At Nine Labs, we have a standard Master Services Agreement which all our clients sign before we begin work. Every once in a while a potential client comes along who wants to change the terms to suit their needs.

A common issue is the deposit.

We take a deposit on every project regardless of size. On anything under $10,000 (which is rare) we request the full budget up front (more on this later).

Calculating the Deposit is a pretty simple process with slight variations based on how the project is setup.

Value Based Projects

We split the total project budget into three pieces: 50% up front, 25% at the projected midway point of the project (determined by date, not deliverables), and the final 25% at the projected end of the project (again, determined by date). For projects over $100,000 we’ll sometimes change this to 30/30/30/10 depending on the exact deliverables and scope of the project.

Retainer Arrangements

When it’s a retainer relationship, we take the first month’s retainer as the deposit and immediately send the invoice for the 2nd month on Net 15 terms so that the payment arrives ahead of the month for which it’s due.

Deferred Payment

Sometimes a client will ask to defer payment on the deposit citing Net 30 terms or some other reason, and usually that reason makes complete sense to them. In this case we tell them we’re happy to wait for the check to arrive, but we won’t begin work until it does.

Partial Payment

A cousin of the deferred payment, taking part the money now and the other part in 30 days puts you in the same boat as waiting for all of it. In the case, we tell them that we’ll just wait until the full deposit has arrived before we begin work.

Small Budget Projects

Occasionally a really cool project with a very small budget (e.g. under $10,000) comes along. This might be a local indie shop, a non-profit, or something else that really gets the team excited. If the team really wants to do the work we’ll take these projects on and generally try to complete them in one or two sprints. In these cases we request payment in full before the project begins.

The main reason is that the administrative costs of getting a project up and running alone can run several hundred dollars, and paying the team for work on a single sprint can easily get into the low four figures. We don’t want to be held up from making progress on things while we wait for another payment from the client. Getting the entire budget up front eliminates these bottlenecks and allows us to get to work.

Beginning work without payment is dangerous.

From a cashflow perspective, not having money in the bank to pay your team puts you in a very bad position. By not taking a deposit, you’re using budget from previous projects to pay for the work product of the current one. That puts you in a perpetual cycle of “robbing Peter to pay Paul”, and, trust me, that’s a downward spiral you don’t want to ride. What if the current client doesn’t pay (for whatever reason)? You’ve delivered a work product and paid your team, and are left holding the debt. Some might say that’s the risk of running a business. I say mitigating risk (especially financial) is being smart about how you run your business.