One of the most common and repeated requests I receive from clients is to draft a consulting agreement or a professional services contract.
When doing so, it’s important to consider the key terms to be addressed and defined within the document. Here are 15 important lessons to follow when drafting the agreement:
com walter.skipper quarles Walter J. Skipper, U.W. 1990, is a partner with Quarles & Brady, LLP, in Milwaukee, where he concentrates his practice in business law and helping clients overcome problems.
1) Specify the actual services or work that will be done. Clearly describe services to be provided and/or tangible work product to be delivered, and what is needed from others to be able to complete the project. Try to avoid broad descriptions.
For example, if you are helping with strategic matters, specify “gather a list of key findings, issues, and recommendations.” Draft in objective words.
2) Describe the fixed fee or specify the hourly costs. Make sure to detail what out-of-pocket costs are allowable and when pre-approval is needed. List when it’s paid and consequences if not timely paid.
3) Address the use of subcontractors. Generally, it’s helpful to state whether parties are permitted to use subcontractors and, if so, whether there are any limits on such use, such as requiring folks to honor their confidentiality requirements.
4) One of the most important contract terms is to address agreed upon service levels; the normal generic terms used are “timely, professional and workmanlike manner in accordance with industry standards.”
5) Define the client’s responsibilities. After setting the fee, the next most important step is to spell out what the consultant will need (and when) from the client, in order to be able to timely and effectively deliver on what has been promised.
The consultant often must rely on receiving decisions, approvals and information from the client, which means it is very important for the agreement to also specify that the provider is responsible for the content and the consultant can rely on the information without verification.
6) Discuss the ownership rights to intellectual property. After addressing the work, it is important to designate who owns the intellectual property that is created and who is free to license it.
The traditional approach is to stipulate that, upon full payment, the client shall have all right and title in interest in the deliverables. But sometimes it is appropriate to further limit the client’s use through third parties or, if they are free to do so, to further specify. And, if the case, state that the consultant retains ownership of all materials prepared prior to the engagement.
7) List out the time period to accept the deliverables. List out the time period when the deliverables are deemed accepted, or by whom any objectives must be raised – otherwise the consultant is left open for future claims. It is best to give a reasonable amount of time, such as 30 days, allowing people to correct, collect, and identify non-conforms.
8) Address warranty terms and steps for any breaches. One of the most contentious areas in this type of contract are the warranty terms. The best practice is to state the warranty to deliver in accordance with the specifications, provide for an effort to address any breaches and then address the important exclusions for implied warranties of merchantability, non-infringement, or fitness for a particular purpose, or otherwise.
9) Provide a risk allocation provision. Generally, since the consultant will only be earning a set fee and not sharing in the client’s profits, it’s extremely important to limit potential damages to specified amount, such as fees paid, or to provide some other mutually acceptable arrangement.
10) Address that each consultant is an independent contractor and that the consultant is responsible for FICA, FUTA, income tax withholding, any pension plan or health benefit plan. It is normal to require a consultant to indemnify the client for any employment taxes. It’s helpful, for tax purposes, to state that the contractor will determine the method and means of performing the services that assist with being treated as an independent contractor.
11) Address termination rights. Normally, there is a longer notice period if the termination is for convenience (i.e., without cause), while termination for cause is often effective immediately. Accordingly, defining what constitutes “cause” is also significant.
12) It’s fair to state that all parties will comply with all applicable federal, state and local laws, statutes, ordinances, regulations, and judicial and administrative orders and degrees, including, but not limited to, all laws related to safety, health and the environment.
13) Other folks address insurance, and require comprehensive or CGL, business automobile liability, workers’ compensation, employers’ liability, excess or umbrella liability, errors & omissions, and the coverage amounts.
14) Address indemnities. Who is responsible for any claims or damages? And is there a different level of liability for damages that arose from gross negligence, willful misconduct, or fraud?
15) Other traditional contract terms. Finally, the agreement needs to list out the limitation of liability and the traditional legal terms, such as: governing law, jurisdiction and venue, waiver, notice, counterparts, and force majeure.
Keep in mind that the primary goal is to help set expectations, so that folks can understand their deal and avoid disputes. Also, it’s good to discuss everything up front, as the parties often have not thought through these terms.