Are prepayments worthwhile?

Taisiia Mliuzan
07 February 2020

In IT recruitment the success-based payment model is the most popular. Considering that IT roles are filled fairly quickly and the high amount of competition between agencies, clients are mostly used to this payment model. Sometimes there may even be a split fee option: at the candidate’s first workday and after he/she passes probation.

However, there are companies that are trying to reduce the risk of time wasting without generating any revenue by asking for prepayments of $1000-$1500 per vacancy, or 20-30% of the estimated fee, etc.

What should you be paying attention to when choosing a prepayment model, and when working out the details with the lawyers before inserting such a model into the contract?

◊  Outline clearly what the prepayment covers:

– research and help in writing the content for the vacancy, PR-campaign;
– short-listed candidates (describe who these individuals would be the minimum number of them);
– the candidates, who successfully passed a certain number of client interviews (the actual number of people);
– other options.

Conditions in case a prepayment is made, but you hadn’t delivered on the terms agreed:

– additional recruitment services for the next available vacancy without any additional prepayment;
– specific amount of a refund within a specific period, etc.;
– additional separate services in your area of expertise for the amount equal to the prepayment.

Is anything owed to a client if they filled the vacancy with their own resources/with the help of other contractors after making a prepayment?
What are the options in case the vacancy is filled as a result of organizational changes within a company?

We try to work on terms, which include a prepayment only when it comes to C-level positions and in those cases, when a client admits that they do not know much about the job market, or if the requirements of a role may change during the search. Currently, 10% of vacancies in our portfolio are those, which included a prepayment, and we have never had a case where the refund of such a prepayment was necessary. From the experience of our colleagues and ourselves at CNA International IT, we came to the conclusion that the high reputational risks and the negative perception that most clients have when it comes to making a prepayment may have a much worse impact on our goodwill than any positives you could take out of receiving payments at the very start of a project. Due to a high amount of inbound inquiries and a high percentage of success when we take on a project, this framework works well even without obligatory prepayments.

◊ Nevertheless, we believe, the best solution is a fixed fee of up to $1500 for any vacancy. This covers:

– creating a message to the job market;
– the provision of initial market feedback and its reaction to the company in question;
– provision of information regarding the status of the first 100-200 profiles, which had been processed.

A ​prepayment is satisfying and, on the one hand, helps involving the client to actively take part in the recruitment process, while on the other hand, it mitigates your risks at the start of the project.
The downside is the possibility of a negative reaction that can spread within the post-soviet region’s realities, mostly through exaggerated word-of-mouth comments whenever a client loses money on a service, which hadn’t been provided in full as the client declined to accept all of the terms of the contract after making the prepayment and after signing the contract.

◊ Clear up any disputable clauses and avoid ambiguous wording in contracts, seek the assistance of a lawyer for tips.:

Make sure to formalize the delivery of a service by issuing a certificate of completion after receiving a prepayment if you work through a local entity

Seek clarification from finance experts on what foreign exchange controls are and how to act in case you need to transfer money to a different country.

If there is an option of using a subsidiary of your company registered in the EU, the U.S., or another nation with simpler regulations around financial operations in order to sign agreements that include a prepayment, make sure to take advantage of such an option.

We are certain that as experience is gained and the necessary attention is paid to the phrasing of terms acceptable for you, it is possible to avoid multiple misunderstandings with your clients and, in turn, poor results.