Writing a Consulting Contract - A List of the Essential Parts
If your business hires outside consultants, it's worth your while to learn how a consulting contract is structured. And if you're a consultant yourself, you'll want to know how to prepare your own agreements with clients to cut down on your legal fees.
While people often assume you need to have an attorney draw up your contracts, if you acquaint yourself with the various provisions that are included as standard elements in a consulting agreement, you should be able to confidently draft your own contracts.
The terms of the contract should be discussed and agreed to verbally first, before putting it in writing. It might be a good idea to prepare a Letter of Intent first, to make sure that both parties are on the same page before you enter into a formal written agreement.
The Elements of a Consulting Agreement
1. The Preamble. On the first page you will set out the full legal names and a brief description of each party, and a summary of the parties' intents and the purpose of the contract.
2. Services to be Provided or Excluded. Fully describe the scope of the services that the consultant will provide, either in the main body of the contract or in an attached schedule. If certain services are specifically not included, these exceptions should be clearly set out. All deliverables, completion dates and deadlines should be listed.
3. Employees and Contractors. If more than one person will be providing consulting services, identify them and how they are related, i.e. which ones are employees and which ones are independent contractors retained by the consultant to assist with the project. It may be helpful to include an organizational chart with each person's name, position and job description, and the reporting hierarchy. Each of these persons should agree in writing to be bound by the terms of the Consulting Contract.
4. Qualifications. The consultant's qualifications should be described, or if the parties prefer, the consultant can make representations to the effect that he/she is fully qualified to provide the services.
5. Term and Renewal. Is the contract ongoing and open-ended? Will it renew automatically or will the parties negotiate a new contract before the old one expires? Is it a project-specific contract that will end when the project is completed? Is it a one-year arrangement? Define what the term of the agreement will be. If it is project-specific, clarify the circumstances that define completion of the project.
6. Contract Price. The contract price should be clearly set out. You also need to be very clear about:
- the amounts of periodic payments and the dates on which they are due. If payments are tied to the completion of certain milestones, those milestones need to be clearly defined;
- the method of billing by the consultant (weekly, monthly, etc. or whether invoicing will be done periodically as milestones are accomplished);
- the method of payment by the customer. State if payment is net 30 after the date of the invoice or within a specified number of days after a deliverable is delivered or a milestone is reached.
7. Invoices. If an invoice is required to initiate the payment cycle, it's advisable to include a description of the invoice format or attach a sample invoice as a schedule.
8. Approval Process. Describe the procedure for approval and acceptance of each phase or deliverable, as well as the procedure for revisions if any are required.
9. Contract Extras. Describe how changes or additional services can be requested by the customer, the additional amount that must be paid for those extras, and when and how it must be paid.
10. Currency. Be clear on what currency is the basis for the amounts quoted by including a paragraph like this one: "All amounts required to be paid under or in connection with this Agreement shall be paid in lawful money of ___________ (name of country)."
11. Expenses. Detail which expenses will be paid by the customer, what proof is required for reimbursement by the customer (e.g., receipts), any maximum limit on expenses, and which expenses or amounts require the customer's prior approval. Clarify whether expenses will be included as line items on the regular invoices or if they will be billed separately.
12. Reporting. What kind of reports will the consultant be required to deliver, how often and in what form? This should all be clearly established in the contract.
13. Ownership. Be very clear about who will own the work product, including any intellectual property rights included in that work product. If the contract is made on a work-for-hire basis, the customer should be the owner of the work product and IP rights.
14. Insurance. Will the consultant be required to carry E&O / professional liability insurance during the term of the agreement? Make sure the insurance provision establishes the amount and type of coverage to be maintained.
15. Termination. This section should set out:
- the grounds on which the contract can be terminated by either party,
- the procedure for termination, including:
- the length of notice period required,
- the form of notice (typically in writing) and how it can be given (by fax, personal delivery, registered mail, etc), and
- what information must be included in the termination notice (reason for termination, date on which the agreement terminates, and what the non-terminating party can do to remedy the situation, such as paying any outstanding amount that may have triggered the termination),
- what happens to work that is already underway,
- payment of unbilled or unpaid amounts, and
- which provisions of the agreement will survive the termination. This could include such things as confidentiality restrictions, intellectual property rights, and licensing arrangements.
16. Dispute Resolution. Include a provision to deal with how disputes arising out of the agreement will be handled, such as having the parties agree to submitting disputes to binding arbitration or a third party mediator. It should also include the legal remedies available to each party.
17. Governing Law. Clarify the jurisdiction which governs the agreement (eg. "This Agreement shall be governed in all respects by the laws of _________________.").
18. Notices. Provide an address for each party for service of notices and other communications. If copies are to be provided to attorneys, accountants or other advisors, include an address for each of these persons as well.
19. Confidentiality. Include confidentiality provisions in the consulting contract or, alternatively, have the consultant sign a separate Confidentiality Agreement, make reference to it in the contract and attach a copy as a schedule. The confidentiality provisions should survive the expiration or termination of the contract. Clarify what the legal consequences will be for disclosing any confidential information without consent.
20. Non-Competition. Consider whether to include a non-competition clause (also called a "non-compete"), which restricts or limits the consultant's ability to perform similar services for a client's competitors (or its customers) during the term of the contract.
21. Entire Agreement. Make sure that all items agreed to verbally are set out in writing in the agreement. And include a standard clause that says the agreement supersedes any other verbal or written agreements between the parties and that no modifications or amendments are binding unless they are in writing and signed by both parties.
22. Limitation of Liability. Limit your liability to the extent legally possible. You cannot completely eliminate or avoid liability, but you may be able to limit the amount an unsatisfied client can claim to a reasonable amount, such as the amount that the client has paid under the contract plus attorneys' fees. The contract should specifically prevent recovery for consequential damages. Include your employees and subcontractors under the limitation of liability clause to reduce their exposure as well.
Important Things to Remember!
I. Read and understand what you're signing.
Both parties should review the contract with a legal advisor and ask for explanations of any clauses that are not completely clear. Whether you're the client or the consultant, you should not sign anything unless you fully understand what you're signing.
II. Spread out the payments.
If the contract is for a lengthy project, don't agree to wait until the end of the contract term to get paid. Split the payments up over the duration of the contract.
III. Avoid overly restrictive non-compete provisions.
If a non-competition provision is included, you must ensure that it does not unfairly restrict the consultant's ability to earn a living in his/her field of expertise. This can result in the provisions being struck down in the courts. For instance, in California courts non-competition provisions are very likely to be deemed invalid. And in most other jurisdictions the more restrictive the provision is, the more likely a court will strike it.
IV. Be careful of the wording of the ownership clauses.
The ownership provision should be worded so that it does not give the client title to ALL work performed by the consultant during the term of the contract. This could be interpreted by a court as giving the client title to work performed for other clients. You should get legal advice on this subject to ensure that (i) your rights are protected and (ii) other parties' rights are not infringed upon.
V. Renegotiate any prohibition about assigning the contract.
You should be wary of provisions that unreasonably restrict the consultant from assigning their interest in the contract or from subcontracting any of the work. Renegotiate this with the customer before finalizing to allow for assignment with consent, which should not be unreasonably withheld.
Almost any contract - even a "standard" form contract - is negotiable. If you're signing someone else's standard contract and any condition or provision of that contract makes you nervous or uncomfortable, it's your responsibility to bring it up. Don't sign anything until you're satisfied with it. Review it with your lawyer, who can then assist you in negotiating a more favorable arrangement.