If you run a business providing services to customers, clients or other businesses, its imperative that you use contracts for each project or transaction.
Not for each client, but for each transaction or project you do for a customer or client.
Some of you may be intimidated by Contracts, or feel that you don’t need one for every transaction or project.
But you do need them, every time. Because…
Contracts Are Your Friends
They help you and the other party to the contract understand what’s expected of each of you.
And if things go wrong, contracts protect you.
And they don’t have to be complicated. In fact, depending on the business transaction, most of the time a simple contract is best.
Just make sure that your contracts contain certain provisions.
These provisions work regardless of the type of project or client.
But Before We Get to Those Provisions…
A word of caution.
The provisions we’ll get to in a minute are the bare minimum your contracts need. However, there are other provisions you might need, or want, depending on the type of transaction and the other party involved.
For example, you may need provisions addressing copyright issues or indemnity. Or if this is a business transaction involving the sale of a business or its assets, then you will need many other provisions than what are discussed her.
And those types of transactions are beyond the scope of this article. For purposes of this article, we’re only talking about the provision of services.
I can write an entire article on just one of those “advanced” contract provisions. And I will.
But for now, we’re focusing on just six important provisions that every service contract needs.
Okay enough with the disclaimers. Sorry, but that’s what we lawyers do. We disclaim things.
On to the provisions. . .
1. Compensation a/k/a Getting Paid
This one’s pretty obvious, right?
Every contract needs a compensation provision that includes a payment schedule. But there are some not so obvious terms that you can, and should, include within this provision.
Use a Replenishing Retainer
First, if the contract involves your business providing ongoing services to a customer or client, use a Replenishing Retainer if at all possible.
These provisions are great for ensuring consistent cash flow, and avoiding nonpayment for completed work.
Here’s how these work.
For hourly rate projects, the client pays a specific sum of money before you start working. Let’s say it’s $1,500.00. Once you have a signed contract, and the client pays the retainer, you begin working on the project and bill your hourly rate against the retainer.
When the amount of the retainer falls below a certain amount, let’s say $500.00, you send a bill to the client showing the amount of work you’ve done, your hourly rate applied against the retainer, and the amount remaining in the retainer.
The client then must replenish the retainer back to $1,500.00. After the retainer is replenished, you continue working.
Replenishing Retainers also work for flat fee or subscription rates.
For these types of transactions or projects, the customer or client pays you a specific sum per month, quarter or year, and that amount secures your availability to provide specific categories of services of the customer or client.
You don’t work until the client pays the flat or subscription rate the following month, quarter or year.
And, just like your work for hourly rate clients, you are ensured consistent cash flow.
Always Require a Deposit
Now, a client might not agree to use the Replenishing Retainer. And if that’s the case, then you should always get a deposit up front.
This will protect you if something goes awry with the project, the client goes out of business, or it terminates the project unexpectedly.
Kill Fees Are a Must!
In addition to a deposit, you should also have a provision for a “kill fee.” This fee protects you if the client unexpectedly “kills” a project after you start the work.
If that happens, the kill fee compensates you for the time and expenses you incurred working on the project up to the point the client “killed” it.
For example, let’s say you get a deposit of half of the total amount for a flat rate project.
That deposit protects you up to a point, but what if the client “kills” the project after additional time and expenses are incurred?
You might not get paid for that time or expense, unless you have a kill fee provision.
Late Payments Mean Late Fees
Always, always, always include late fees. It doesn’t matter what your payment terms are.
A late fee will encourage on time payment.
And if the client fails to pay on time, you’re entitled to be compensated for the effect the late payment has on your cash flow.
2. Specify the Scope of Work to Avoid Creepy Projects
Scope of work provisions outline the specific work you agree to do, and help you defeat “scope creep” before it happens.
This provision ensures that there is no confusion about what you agreed to do, and the deliverables the customer or client expects.
And if the client comes to you during the project and asks you to do something that is beyond the scope of work provision, then the parties must execute a separate contract for that additional work.
3. Restrict the Number of Revisions
If you are producing written work product, you need a provision that limits the number of revisions the client can request (usually two or three), and anything beyond that will cost extra.
With flat rate projects, your profit will decline precipitously when a project you estimated would take one week goes into a second week, and then a third, because of unanticipated revisions.
And for hourly rate projects, clients will expect you to do multiple revisions for free, or balk at your invoice that contains time for numerous revisions that the client requested.
So, always restrict the number of revisions.
4. Attorneys’ Fees and Costs
Remember how excited you and your employees were to land that new customer or client?
You enjoyed working with them, and did excellent work.
And then you submitted your invoice. And then, crickets.
Sure, you followed up by email and phone, and maybe you live in the same area so you visited their office. But they still didn’t write the check.
What do you do now?
Well, if you hire an attorney to collect, it’s going to cost you. And sometimes that cost isn’t worth it.
Let’s say the client owes you $1,500.00. It’s possible that the attorney’s fees and costs to enforce your contract will cost you more than what’s owed.
But if your contract includes an attorney’s fee provision, you can recover those fees and costs when you prevail. And just having this provision in your contract can deter some clients from stiffing you.
Attorneys’ fees provisions are common in most contracts. So, its unlikely that your customer or client will balk at signing a contract that includes one.
But if they do, its not a good sign and could foreshadow problems down the road.
5. Entire Agreement/Merger Clause
This provision states that the entire agreement between the parties is contained within the written contract. And any agreements outside the contract are merged into the final written contract.
In other words, anything that’s not addressed in the contract is not part of the agreement.
So if your client comes to you and says, “hey, we agreed to (something that isn’t in the contract),” just point to the entire agreement/merger clause. End of discussion.
Which leads us to . . .
6. All Amendments Must Be In Writing
Much like the entire agreement/merger clause, this provision ensures there are no misunderstandings about what is and what isn’t in the contract.
However, this one deals with agreements after the contract is executed.
With this provision, your client can’t claim that you entered into a separate oral agreement to change something in the contract after it was signed.
If you and your client agree to amend the contract, it must be in writing and signed by the parties.
So there you have it.
Hopefully you feel more comfortable with contracts and see the value in always executing a contract for each transaction or project.
And the next time you land a great new customer or client, make sure that you sign a contract with these six provisions before you begin the work.
