Escrow Services, Work Tracking Systems and Payment Guarantees
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The trust problem outlined above inevitably boils down to a classic “you go first” dilemma: whoever goes first must trust the other party to follow through with their end of the bargain. If the contractor does the work in advance, he/she must trust the client to pay after the work is completed; if the client goes first (via an advance payment) he/she must hope that the freelancer won’t just take the money and run.
Escrow breaks this deadlock through the involvement of a third party that is neutral to the transaction. When escrow is used, the client makes a payment in advance, but not to the freelancer’s account. Instead, the funds are held by the escrow agent while the work is performed. When the work is done, the funds are released by the escrow agent to the freelancer.
The advantages of this are obvious; in essence, it allows both client and contractor to “go first” while eliminating much of the risk. The contractor does the work before being paid, but he/she knows the funds are there when the work is completed. The client pays before the work is done, but knows the contractor can’t take off with the funds, and that they can be returned safely if the contractor flakes.
Because of the value this represents, most of the larger freelancing sites do offer an escrow service, usually run by the site itself. In fact, there’s only one large freelancing marketplace where no escrow is supported: oDesk. This is partly because their site is largely oriented towards hourly work, but it’s a significant impediment to flat rate projects.
It’s worth pointing out that escrow is not a panacea. It is still possible for problems to arise, most notably if the client and contractor cannot agree on what constitutes properly completed work. In this situation, the site’s dispute resolution or arbitration system may come into play. Fortunately, these situations are relatively rare, and escrow works well most of the time.
Note that some sites charge an additional fee for using their escrow service.
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Last Site Update: October 21, 2011
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