There are a great many myths surrounding the ability of a contractor to charge the debtor interest on overdue claims/invoices.
The truth is that most contractors do it incorrectly, or not in keeping with the contract, or do it when there is no entitlement to do so. But it also remains true that many contracts provide for interest charges and if you’re not paid on time, you can charge interest.
So what can’t you do in relation to interest charges?
- You can’t just stick an interest charge on your invoice unannounced
- You can’t have a little clause on the invoice to create your entitlement
- You can’t have a clause about interest as part of your terms and conditions that were never provided to the client
- You can’t have a crazy rate of interest
- You need to avoid monthly compounding interest
In points 1-3 above, the central requirement is that your client be made aware of the interest provisions of any agreement and that they sign the agreement. Too many contractors have no written agreement and then decide to whack on an interest charge when they are not getting paid on time. You can’t do that. Likewise you can’t seek to impose interest charges once you’re invoicing. By then it’s too late. Either it’s clearly agreed upfront or you can’t do it.
In points 4-5 above, the central requirement is that if you can charge interest, the rate cannot be a penalty or ‘punishing’ amount. I realise that for many the whole point of charging interest is to punish your debtor for paying late (or not at all!) but you’ll run the risk of having an unenforceable charge.
We once won an adjudication which included an interest charge of 10 per cent per month compounding, and the interest claim came to over $100,000. The rate was clearly noted on the contract and the client had initialled and signed off on it, so it could be claimed.
But it could not be enforced. The debtor took the matter to the Supreme Court and while the court decided the work had to be paid for, the interest rate was found to be ‘unconscionable’ and in breach of various provisions of the Trade Practices Act.
The rule here is to use a reasonable rate on a per annum basis. A good rate to use is the one used by the Supreme Courts around Australia for judgment debt; currently around 8.5 per cent, depending on which state you’re in.
If you’ve got those boxes ticked, then you need to get two dates really clear. The first date to nail down is the day when interest starts to accrue. That is the day after the due date for payment. After all, you can’t charge interest until the money is actually overdue. Assuming you have 30-day terms then on day 31, interest starts.
The second date to nail down is easier. That is the date on which you invoice or the reference date of your claim. Ultimately, interest will accrue up until the day you’re paid. In each claim, you can update the total interest bill as you go.
Finally, when you add interest to your claim, make it a separate line item and include your full calculations and the dates between which you are charging interest. Also refer to the contract clause that provides the entitlement to charge interest. A number on its own means nothing. You need to show how you got to the interest amount.
But should you even claim interest?
Doesn’t it just antagonise your client and make getting paid for the actual work much harder? This is a valid question.
From what I see, the answer lies in your particular situation, for while the letter of the contract means you can ask for interest, many contractors will feel that they may as well kiss their money goodbye if interest is charged.
On the other hand, some payment disputes get to that point where the relationship is so broken down that there is nothing to lose by charging interest on top of the value of the work and going your hardest for it.