This is really where the rubber hits the road.
You need to be hard on the payment issue. If you are soft, then you go to the bottom of the pile. This is where firstly, you need the right depth of relationship to be able to harass the client into paying and if you don’t have that level of relationship then you need to be unmoving.
But make sure that what you are asking for is essential to their business – if you have no leverage then when you get hard you run the risk of losing the client.
Being hard means that you do not give in to the temptation to hand over work without the payment being arranged. Anyone who has worked in China for any length of time can tell you many horror stories where they have lost the chance for payment by losing the ‘moment of power’, as Louisa Relia from Seed Design Collaborative describes:
I was working on a big, beautiful spa resort there. A production team in Shanghai was doing the work with us. We had a big payment promised, but we were holding back on the CAD files and electronic drawings and didn’t give them the whole cow while waiting for the milk money. The engineer called the head of my production team and said, “Look, we really need to get the CAD files so we can figure out the basement parking floor for the engineering plan.” The fellow who was working for me sent him the files and all of our drawings.
What we didn’t realize was that the engineer was the grandfather of some relative of the client.
The client got the files and then disappeared.
We lost all of that money with that silly mistake.
There are courts in China to recover debt – and there are definitely many cases of foreigners getting their money through the courts – but like anywhere else it takes time, and you can end up spending too much capital on chasing it for the risk that the judge might not see it in your favor.
The time that having a contract is worthwhile is when there is a dispute about money – at that point where the client is simply not paying then a written contract that has clearly stated the deliverables in a clear and unambiguous way is essential for getting the lawsuit off the ground to try and recover your money.
You must make sure you have a strict contract in China that you can bring out in any dispute – and it must be unequivocal and clear.
Contracts are essential:
We set up contracts. We don’t do any work for free. We get twenty percent up front before starting any work, which protects us, regardless. If you do three months of work per stage, and then the client wants to fire you because he doesn’t like you, you’ve actually got the money in the bank already. Those are our contract conditions. That works for us Some people say, “Oh, the Chinese don’t have a legal system,” but they do. They have courts. And every project has to have a contract. That’s law in China. You need to have a contract, and you need to get a tax invoice to be paid. And you have to register every contract, which is actually very good. Contractually, having a lawyer really helped.
Most Chinese companies – particularly the smaller ones – will not let any work go out of their hands unless it is paid for in full – watermarks, password protected files and other preventative measures are used all the time in China before payment so don’t be afraid to use these measures if you are not sure of getting paid. Because once you lose that moment of power then you have lost the money.
Be relentless in chasing for the payments – the accounting department in my own company goes and sits at the doors of companies that owe money to us if we are uncertain of getting the money through.
But also be aware of the face issue – be discreet, do not under any circumstances be aggressive, allow discussion and allow for payment plans if required.
The concept of a ‘guanxi’ harness where you have developed powerful relationships that can be called on to help resolve issues is a dynamic which comes in very handy – if you have firm independent ‘guanxi’ that the person with whom you are dealing would be embarrassed if you were to mention delinquent accounts to, then the harness is in place and you can be much more relaxed about being paid.
Do remember to build in the extra amount for the final payment into the up-front fees – there is another ‘face’ issue here – and I am going to say something that might be seen a little bit controversial – there is still a lot of ‘zero sum’ thinking in China – where if you win, I lose and vice versa – so not paying the last payment is a way to say – I’ve won.
Because this is known most people in China have already added on this extra so when it is taken off then the amount is the same – so in a way it’s not actually zero sum but win/win – just hidden.
And finally, accounting departments in China are very powerful – there is always a hard face person sitting there who is brilliant at getting costs down, delaying payments, reducing amounts and generally making people’s lives difficult. The actual clients that you are working with might not even be aware what is going on – so sometimes it is appropriate to invite the client out for a meal and gentle mention that things are slow in the payment department and can he help.
10 Essential Strategies to Safeguard Payment:
- Maintain very close and mutually beneficial relationships with your client. A close relationship is the best way to get paid for work, particularly if you have on-going business.
- Be prepared to wait for payment – even as long as a year – the client may simply be juggling too many monetary balls at the same time.
- Ensure you have a properly constituted contract for the work and that the contract is registered with the local court as a valid contract.
- Do not hand over finished work until payment has been arranged if you are at all unsure about payment.
- Insist on regular progress payments.
- Build in a buffer of approximately 10% to cover the final 10% payment – which is usually the one at risk of not being paid.
- Try and develop a relationship with the accounting department – they are often the ones who hold up payments for their own reasons.
- Make it easy for the client to pay you – by having a legal local company registration that is able to issue ‘fa piaos’ – formal tax receipts. Either a Wholly Owned Foreign Entity or a local agent can provide this.
- If you are insisting on payment to be made by transfer out of China (NOT advised) check in advance that the company has the permissions and the means to make these payments.
- Be seen to be reasonable and understanding and retain an air of calmness.
Bear in mind some important ‘DON’TS’ in getting paid:
- Don’t get angry and have an argument – this will only trigger a determination not to pay.
- Don’t criticize the person in charge – especially publicly or in front of staff – over non-payment. In a shame based ‘face’ culture, this is tantamount to declaring war.
- Don’t threaten court action unless you not only mean it but have investigated the likely success of the success of the action and have got a concrete arrangement for taking the case to court.
- Don’t say that you are bringing in the local foreign consulate to put pressure on the client – this is almost 100% guaranteed to fail.
- Don’t send juniors to try and negotiate – if you are the person in charge then go and negotiate yourself.