Payment terms for agency subcontractors

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Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And we’re going to disagree today. It’s kind of fun. I’m looking forward to it because usually we’re in more or less agreement. We may differ on a few little things, but this time maybe, I mean, we’ll see, maybe we’ll find some common ground, but we’re starting out the show in disagreement right after this.

So when we started our conversation today to discuss stuff, we didn’t even really get into the niceties very much. We really just jumped right in, because Gini, you had a bone to pick right out of the gate today. And so we said, let’s go ahead and record that.

Gini Dietrich: I was like, let’s not chitchat. Hang on. I’m trying to find it.

There it is. “If your agency does work for other agencies, don’t accept getting paid only after the end client pays the other agency. You are not a bank and shouldn’t be filling that role for your clients. Even if that client is another agency. Stick to your usual payment terms. If the agency you are doing work for wants to withhold payment until they get paid, insist on having your own contract with the end client that you can pursue collections directly, if it becomes necessary.”

Chip Griffin: That was something I wrote on LinkedIn not too long ago. And apparently I struck a little bit of a nerve. I know I struck it with other people. I didn’t realize I had struck it with Gini until we started recording or, discussing the recording today. So. What’s wrong with what I said?

Gini Dietrich: Well, a couple of things and it’s not necessarily wrong.

It’s just that in many cases, And I’ll just speak for myself. I’m using contractors that are more senior level experts that have a specific expertise. So it doesn’t make sense for me to hire them full-time as employees, because I won’t have, I won’t need that expertise consistently. I might need it for a project.

I might need it for crisis. I might need it for a reputation piece, but I’m not going to need it consistently. So I’m going to hire them to do that work for something really specific. My employees are going to get paid on time. They get paid every two weeks. That whole thing, regardless of us getting paid by a client or not.

But one of the things I do say to contractors is we have 30 to 45 day payment terms with our clients, which means we have 30 to 45 day payment terms with you. And for the most part, everybody agrees to that. I do work really hard to have them invoice ahead of time so that I can invoice clients ahead of time and get them paid within that timeframe.

But there is on an occasion that they, it may go 45 to 60 days just because we haven’t been paid yet. I’m also not the bank and I have to be paid as well. And I think you’re just saying like point blank blanket across that if you don’t stick to your usual payment terms, or you should have a contract with the end client.

Doesn’t always work.

Chip Griffin: So I hear what you’re saying and I am not going to sit here and tell you that I’ve never done this to my contractors as well. It is a very common practice in the agency industry to have those kinds of terms with subcontractors, whether they are freelancers or small agencies or what have you.

Here’s my issue with it. And here’s why I think we need to stop that practice as an industry. It’s the only vendor that we have as an agency that we do this to. We don’t do it with our employees. We don’t do it with our landlords. We don’t do it with Apple when we need a new computer. We don’t do it with Staples when we need office supplies. We don’t do it with our health insurance carrier.

We only do it with freelancers, contractors, and subcontractors, and it’s wrong. It’s just straight up wrong. It’s not the way to do it. If we, if we’re in a position where we have to get that payment from the client first, then we need to figure out different terms with our clients, or we need to big build up bigger cash reserves in order to be able to handle it.

Now, I’m not saying that you need to pay the contractor on day one. I think it’s okay with contractors to have reasonable payment terms like a 30 day payment. But it should not, it should not be contingent upon being paid by the ultimate client, because the problem is, if I’m a subcontractor, I have no recourse.

I can sit there and, I can bang the table and I can send you email after email, after email, but I can’t go to the person who’s actually deciding to cut that check. I can’t call their accounting department. I can’t call the ultimate decision maker. I have no contact. And so it puts you in a position of ultimate weakness as far as collections. And so you’re not only turning into the bank, but you’re turning into a bank without collection authority.

Gini Dietrich: Okay. So I actually think we agree on this because I think what’s tripping me up is, is the terminology of saying you can’t get paid until you’re, you’re not going to get paid until the client pays us, which in effect is true.

But that’s not the terms I have with our contractors, the terms I have with our contractors are 30 to 45 days because that’s the same terms I have with our clients. So it’s my job to make sure that I’m paid within that 30 to 45 days. But by golly, if I’m not, I’m still not going to stiff the contractor.

I’m not. But, so I think it’s semantics from this perspective. I think we agree on this.

Chip Griffin: Well, that’s a shame, but there are a lot in the agency community who do not, right? Because it is incredibly common for that payment to be contingent upon being paid by the end client.

Gini Dietrich: And they put that in their contracts?

Chip Griffin: They’ll put that in their contracts, or they’ll just tell you straight up, you know, we’ve got 30 day payment terms, but I’m not going to pay you until, and what are you gonna do? You’re gonna sue the larger agency? I mean, theoretically you can, you know, good luck getting a whole lot of business, if you’re doing that to other agencies in the space, right. I mean, it’s just, it’s not likely that you’re going to pursue that course of action. And I know that we’ve differed on this as well because you like the legal action for collection purposes.

Gini Dietrich: I do. I like to be right.

Chip Griffin: But the vast majority of agencies don’t go that route because it may make a point, but it burns a lot of bridges and it tends to cost more than you’re actually collecting in most cases. So, so my point is that if you have agencies, smaller agencies accepting these terms, it’s sort of like when you’ve got large agencies that are accepting the 120, 180 day payment terms, and the other nuttiness that some of the big brands are trying to push out there. They get them because enough agencies will say yes. If enough subcontractors are still saying yes to those kinds of terms or that kind of behavior, it encourages the midsize agencies to continue to do that and to continue to balance their books on the backs of the smaller guys. And that just doesn’t make sense. And so we need to stop that practice at every level. If you’re on the end of saying, I’m not paying you until we get paid, you need to stop. And if you’re on the end of saying, I’ll accept that, it needs to stop. Now there’s always exceptions to every rule, right? So if, if it’s two small agencies and they’re billing for convenience out of one, okay, fine. You know, you guys can work whatever kind of arrangement you want out. That’s not really a subcontractor relationship at some point. That’s really more of a, you know, you’re a joint service agreement for contract purposes, you kept it at clean and simple. That’s fine. If you’ve got an agency that you work with all the time, and maybe they’ve just got one client that’s slow to pay. And so you’re, you’re willing to make an exception. That’s fine. Right. You know because trust comes into this relationship as well.

The problem is I’ve seen a lot of cases where an agency is working for a larger agency for the first time and they accept working under these conditions. And it just it’s, it’s just straight up wrong. It’s the only vendor you can do that with. You don’t have anybody else that you can get away with saying, I’m sorry, I didn’t get paid.

I’m not paying you. I mean, seriously, look through, look through who you write checks to. There’s not a single other category that you can withhold payment from except subcontractors. And so why should they be second-class citizens?

Gini Dietrich: Yeah, that’s totally fair. And I agree with that. I also think that just like we wouldn’t accept six month terms, you shouldn’t expect that your subcontractors are going to do that either. That’s not fair.

Chip Griffin: I mean, part of the problem is that that as a subcontractor, you go into these and you might agree to that. And they say, yeah, we usually get paid within 30 days. So it’s not a problem. Oh yeah. Cool. It’s not a problem except maybe that’s not true.

Right. Or maybe, maybe you’ve landed on their one client who turns out to be a slow payer. And look, there are a lot of really large brands out there that are notoriously slow payers. They, most of them will pay eventually. Right? So if you’ve got, you know, a Fortune 100 brand and for your agency’s roster, chances are they’re going to pay. They may not pay in the most timely of fashions though. Right? And it’s bonkers because you’re a drop in the bucket for them, a drop in the bucket. I mean, even the largest agencies, you’re a drop in the bucket. And yet their accounting departments will still slow down payment because it’s what they do.

Gini Dietrich: Well, they’re making money off of your money is what it is.

Chip Griffin: Yeah. But at the end of the day, they’re not making that much money, but you add it up. And, you know, as, as Senator Dirksen, once said a billion here, a billion there, and pretty soon you’re talking real money, right. And when you’re these big brands, that’s what they’re doing.

But the problem is that that then forces the bad behavior to continue on down the line. And so at every level, we need to fight back against this and we need to have standards in place for the terms that we will accept. And we cannot be in a position where we’re allowing those kinds of payment terms, even when it’s that bigger agency that we think is going to throw us a whole bunch of work.

And, and we’ve talked previously, there’s all sorts of benefits to doing work for other agencies, but there are pitfalls and this is one of them.

Gini Dietrich: Yeah. I mean, like I said, I think we agree. It was probably just the semantics of it. But I think one of the most important things, and we’ve talked about this at length on this podcast too, is getting your own terms in place.

Like we, we’ve talked about how I handle big, huge global conglomerations. Like they’ll come to me and say, okay, we want to do this, this and this, but our payment terms are six months and I’m like, great, we’re going to invoice you now. And we’re going to start in four months or, you know, whatever happens to be, we won’t start work immediately.

And there’s some hemming and hawing and all that. And we have to negotiate and do those kinds of things. But for the most part, you can work yourself around that so that you’re not doing work now and getting paid six months later, you can invoice now and get paid six months later, but don’t start the work until you’re closer to that six month mark or that five month mark so your at 30 days. There are lots of things that you can do to protect yourself, which then allows you to protect both your employees and your subcontractors.

Chip Griffin: And it’s really important to, if you’re doing work for another agency, to have an honest conversation before you enter into the work. And I think it’s reasonable to say to them, look, you know, I know a lot of agencies will try to withhold payment until you get paid regardless of what terms we may have in our written agreement. What’s your practice? Tell me how you do it, because even if it’s a larger agency and they’re not the accounting department, they know. Yes. Because they know that, that if they’ve been in that position where they don’t pay subcontractors in a timely fashion, they’ve been on the receiving end of calls because trust me, I’ve made plenty of those calls at various points in my career, no matter what size agency I was in to someone that we were doing work for or with, and we were not getting paid in a timely fashion.

It’s part of business, it’s a crappy part of business, but it’s part of it. So they know if their agency has a history of doing this, particularly with the clients that they’re working on. And if that’s the case, you have a right to know that as the subcontractor, before you go into it. So you can go in eyes open, and you’re not surprised that 60 days in, 90 days in you still haven’t been paid.

Gini Dietrich: That’s really good advice, I think. Having that conversation up front to say, Hey, listen. How, when are you paid? What are your payment terms? What can I expect? I think that’s really good advice. And then that allows you just to decide whether or not it’s something that you want to do, because I can tell you right now, if somebody wanted to contract with us and they wanted to pay us in six months, I’d be like, find another sucker.

Chip Griffin: Right. But there are plenty of upstream agencies that will do that. And because of that, you need to be in a place where you understand what you’re getting into. Right. And a lot of times agencies are afraid to ask these questions because they don’t want to rock the boat. They’re so interested in just getting the agreement signed because they think they’re getting paid. Well, if you’re excited to get the agreement signed, but you don’t get paid in a timely fashion, are you still excited about it?

Probably not. So ask those questions, have those difficult conversations upfront. There’s no better time than the start of the relationship to ask tough questions because that’s when everybody’s still feeling good about things. If you wait until something goes wrong, it’s too late.

Gini Dietrich: It is too late. And then everybody’s upset and you’ve burnt bridges and all of those things that go along with it. You’re 100% correct to do that upfront.

And it may feel like a hard conversation, but you’re right. Everybody’s unicorns and rainbows and sunshine. And they’re like, oh yeah, well, let’s have this conversation. And you know, six months from now, it’s not rainbows and sunshine and unicorns at all.

Chip Griffin: Right. And it’s always better to know what’s gonna happen going in. So even if you decide, okay, I’m willing to accept, you know, for whatever reason you don’t, you don’t think I’m right here and you don’t want to refuse it and, and, you know, walk away from it. You’re willing to accept it. At least now, you know. At least now you have some idea that this check could be awhile before it shows up.

And so maybe you factor that into your price. You know, one of the things that we’ve talked about on this show repeatedly, and that I always preach wherever I’m at is that if you’re going to make concessions on one aspect or another, then you need to get something. So if you’re going to allow slower payment, you need to charge more, right.

Because you need to account for the fact that you’re essentially giving them a loan. Right. So, so you, you can now sort of factor in if you will, that interest into your payment terms.

Gini Dietrich: That’s good advice, too.

Chip Griffin: I mean, you don’t put down, you know, I know a lot of these contracts will say, you know, it’s eight and a half percent late fee per month or something stupid like that. And nobody ever ends up enforcing that. You know, they’re nice. I don’t mind seeing them in there because you know, it’s potential leverage when you’re cleaning things up. Oh, I know you’re two months late, but if you pay up, I won’t charge you the late fee. Well, you never going to charge him the late fee to begin with.

And frankly, if you start charging late fee, there’s some research that suggests that the clients will just start paying later because now it’s acceptable, you know, and they just rack it up. And so if that late fee is less than whatever else they could be doing with the money, I mean, it’s like there was this, there was this big study, a number of years ago where they, they looked at a daycare facility.

And the daycare facility was fed up with parents, not showing up on time to pick up their kids. And so they put in a late fee. So for every 15 minutes you had to pay X amount and guess what? It actually made the problem worse because parents now instead of feeling guilty for showing up late, you’re like, Well, I just pay you the 20 bucks or the 50 bucks or whatever it is because I’ve got something I’d rather do.

And so for me, it’s worth it, right? So anytime you get into these things, but my point is this, if you’re going to accept that you’re going to be paid late, factor it into your price. Factor it in other aspects of what you’re doing, because all of these things are fair game. When you’re in a negotiation for a contract there, you know, you can make concessions wherever you want, as long as you’re getting something in return. The problem is that a lot of agencies give, but never get. They give a discount, but they don’t reduce the scope of work. They agree to bad payment terms, but they don’t change the price. Right. You need to make sure that for every bad thing you agree to, you get something good in return.

Gini Dietrich: That’s – I love the advice of, of adding that into your, or marking up or adding an interest for protection or something, just charging more based on that. I love that advice. I’m going to do that. That’s good advice.

Chip Griffin: Yeah. And look, I mean, the point is, and to me, that’s true. You know, there’s all sorts of reasons you ought to be raising your price for a particular piece of work. And it’s not all about just the value and blah, blah, blah. We’ve talked about value based pricing, whatever it is, value pricing. It’s about all sorts of – it’s risk, right? So the more risk you have on payment, on going out over scope, on the client being a pain in the butt, you know, whatever it is there, all of those things need to be factored into your price.

And when you’re working with other agencies, it’s really vital that you understand how they operate. You want to understand how they’re, how they’re going to work with you on a day to day basis, but also how are they going to pay you? How are they going to treat renewals or things like that because agencies will treat other agencies as second class citizens all the time, all the time.

And it’s exemplified by this particular issue where for whatever reason agencies believe that paying other agencies sits in its own special category and you can abuse the heck out of them in ways that you can’t do to anyone else that you write checks to.

Gini Dietrich: That’s fascinating. Isn’t it? These are our people and we’re not treating them – I mean, I certainly early in my business stage, I’m not going to say that I was not guilty of that. I was guilty of it too.

Chip Griffin: Absolutely. I mean, I have been too, right. Because particularly, you know, you’re a small agency and you take on a big project and, and you’re using mostly subcontractors, you know?

Oh, I can’t front the cost for this. Well, then rethink what you’re doing with the end client, because it doesn’t make sense for you to have to go to this whole group of people and say, yeah, I’m going to pay you whenever I get paid. That’s just, those are unfair terms that you would never, ever get away with it with anybody else.

Gini Dietrich: Yeah. And you would, you should not accept that on your end, either. So why would you expect that somebody else is going to accept that.

Chip Griffin: So I’m glad we’ve solved the problems with the agency and the sham. I’m glad we found some common ground. I mean, I’ll be honest. I’m a little disappointed that we found common ground.

Cause I thought, I thought maybe we would finally have that topic where you and I actually ultimately disagree and yet we ended up right back at the place where we disagree a little around the edges, but not as much as you thought when you came in hot and fiery.

Gini Dietrich: I did. I was like, come on now. You’re right, I did.

Chip Griffin: Well with that common ground, we will have to end this episode, and try again, next time to fight about something.

Gini Dietrich: All right, I’ll try. I’ll try harder next time.

Chip Griffin: We’ll do our very best. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And it depends.