Payment terms: milestones, acceptance and extra work

The price is agreed and work is underway. But when must the customer pay? That depends on what completes a milestone, how the result is checked and who can approve extra work. Those provisions need to work together from the start. The legal explanations are based on the law of England and Wales.

First, identify what the payment covers

Each milestone has its own payment trigger

What for

A defined result, such as an integration with a payment system.

When

After that milestone is checked against agreed acceptance criteria.

What to connect

The deliverable, its price, acceptance and the right to invoice separately.

If every payment depends on the final launch, dividing the work into milestones will not itself help.

A service period and a separate implementation

What for

A month of support, access to a service or an agreed number of hours.

When

In advance or in arrears. Separately decide whether a report and approval are required.

What to connect

The billing period, scope, invoice and consequences of late payment.

Implementation can be paid by milestone and support for the same system monthly. Approval of one should not inadvertently hold up payment for the other.

1. The milestone is complete, but invoicing waits

The schedule has three milestones, each with a price. Yet the payment clause says you may invoice only after the final launch. Completing the first two milestones does not necessarily trigger a separate payment under that contract.

1. AcceptedDesign$10,000
2. AcceptedIntegration$10,000
3. In progressLaunch$10,000

Invoice only after launch

The trigger has not occurred

$0

No interim invoice can be raised under this clause.

Invoice each accepted milestone

Two invoices can be raised

$20,000

They do not depend on completion of the launch.

The difference lies in the trigger, not the payment period.

We compare two payment clauses. Milestones 1 and 2 are accepted without objections; there are no advances or other conditions. This is not a calculation of every possible claim for breach or on termination.

Under English law, an unfinished milestone and completed but defective work are analysed differently. In Hoenig v Isaacs, the work was completed but defective. The court allowed recovery of the price less the cost of correcting the defects. That does not mean every completed part of an unfinished project must be paid separately: look to the contract for the payment trigger.

Resolve the issue in the contract: define each milestone, its price, the payment trigger and which defects may hold up payment. If launch depends on data or access from the customer, agree what happens if the customer is late providing it.

Acceptance needs an endpoint

What is checked

Specific functions and criteria in the scope, not simply “customer satisfaction”.

When the clock starts

When the customer receives the deliverable and everything needed to test it.

Which objections matter

Which defects are material, how they must be described and when they must be fixed.

What silence means

If no response should mean acceptance, say so expressly.

Production use can also be an agreed acceptance trigger. Distinguish it from testing and address rights relating to latent defects. Silence or use alone is no substitute for a clear contractual mechanism.

Where the English late-payment Act applies, a prolonged acceptance procedure is normally treated as completed 30 days after the relevant work is performed for the purpose of calculating statutory interest. If it finishes earlier, the actual date is used. The customer must have received notice of the debt amount no later than completion of the procedure. A longer period must be expressly agreed and must not be grossly unfair to the party awaiting payment (section 4(5A)–(5D)). This does not automatically accept the work under the contract: the rule concerns interest calculation only.

2. The scope grows, but the price stays the same

“Fix the export” could mean a defect in a promised feature or a new request. Without a clear distinction, a discussion about quality can turn into extra work with no agreed additional fee.

“Yes, we can do that” does not necessarily change the contract price. In Rock Advertising v MWB [2018] UKSC 24, the UK Supreme Court upheld agreed formalities for variations. Relying on an exception based on the other party’s conduct is risky: the informal agreement alone is not enough.

An email may nevertheless satisfy writing and signature requirements. In C&S Associates v Enterprise Insurance [2015] EWHC 3757 (Comm), an exchange of emails met a clause requiring variations in writing signed on behalf of both parties. Check the clause, the email’s content, the intention to authenticate it and the sender’s authority. The Law Commission’s 2019 report states that an electronic signature can be legally effective if that intention exists and any required formalities are met.

A practical approach: agree a workable change process, identify the authorised people and record the scope, additional fee and revised timing together.

3. Payment is overdue: interest and suspension

First check whether payment is actually due: have the invoice conditions been met, has the customer received it and has the payment period ended? If only part is disputed, the contract should explain what happens to the balance. The contract service page shows example edits.

Agree the rate and how interest accrues

Specify the amount on which interest accrues, the start date and the rate. Clarify whether it applies only to the debt or also to interest already accrued. Whether the clause is enforceable depends on the law governing the contract.

Debt, USD10,000

Annual rate12%

Days overdue30

$10,000 × 12% × 30 ÷ 365

$98.63interest for 30 days

12% is illustrative, not a universal rate. The debt is unchanged and the agreed calculation uses a 365-day basis, without interest on interest. Other late-payment amounts are excluded.

If the contract is governed by English law

The Late Payment of Commercial Debts (Interest) Act 1998 may provide interest in a commercial transaction. Choosing English law alone does not guarantee it. Under section 12, the Act does not apply if the contract has no significant connection with England and Wales and, without that choice, the applicable law would be that of a country outside the UK.

Where statutory interest applies, the rate is 8 percentage points above the relevant Bank of England reference rate. The interest rate Order uses the preceding 31 December rate for interest starting between January and June, or the preceding 30 June rate for interest starting between July and December. This is a separate rule, not the basis for the contractual 12% in the example above.

Under sections 8 and 9, a substantial contractual remedy can displace statutory interest. A lower rate is not enough on its own to reject it: compensation, deterrence and fairness matter. In Yuanda v WW Gear [2010] EWHC 720 (TCC), 0.5% over base failed the test in the circumstances of that contract.

At the other extreme, a contractual rate may be unenforceable as a penalty if its consequences are out of all proportion to the legitimate interest in timely payment. The approach to penalty clauses is set out in Cavendish v Makdessi [2015] UKSC 67.

Advances have a separate rule: under section 11 and section 4, statutory interest generally starts on the day after performance of the obligation to which the advance relates. Agree the consequences of a late advance expressly. Section 5A also provides a fixed sum and reasonable recovery costs to the extent they exceed it. Those are calculated separately from interest.

As at 20 October 2026, the Commercial Payments Bill is still before Parliament. It proposes to prevent contractual replacement of statutory interest in new contracts within the late-payment Act’s scope. These changes are not yet in force; their commencement date is to be appointed separately.

Can you stop work?

Under English law, non-payment does not itself generally permit you to suspend performance while keeping the contract alive. The court explains why in Energy Works v MW High Tech Projects [2022] EWHC 3275 (TCC), paragraphs 75–81. Provide an express suspension right: when it arises, how notice is given and how long the customer has to pay. Without one, stopping work may itself be a breach, and a serious breach can allow the customer to terminate.

1. 01An undisputed amount is overdue

   The payment trigger and due date have been checked.

2. 02The customer receives notice

   At the address and by the method specified in the contract.

3. 035 working days pass

   The agreed period after receipt. The debt remains unpaid.

4. 04The specified work is suspended

   Only to the extent the clause permits.

Separately address data access, preservation of the work, resumption and timetable adjustments. Five working days is only an example.

Do not confuse suspension with two other situations. If an advance is a condition of starting a new milestone, that duty may not yet have arisen. Termination for a serious breach needs separate assessment. The statutory suspension right for certain construction contracts under section 112 of the 1996 Act is not a general software development or support rule.

Before signing

• Every payment has an identifiable trigger: a milestone, service period or advance.
• Acceptance criteria and the consequences of objections are agreed.
• A new request is not automatically a defect. It is clear who can change the price and timing, and how.
• The interest rate has been checked against both the contract and the law.
• Suspension has defined grounds, notice requirements and a process for restarting work.

For the rest of the contract, see what to check when an overseas company sends you a contract. If rights in the deliverables pass only on payment, see also who owns the features a customer pays you to build.

Need these provisions to work together?

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Sources

• Hoenig v Isaacs [1952] EWCA Civ 6: substantial performance and payment conditions.
• Rock Advertising v MWB [2018] UKSC 24, paragraphs 10, 12, 15–17: contractual variation formalities.
• Law Commission: Electronic execution of documents: electronic signatures and formalities.
• C&S Associates UK Ltd v Enterprise Insurance Co plc [2015] EWHC 3757 (Comm), paragraphs 122–124: variation by email exchange.
• Late Payment of Commercial Debts (Interest) Act 1998, sections 1, 4, 5A, 8, 9, 11 and 12: simple interest, acceptance periods, fixed sums, contractual remedies, advances and international transactions.
• Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), paragraphs 90–94: a low contractual rate replaced by statutory interest.
• Cavendish Square Holding v Makdessi [2015] UKSC 67: penalty clauses.
• SI 2002/1675, article 4: uplift and reference rate date. GOV.UK user guide (2014): interest calculation.
• Energy Works [2022] EWHC 3275 (TCC), paragraphs 75–81: suspension and termination.
• Housing Grants, Construction and Regeneration Act 1996, section 112: the special construction rule.

This article concerns business-to-business contracts governed by the law of England and Wales. The situations and figures are illustrative. Terms for a particular transaction depend on its circumstances.