From Eric Miller,
Your Guide to Graphic Design.
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Spec work (short for speculative) is any job for which the client expects to see examples or a finished product before agreeing to pay a fee.

A.

Why to Avoid Spec

This type of work is widely considered undesirable and immoral by the graphic design community, as it requires the designer to commit time and resources to a project with the chance of getting nothing in return. While a client may feel they don’t want to invest money until seeing some work, designers should not have to prove their worth to get a job. Instead, clients should choose a designer based on their portfolio and experience and commit to building a working relationship with him or her. Only then will both the client and designer see the best results.

Why Spec is Bad for the Client, Too

Spec work doesn’t just hurt the designer. If potential clients are asking one or several designers to show work, they are immediately establishing a negative relationship. Instead of building a long lasting relationship with a single designer, they are often asking several to submit work with little contact, taking a chance that the right design will be presented.

Design Contests

Design contests are one of the most common forms of spec. A company will put out a request for a design, inviting anyone and everyone to submit work. Often hundreds of designers will submit a design, but only the chosen work, the winner, will be paid. Designers may see this as a great chance to design a logo for a company and make some money… if they win. However, this is really an opportunity for the client to get a limitless number of designs and only pay for one. Instead, clients should hire a designer, clearly communicate their goals, and have the designer present several options after a contract is signed.

How to Avoid Spec

Spec work can be avoided by simply saying you won’t do it. Often, clients may not realize or consider the negative aspects of it, so educating them is also helpful.