Milestone payments are a smart way of breaking down the work that you source from independent contractors, and adding clarity, trust and communication to your relationship.
If you’ve never used milestone payments before, here’s what you need to know.
This post is part of our guide on how to pay contractors.
What is a Milestone Payment?
Using milestone payments means breaking down a whole task into stages, and offering a single payment for a specific deliverable or milestone as a part of a whole project.
It’s important to clearly define what each of the milestones of a project are, and set terms. These will include:
Due date: When should the milestone be completed by? This helps to set expectations around pace of work, and encourages the independent contractor to be transparent about their progress. As the company, make sure to give yourself a few extra days in case you need amendments to the work, or in case the freelancer needs an extension.
Deliverables: What is included in this stage of the project? This is where you will lay out what expectations you have around the work that will be completed. In some cases, there might be no deliverables to define for a specific milestone, for example if the milestone is a deposit on work to be done.
Amount: How much are you paying the independent contractor for this milestone? This could be written as a percentage of the overall cost or as a clear sum of money. For example, you might pay 25% after half of the project is complete, and then the remaining 75% on completion. It is advised to agree on the payment method in advance as it maybe deduct some percentage of the total amount paid to the freelancer.
Why Define Milestone Payments At All?
Working with independent contractors often means aligning your company with their terms. For example, many freelancers will not work with a company unless they receive a deposit before they begin. Despite this, a lot of companies just don’t have the payment processes in place to offer multiple staggered payments for a single project.
The ability to offer milestone payments allows you to easily work with any independent contractor, no matter what their terms might be.
Defining milestones also removes a lot of miscommunication. By breaking down the project into smaller stages, both parties are clear on the scope of the work.
Let’s say you hire a consultant to perform a six-month cybersecurity strategy project for your company. You’re expecting a detailed inventory and risk assessment, followed by a presentation of suggested mitigation and preventive measures, and then the implementation of the agreed on strategies. However, unknown to you, the consultant generally combines stage one and two into the same deliverable. Without milestones laid out, this can cause frustration and misalignment.
By creating set milestones, and attaching payments to each stage, both the company and the independent contractor is clear on the process and terms of the project.
Milestone payments are already useful for accounting purposes. If you hire a website designer to create your company website, it may take 6-9 months to complete the project.
By creating milestone payments, the budget for this contractor will not need to come out of the same quarter or fiscal year, and can instead be spread out more intelligently. In contrast, without milestone payments, you may find that you need to spend your entire Marketing budget on a single independent contractor or project that was mostly completed months earlier.
Common Milestone Payments for Independent Contractors
There are many different ways to structure or set up milestone payments. Here are some of the most common.
Deposit or up-front payment
Especially for a high value project, an independent contractor may need to ask for a percentage of the payment up front. This may cover expenses such as laying out for equipment, or could be to pay subcontractors that they need to source to begin the task. For example, if you hire an independent contractor to build your company a mobile app, they may need to hire additional developers, engineers, or subject matter experts.
A deposit also gives independent contractors peace of mind, especially if they haven’t worked with you in the past. Many freelancers have been burned by companies who take their completed work and then refuse to pay, so an upfront payment milestone can provide confidence in the relationship.
On schedule for large-scale project
If a project is going to last for many months, or if it will be worth a large sum of money, milestones can be set up at a regular cadence. This could be by date, for example on the first of the month, or every two weeks on a Friday. In this situation, an independent contractor would be paid for however many hours’ worth of work they have completed by this date. It could also be scheduled for a set number of hours, so that when 20 or 40 hours’ of work is complete, this triggers a milestone which can be paid immediately.
This approach is useful if you’re paying your independent contractors an hourly rate. For a project price, it makes more sense to establish specific deliverables or milestones ahead of time, and how much each will be worth in terms of payment. These could be:
- Deposit: A set percentage ahead of time for upfront costs or to show goodwill.
- Presentation: A payment on presenting initial concepts, strategy, or outline.
- Delivery: The majority of the funds, on receipt of the completed project.
- Additional: Any additional payments for editing, expanded scope, or expenses.
Long-term contract for repeated work
In some cases, you will sign a long-term contract with an independent freelancer for repeated work for your company. Unlike an employee, they will still work for other companies, and they still have control over whether they take on projects or not. However, you have established an ongoing relationship and there is the assumption of continued work, for example SEO or writing services which are continuous each month.
In this case, you can set monthly milestones where the independent contractor will request payment for the work they have completed during that time period, creating a simple and repeatable process which makes it easier for the company and the worker to track projects and their completion.
Think You Don’t Need Milestones? Think Again
No matter the way you work with independent contractors, milestones can simplify payments, add trust and communication between the company and its workers, and create a transparent and clear workflow for all ad-hoc and non-payroll projects.
If you’re still using your traditional payroll processes to pay independent contractors on your own terms, schedule a demo of the Stoke Freelance Management System here.