How to not get financially burnt when a project breaks down.
It's never fun when a project comes to a premature end. It can happen for many reasons from communication problems to financial problems. But whatever the reason is, you're going to need a set process on how you deal with it if it ever happens.
As with many processes, there is no perfect single solution that suits everyone. How you handle this will depend on a few key factors, such as how you charge for the project (100% upfront, paid stages, long term payments, ongoing payments), as well as your own boundaries with what is "fair".
I use the word "fair" hesitantly as it is almost impossible to pinpoint what fair is, but it's the best word for it. We all have a personal connection with our own business terms and they can be controlled by comfort, desire or a mixture of both. Plus, the word "fair" might not always be perceived as equal for both parties involved. While it's imperative you protect yourself and your business, it's a pretty good idea to protect your clients also.
It's also "fair" (there's that word again) to presume that even when you have set terms that there will be situations where you may deviate from your terms, allowing for leniency depending on the situation.
Refunds vs No Refunds vs Kill Fees - what's right for me?
In situations where you charge 100% or larger sums like 50%, while it's not impossible, it can be hard to commit to (as well as sell) a full non-refund setup. That's because this arrangement is very high risk for the prospective client if the project or relationship breaks down early on.
One common way to combat this problem is the kill fee. This is used when you are billing the client for the work that you have been doing, and if the project needs to end, you charge them either a set fee or a percentage of the remainder of the project. The only negative that this technique can have is when the client is unable or unwilling to pay the kill fee (and even sometimes the outstanding invoices). While you might be safe with them signing a contract, you may find this an expensive and exhausting process.
A way around this is to simply charge in stages with NO REFUNDS, where you get paid for the stage of work you are about to start and you don't start the stage until the money clears. This means at any stage, worst-case scenario for you, you have been paid for the work you have done (if the project breaks down at the end of a stage before the new one starts). In many situations, you will be slightly in front.
Contract Contract Contract.
I can't emphasise enough the importance of a contract. When you find out what the best option is for you, you need to put it in writing, but even then, that is not enough. Something like your refund/kill fee policy should be something you briefly cover with a prospect before you take on a project. This will help ensure that you have as little push back as possible when you find yourself in the unfortunate situation of terminating a project.