Whether you’re a consultant or looking to retain one for your business, there are some fundamental issues that must be covered your consulting agreement to ensure performance by the other party while reducing your liability exposure if something goes wrong.
Here are five key areas that should be covered in every consultant agreement you sign.
1. Detailed Scope of Work (SOW).
Your scope of work (a.k.a. scope of services) for a project should specifically identify what will be done and exclude services that will not be performed.
According to Business Contracts Lawyer Mike Young, one of the most common mistakes is to have a consulting agreement vaguely refer to the services that will be performed, with each party having a different view of what’s included in those services.
Retaining a consulting firm to provide “marketing services” without defining activities, milestones, deadlines, and objectives is a recipe for disaster because invariably one party will not deliver according to expectations of the other.
Business management believes they have been cheated by nonperformance. Conversely, the consultant thinks he has actually over delivered.
Yet neither party can prove or disprove their position because there is not a detailed scope of work as a standard against which to measure performance.
2. Defined Compensation.
The second most common area of dispute in consulting contracts is the amount of compensation to be paid and the milestones that trigger payment.
As a general rule of thumb, it it’s not in the agreement, the compensation will not be paid. For example, there’s a consultant who is currently suing his client for a performance bonus.
Under the agreement, the consultant has been paid $2 million. However, he contends that there was a “general understanding” that the client would pay a bonus consisting of 5% of the additional revenues he generated. The client takes the position that no such understanding exists and there is no obligation to pay beyond what the written contract requires.
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Even when the amount of compensation is clearly defined, payment issues arise when the milestones triggering payment are too vague. Each milestone should be specific (by date, objective met, etc.) so that there is no room for confusion.
3. Changes in Scope of Work.
Your consulting agreement should provide a mechanism for written change orders to the scope of services that will be performed, including agreed upon payments with related milestones, so that both parties know what’s expected going forward with the consultancy.
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Oral or other informal modifications (e.g. emails) that modify the scope of work often create misunderstandings that can easily be avoided by detailed written change orders.
4. Confidentiality and Publicity.
Consulting contracts should address the nature and extent of confidentiality, both as to the client’s data and the existence of the consulting arrangement. Will the consultant be able to identify the client by name as a client for marketing purposes (on the consultant’s website, press releases, etc.)?
What constitutes confidential information? If the consultant is using subcontractors (e.g. website designers), will the subcontractors also be required to sign confidentiality agreements?
5. Alternative Dispute Resolution.
When there is a dispute concerning performance by either party, it’s rarely a good idea to head straight to court (notable exceptions for breaches of confidentiality and intellectual property infringement).
If the client is upset about the services rendered or the consultant feels cheated as to compensation, a good first step to resolving the issue is informal mediation using a neutral third party as conciliator.
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Should mediation fail to achieve a resolution of the dispute, the consulting agreement should provide for binding arbitration at a mutually agreed upon location. In the United States, it’s common to have such commercial arbitration handled per the rules of JAMS or the American Arbitration Association.
Other Consulting Agreement Provisions
“There are other clauses you’ll want to include in your written contract,” Business Contracts Lawyer Mike Young said. “An experienced transactional attorney can prepare a customized consulting agreement template for you to use that can be modified on a per-project basis.”
