To Draft A Good Consulting Services Agreement You May Require A Qualified Attorney. But Do You Know Enough To Judge If Your Attorney’s Doing A Good Job?
A lot of consulting entrepreneurs believe that drafting a good contract and agreement for consulting services is an attorney’s job. They get themselves the best attorney they can afford, and then take their eyes off the contract.
This attitude towards outsourcing legal help doesn’t work. You have to know enough about agreement drafting to at least know if your attorney is on the right lines to protect you and your client. Also, without your help, most of the critical parts of the draft cannot be filled.
Contracts and agreements need special care when you consider what will happen between you and your client if things go terribly wrong. The contract will help to either resuscitate the relationship or help the parties to part ways – but do so without bad blood or erosion of brand equity.
At Solohacks Academy, we believe you should always draft a consulting services agreement with as much detail as you can include, so that all contingencies are factored in as best as you can anticipate them. Try to brainstorm and cover as many ups and downs as you can think of. That is your best insurance for the future.
1. Be careful when naming parties and their credentials involved in the agreement
This first part of a Consulting Services Agreement sounds very straightforward. Your agreement should start by listing out all parties involved in the contract, including their official names and locations.
Now, think through this one. It is deceptively simple, but it can have some serious ramifications in the future if you don’t apply your mind to it. Here are some very important questions to ask yourself about adding yourself as one party, and seeing who you will be adding as your other party:
- Do you want to be added as yourself (the person, in your individual capacity) … or with your name and job title (as the person responsible for carrying out the agreement in your official capacity) … or do you want to add your consulting business as the party (with you as its official) … or do you want to add the name of the parent company of your consulting business (many people have a holding company name that’s different from the consulting business name, and owns the consulting business).
- All of the same four options apply also for the name of the other party, which could be your consulting client. In addition, if your client is a large company, see which division of it is your exact client and responsible for the agreement.
Why does it matter so much? Why must you pay such acute attention to the naming of the parties? This is because the eventual liability (legally speaking) of an individual acting in an individual capacity can be a whole lot different from an individual working as an official of a business. Again, a business may have a different set of responsibilities (as listed in its memorandum at the time of inception) from its parent holding company. A geographical or functional branch of a company that enters into your agreement may have its roles and liabilities circumscribed by its geography or state rules or its departmental functions as prescribed by its company rules.
You don’t want someone wriggling out of the contract or agreement later saying, “We signed the agreement, but we didn’t have a full mandate to do so because of prior regulations within our business.”
Always make sure you know how you are supposed to enter the agreement from your side, and what the implications could be depending on who enters the agreement from the client’s side.
2. List the roles, responsibilities, contributions due from both consultant and client
The second item to watch out for on your Consulting Services Agreement is the listing of all services you are going to offer to the client. The list is important and should be as comprehensive and clear as possible, with every detail spelled out. Even more important is the description of every service, and what you mean by it exactly.
This listing issue may sound very simple at first glance, but it’s critical. Why? Because you have to ensure that you lucidly make the separation between the many types of services you are proposing to offer. You may be offering a one-time project, or an ongoing one with or without a time limit. The way you name your service may not give the client the full idea, and he may think it to be altogether something different.
For example, if your agreement lists “One-off mentoring services over a 30 minute Skype call” as one of your items to be delivered, you will have to see if the word “mentoring” needs to be better described. The client may think he can ask you for any kind of help. Whereas, you may be thinking of certain limits to what you will include in your “mentoring”. If you leave it as just “mentoring”, the scope of what you will do exactly is not clear. Everyone has a different picture of what mentoring may include. You’d be surprised how the simplest of English words can connote different things to different people.
If you don’t differentiate and elaborately articulate your services, you can run into difficulties later, if the client expects and demands extra work, or claims not to have fully understood what he was agreeing to. On the other hand, if you spell everything out in your contract, you can save yourself from wrong client expectations and resultant bad blood.
Even as you clarify every little bit of what you can deliver, make it abundantly clear what the client has to contribute from his side. It may be a list of materials, or it could be the allocation of a specific amount time, at a specific periodicity, to the project discussions. It could be the need for accurate, reliable material that is up-to-date.
How often have we consultants suffered because our deadlines were dependent on clients meeting their deadlines with due material and physical presence? Let the agreement say it out loud and clear that missed deadlines or sub-optimal inputs from the client will delay the project and your ability to invoice the client duly – and if this happens repeatedly (for example, more than thrice) you will bill the client for delays affecting your cash flow.
3. Be clear about payment triggers, apportionment by phases, and penalties for delay
When listing out your deliverables on a project (as well as those of the client), it is usual to break up the project into clear phases, along with payment terms, the total cost of the project, and the schedules for payment tranches, as phases of the work get done.
Usually, there is always a project-starter upfront payment demanded upon the signing of the agreement. The reason for this payment is because the consultant would like to be sure he can allocate his time to this client (and not to another one) because the commitment to the project has been firmed up with both the agreement signing and the upfront money.
The upfront money could be a percentage of the total costs of the project. Consultants like to keep this lower, say, about 30% of total costs, if they know the client well from previous projects. When dealing with totally new clients whose payment habits you are not sure of, it’s not unreasonable for consultants to be charging 50% of the total costs upfront.
The subsequent tranches of payments can be triggered by sign-offs of completion of the phases of the project. At all times, let your agreement insist on a phase-completion sign-off document along with the payment due for each phase – so that the client does not later crib that the payment was made despite the work not being completely satisfactory or fully delivered in each phase.
There are two ways to always ensure clients pay due amounts on time:
- You can penalize clients for delays, by saying delays over a certain time limit will attract extra charges.
- You can incentivize the client for timely payment by saying payments made within two-three days of an invoice being raised can avail a discount of 5% (or whatever is convenient and attractive).
Which works better – the carrot or the stick? It’s hard to say, but why not include both – the incentive for early payment, and the penalty for delays?
At the end of the project, you may also like to include the idea that the rights to the work (if any) or other legal handovers of the project and its components will be done only after the last payment is made. In other words, the work done becomes the sole property of the client only after the final payment.
4. Set out the timeline details, the deadlines, and termination processes for both parties
Most consultants don’t realize this, but projects should have clearly stated start dates and end dates. The start date should usually be mentioned relative to the signing date of the agreement, like this: “The project shall start from the date of signing the agreement and payment of upfront fees.” If you put a firm date on it like “January 22, 2021” there is no guarantee that the agreement may get signed by then or the upfront fees will be paid before that date.
Likewise, if the project has a clear end date, it prevents a nasty problem many consultants have of “project creep”. This is the situation where the client keeps asking for a bit more, and then a bit more, before signing off the project. Most often these project creep requests are so small it’s hard to say “No” to them. Yet they could become a reason for inordinate delays in the final project delivery and payments.
A classic case of project creep would be, “Can you please ensure my whole team gets the final hard copies of the deliverables?” or “Can we have a trial period of the project before the sign-off – just a few days …” etc. The thing to do is to anticipate that clients will try to be elastic with their expectations to see how much more they can inveigle out of you for the money they are paying. Putting the end date on the project will forestall this. For example, you can say “The project shall end within 4 calendar months of the start date, and not accommodate any further small requests for project additions, thereafter.”
If the project is a large one with many phases and payment deadlines, you may like to add a similar rider to the end stage of every phase – and say that the phase has to end by a certain date, and no further creeping will be allowed. Any extra demands shall be estimated and submitted for approval and signing, before undertaking them – and they will not be allowed to eat into the time allocated for the initial project. Extra additions will be treated as subsidiary projects with their own schedules and payment deadlines.
The termination clause of an agreement is also important. It’s common to put into your agreement that if either side wants to cancel the agreement they will have to give each other one month’s notice in writing (or whatever length of time seems appropriate to both parties). In lieu of notice, if either of the parties wishes to quit immediately there will be a cost payable equivalent to the one month’s notice rescinded (mention the amount). You should also state that after termination, all confidentialities of the project will be maintained by both parties, and mention which materials should be handed over by both to each other, as a mark of termination of the agreement.
What else will be involved in termination? Will refunds be involved? And what about money that hasn’t been paid yet? These also need to be thought through … and worked into the agreement.
One other important thing here is that sometimes consultants and clients like to state in the agreement that neither party may work with a competitor during a cooling-off period of “x” months after a project. Would the cooling-off period still hold in the case of premature termination? You have to think over it, and include the decision in the agreement.
5. State how each party may declare ownership and enforce limits on proprietary materials
You have to take extreme care when you are stating what materials will be exchanged by both parties to the Consulting Services Agreement. A lot of soured relationships always see the parties fighting over what they claim to be “their material” and sometimes the understanding of what belongs to whom is very nebulous.
If materials are proprietary (and carry a patent, trademark, registered copyright, or legal ownership documents) there would not be as much of a problem. But occasionally, even in such cases, there have been known to be litigations. For instance, a client may give a consultant his materials to work with but then claim that he never gave the consultant the right to tamper with his proprietary materials. What includes the right to “utilize and apply the proprietary materials to the project” versus what constitutes “tampering with the propriety materials” becomes a grey area.
If your deliverables during the project include created materials that will be transferred from your ownership to client ownership, you should specifically list these, and mention how the transfer of ownership will be deemed legal and complete.
In the course of a consulting project, many proprietary, or even sensitive, information pieces will often be shared by both parties with each other. Sometimes both parties may feel comfortable with a Non-Disclosure Agreement (NDA), additional to the Consulting Services Agreement.
Aside from the materials and their ownership, most clients also can have very strange notions about their ownership of you (the consultant) and your time during a consulting project. Remember, a consulting agreement does not mean you are part of the materials a client can call his own during a project. There is a distinction between “materials” and “people” which many clients don’t quite see – or choose to see. You have to explicitly state in your agreement that you will not be 24×7 dedicated exclusively to, or available, to one client alone (unless the agreement says so), and clients cannot cross some red lines. For example, they may feel it’s okay to call you at 10 pm in the night, unless you expressly say your working hours and working days are such and such.
I live in a timezone exactly 12 hours away from the US, where a lot of my clients are situated – and I know how frequently they call during “their office hours” not worrying about “my office hours”. I have solved the problem somewhat by specifying certain times that are somewhat convenient to both parties (such as between 9 am-11 am US-EST, which is usually 7:30 pm-9:30 pm for me in India). In these days of global consulting agreements, you have to let the client know what your timezone and available hours are – and also what to do if there’s an emergency.
6. Clarify terms for additional services from the consultant and limitations of liability
Theer are two kinds of protection for you, the consultant, that your Consulting Services Agreement should provide. Here they are:
There may be sudden changes in requirements calling for a complete redraft of an agreement. You may think this is rare, but I have seen it happen so often that I have almost come to accept this as standard practice by clients. For example, when there is an internal resignation of the project owner from the client’s side, or an internal reshuffle of personnel, the new people on the job invariably will want to change everything the predecessor agreed to. For the consultant, it seldom is just another guy at the other end of the project. The new guy will arrive with his own goals, emotional baggage, his peculiarities, and his need to be seen as better than the previous guy.
In such cases, let your agreement anticipate such an eventuality. State clearly that any “serious changes” of the agreement details, caused by a change of client personnel in charge of the project, will entail immediate stoppage of work on the project, and a redraft of the agreement and subsequent re-approvals. The costs of all this will also have to borne by the client. Make sure you also clarify what would be considered as “serious changes” to the original agreement details.
You also have to protect yourself as a consultant with the “Limitation of Liability” clause. This, in simple English, means that the client can’t try and push you around with frivolous lawsuits. Some times, these lawsuits are genuine, resulting from aggrieved or sulking clients – but sometimes these kinds of silly lawsuits are also a way to subtly apply some “soft blackmail” if you are non-cooperative on something else.
I remember a time when a client was wanting me to do some small extra work for him at the end of a project, which I wouldn’t agree to without additional compensation. To get me to cooperate he tried sending me a legal notice for non-return of some sensitive documents – but thankfully, I had the paperwork to prove I had already done so. I got an understanding of what was going on when I realized the client was on one side sending this legal notice, and on the other side talking about extra work. It was beginning to sound like a quid pro quo – like, “You agree to the extra work and I’ll drop the legal notice for the materials.”
Even though I had the paperwork to save myself from his silly notice, it was all a time-consulting cat-and-mouse game – and my time was money. It was a nuisance I could have done without, had I ensured that the “Limitation of Liability” clause was more watertight. You need an attorney to really protect you on this one – preferably one who understands your industry, your client’s industry, and the less-than-good practices prevalent in these industries.
7. Spell out communication formats and systems to be used, and processes for disputes
Many consultants and their attorneys tend to leave out the mode of communication to be followed for the consulting project when drafting the agreement. This usually follows the reasoning that “Everyone knows how we communicate nowadays – by phone, or online meetings, or emails, or old-style letters by snail-mail.”
In fact, being casual about the mode of communication is what can lead to horrible tangles in a project. Even those who are particular to include “what” should be communicated in a project, forget to include “how” it should be communicated.
The problem is that the workstyles and culture of the consultant (who can be a one-man decision-maker solopreneur) may be very different from the workstyles and culture of client businesses (where hierarchies of people may need to be kept in the loop on projects). The mode of communication must be such that all who matter to the project must be able to communicate to-and-fro easily.
Further, clients may have their own internal communication patterns, and if the consultant doesn’t match that pattern, the whole project may lose a lot of time, and get into a tangled mess of miscommunications.
For all these reasons do spell out in your Consulting Services Agreement, what would be the preferred mode of communication. Especially with respect to final decisions on any matter, make sure they are in a form of communication that can stand in a court of law as legally binding. In some countries, for example, they still insist on hard copies as evidence of communication, whereas in some countries digital communication passes the courts.
Another area that needs clear articulation in your Consulting Services Agreement is how disputes should be handled, should they arise. If they are to be arbitrated, then by whom? What process of initial dispute-resolution, or later escalated arbitration, needs to be followed? Who will bear the costs of this? The more you write it all down, the fewer disputes there will be – that’s one of Murphy’s Laws.
Consultants need to beware of two things with respect to disputes:
- Disputes on agreements are always an expensive burden. Some unscrupulous clients may actually use the “disputes clause” to their advantage. They may make the cost of dispute-resolution so high by dragging it out, that most lone consultants wouldn’t have the financial muscle for the fight. They would thus just give in to “settling the dispute” to their own disadvantage. So make sure the cost of the dispute-resolution is reasonable to the size of the project and can only be prolonged upto a limit.
- Some consultants also add an extra sentence that says if disputes stretch out for too long and it results in loss of other income for them from other clients, they will have to be compensated for lost time and money in pursuit of the payment owed to them. This clause is generally added by lone consultants who are able to tell their large clients that they need an even playing field, and they as individuals cannot bear the costs of disputes prolonged naturally (or deliberately), and therefore need this clause for extra protection.
8. Ensure your attorney has included the extra points of “legalese” every agreement needs
Every Consulting Services Agreement needs five small clauses of “legalese” that your attorney will normally include. It helps to know exactly what these mean. They are as follows:
- No Guarantee Clause: Here the agreement generally mentions that no specific guarantee of performance and results can be given, as many factors could affect the consulting project which are outside the control of consultant or client.
- Entire Agreement Clause: This clause usually states that unless both parties sign, the agreement is not valid. And if there are amendments to the agreement, both parties must sign again.
- Severability Clause: The idea behind this clause is that even if one part of the agreement is held to be illegal, invalid or unenforceable, the rest of the agreement still holds.
- Headings Clause: Here it is usually stated that the headings and sub-headings used in the agreement (to separate the many sections of the agreement) are for convenience only, and are are not to be considered as limiting the scope of the sections they pertain to.
- Interpretation and Enforcement Clause: In this clause, the agreement normally declares that its interpretation is governed by the laws of a particular state or country (normally where one or other of the parties is situated), and all legal matters on this agreement should be prosecuted within the jurisdiction of courts in that area.
9. Note formats for signatures of the parties to the agreement, and those of witnesses
Obviously, the agreement has to have a space provided for signatures of both parties, along with their job-titles, business names, the date of signature, place of signatuure and other such identifiers.
Some agreements in hard copies may require the parties to sign at the bottom of each page of the document.
Also the agreement may need to have signatures of a couple of “witnesses” along with their names, addresses, and other details. Your attorney can indicate whether all this is needed and whether all this can be digital, or needs to be physical, depending on State laws.
On odd occasions (for example, if one or other party wants to submit the agreement as part of documentation to a bank to avail a business loan), there could be a requirement for the hard copy of the agreement to be notarized by a Notary Public.
10. Attach numbered lists of all annexures that form key supports to the agreement
A final word here: remember that wherever the agreement says the necessary attachments to the agreement is in separate annexures, make doubly sure that the names and numbering of these annexures are exactly similar on both the agreement and annexures.
You may well ask, “Why does an agreement need annexures, when everything can be inserted into the agreement itself?” Sometimes, the annexures are so complex (for example, if your project phases are very detailed and ramble on into multiple pages) that they may make the agreement unwieldy and hard to read. In such cases, the agreement may refer to the “schedules and project timelines annexed herewith as Annexure A” and add them as “Annexure A: Schedules & Timelines for the Project”.
The most common error people make here is to call the annexure by a certain name, but then refer to it wrongly in the agreement. For example, they may call it “Annexure 1” instead of “Annexure A”. Sometimes people let this pass, but when things go south between the parties, every little mistake in the agreement can become fodder in a court of law.
It is also usually stated (in the agreement) that the agreement is incomplete if read without its annexures as listed. The annexures too must state that they form a complete document set along with the agreement. They too may need signatures and dates and other details of the two parties.
So What Are Your Thoughts? Do Share!
This post is incomplete without your input. The community of Knowledge Commerce solopreneurs would feel galvanized to hear from you … so do share your thoughts on this topic with us, in the comments field below this post.
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