A contract that provides for Milestone Payments is one where payments are not scheduled by time but by a ‘milestone’. This means that payments are due when a certain event or section of work is reached.
We all know the attraction of Milestone payments: all you have to do is get to that milestone quickly and ‘you beauty!’ you get your money quickly.
Typically we see contractors throwing extra staff and resources at the work with the aim of reaching each milestone extra fast and being able to bank the cash fast.
Only then does the brutal reality set in: no payments.
Because according to the client, you have not reached any milestone. And so it starts… the endless argument about whether the milestones were achieved or not. And while all this is going on your client has the benefit of the work being completed much sooner than it would have been under a normal payment arrangement.
The flipside of that coin is that you have incurred far greater labour and resource costs than you otherwise would have. It’s a deadly recipe and you need to avoid it like the plague. It’s a trap. Here’s what’s wrong with them.
Easy to place obstacles in the way
Because the payment is not tied to time (i.e every month) it opens the way for the client to create problems that prevent payment. It is usually the case that milestone contracts provide that each milestone is deemed to have been reached when there are no defects, when all documentation is provided, all declarations are submitted, all timesheets are in, and on and on it goes.
This is deliberate. The more things they want, the more things they can allege you haven’t provided. It is important to realise that it doesn’t matter whether you’ve provided those things or not. To stall on payment, they need only allege that they haven’t received them.
If you think that’s a fantasy just think about the times when your client has denied receiving your invoices. That happens all the time. “We never got your invoice” is the cry every time. So long as they deny receipt, they do not pay.
Contrast this with a contract where payments are made monthly… the client cannot deny that another month has passed. It is much harder to deny payment in that situation. Even if there are defects, they must pay you the balance for the defect-free work.
Once there’s a dispute you’re stuck
Because your payment is tied to a milestone, there only needs to be a dispute about anything at all and the payment is held up. So long as your client can argue that the milestone is not reached, no payment need be made. They may argue about tiny details or that some particular Australian Standard is not met.
The only way to resolve the situation is to fix the ‘defect’ or supply the paperwork. Either way it just slows you down.
Hard to define
Most contactors do not define the milestone in enough detail (or at all). This then opens the way for the client to define it to their advantage, when it comes to payment. In these cases the parties are bogged down arguing over what was meant by the milestone. For example if ‘Milestone 1’ was “excavate basement carpark” there could be a dispute over what that work exactly entails.