artwork or whatever it might be, and every time they distribute another copy, maybe for a fee, maybe not, they pay a royalty. They've agreed that they're going to pay $5 for every copy that they distribute.

09:49
David Tollen
And so these royalties mount up and that's how the vendor gets its money.

09:55
Adam Stofsky
Okay, well, we just covered a lot of payment terms quickly. So we've got our sort of payment deadlines. So this is like your net 30, net 60 or pay within 30 days. We've talked about time materials, we've talked about milestones, we've talked about recurring or subscription payments and royalties. Wow. So that's a lot. That pretty much covers almost all the major. The major categories, I think.

10:19
David Tollen
That's right. You can always come up with something else. And there's a million creative twists and turns out there. You know, for software you might pay per transaction instead of per month or something like that. So there's all kinds of creativity, but those are the main big concepts.

10:37
‍Adam Stofsky
All right, thanks so much, David.