Independent contractors bring specialized skills to the table, making them a popular solution for companies seeking outside help on short-term or high-priority projects.
However, before adding a contractor to your team, you must draft a contract outlining timelines, deliverables, and payment terms. Unlike full-time employees paid on your company's standard payroll schedule, contractors receive payments based on the terms of their contract.
Including payment terms in contracts sets clear expectations for when and how contractors will be compensated.
Key takeaways:
- Companies can utilize different payment schedules and terms to make timely payments to contractors.
- The contractor payment terms you choose — hourly, milestone-based, or fixed — enable you to choose a method that fits both of your needs.
- An Employer of Record (EOR) like RemoFirst simplifies the process of paying and managing contractors worldwide.
What Are Common Payment Term Options for Contractors?
There are several different ways of paying contractors. Here are some of the most common methods.
Hourly Payments
Paying contractors hourly at an agreed-upon rate is one common option. This flexible payment approach works well for contractors with a set schedule, such as 20 hours per week, as well as those working variable hours to complete a specific project.
One potential drawback of this method is that it may be hard to accurately forecast costs if you don't know how long a project will take, if the scope of work changes, or if the project lasts longer than initially budgeted.
Milestone-based Payments
Milestone-based payments are based on the completion of specific tasks or project milestones (e.g., after a first draft of copy is submitted, a wireframe website is built, etc.).
Milestones are agreed upon in advance by both parties, and payments are issued as the different milestones are met.
This method ensures transparency and accountability throughout the work process. It's ideal for project-based work with clearly defined deliverables and/or a set due date.
Fixed Payments
With this method, contractors are paid a fixed amount at regular intervals, like weekly, biweekly, or monthly.
A retainer agreement, where a contractor is paid an upfront fee to secure their services for a specific period or ongoing work, is another type of fixed payment.
Retainer payments are commonly used for freelancers who provide consistent, on-demand expertise, often cover a set number of hours or tasks per month, and help ensure that the contractor prioritizes your projects.
Fixed payments are ideal for long-term agreements or ongoing work where a predictable payment structure is necessary to simplify budgeting.
What Are Common Payment Schedule Terms for Contractors?
Beyond deciding how to pay your contractors, it's equally important to determine when to pay them. Here are some of the most common contractor payment schedules.
Prepayment
With this type of payment schedule, the employer pays the contractor upfront, partially or in full, before the work is complete. A prepayment essentially functions as a down payment for the project and can cover a percentage of the total fee — such as 20% or 50% — or the entire amount.
This schedule is popular with contractors as they are guaranteed to receive at least partial payment before commencing work, which is especially important for managing their cash flow if they anticipate incurring expenses while working on the project.
Prepayment also benefits employers by legally binding the contractor to the terms of the agreement, increasing the likelihood that the contractor will complete the full scope of work.
Net Payment
A net payment structure means that the contractor is paid within a specific number of days from their invoice date.
Common net payment terms include Net 10, Net 30, and Net 60, which indicates the number of days before payment is due — 10, 30, or 60 days from the invoice date. For instance, Net 30 means the company must pay the contractor within 30 days of the invoice being issued.
Before signing a contract with net payment terms, ensuring that your finance department can pay within the contractual timeline is essential. For example, a contractor may request Net 10 terms, but your company policy is to pay contractors within 30 days, not 10.
Payment on Delivery
This payment schedule is less common and specifies that the contractor needs to be paid within 24 hours of submitting their invoice.
Some contractors prefer this method because they get paid quickly, and it builds trust with your company — vital if you plan on collaborating in the future.
However, depending on how your company processes invoices, it can be difficult, if not impossible, to make a prompt payment on such short notice, especially if you don't know in advance when the work will be delivered. And, if you encounter payment delays due to the tight turnaround, you could be in breach of contract and incur late fees.
Try to negotiate upfront for a minimum payment term of at least Net 10 to give you more of a buffer and help avoid contract violations.
Stage Payments
With this payment method, contractors receive scheduled payments based on project milestones. For example, 50% of the total fee might be paid when the quote or estimate is accepted, with the remainder paid upon project completion.
Stage payments benefit both contractors and companies by allowing for clear forecasting of deliverables, costs, and payments throughout the project. This structure also helps motivate contractors to stay on schedule and meet agreed-upon milestone stages.
For companies, stage payments offer the advantage of spreading costs over the project's duration. It also creates natural checkpoints as the project progresses, ensuring it stays on track and reducing the risk of incomplete work.
The Importance of Clear Payment Terms in Contractor Agreements
As we've already mentioned, when you hire a contractor, including the payment terms and schedule in the contract is essential. This ensures the company and the contractor are in alignment with expectations.
It should also stipulate what happens if either side breaches the contract. For example, this might include late payment fees, payment penalties for missed deadlines, and termination clauses. The contract should also include terms regarding dispute resolution.
Employ and Pay Contractors with RemoFirst
RemoFirst can help you easily manage and pay contractors in 150+ countries. With automated and streamlined payment processes, RemoFirst ensures that your global contractors are paid accurately and on time.
Schedule a demo today to see how RemoFirst can simplify your contractor management.
