What Small Businesses Need to Know About Consulting Agreements
Consultant Letter Agreement
The consultant agreement can take on a variety of formats. A letter agreement is often used for smaller consulting jobs, or those jobs that involve less than $1,000 of work. The letter agreement will contain most of the same elements as a traditional contract, however, it will be presented in a less formal manner. It should contain the following sections: identification of involved parties, terms, payment, responsibilities, and signatures.
The first part of the letter will introduce the parties that will be involved in the contracted relationship. Usually this is done by identifying who the contractor is and who the contracting company is. It is important to make sure that names are spelled correctly, and the correct positions are listed next each name.
Next the terms of the contract will be outlined including when the contract begins and when it will expire. Make sure that the dates are correct, and that they reflect the time span that was agreed to orally. If changes need to be made simply cross out the wrong dates and write in the correct dates on the letter agreement draft. The consultant can use your draft to make corrections when they are composing the final letter agreement.
The next section of the letter agreement will need to detail the services that will be provided by the consultant. This will include what responsibilities they will have including any auditing, quality control, problem identification, reports, etc. It will also identify what they are not responsible for. For example if the contract is for auditing services, the consultant may make a note in the letter agreement that states that the purpose of their audit is not to identify fraudulent activity, but to identify mistakes or misclassifications. This absolves their liability to identify fraudulent activity and establishes their responsibility to the client to find accounting mistakes and classification problems.
The next section will outline the payment that the consultant expects. This will need to include both the total value of the contract as well as a breakdown of costs. It will also need to include when payments will need to be made, if periodic payments will need to be made, and if a retainer will be required.
The final section of the letter agreement will be a place for the consultant and company representatives to sign and date the letter agreement. After signing this letter it becomes a legally binding agreement. This document does not need to be notarized, but it can be if the company or consultant desires.
Consultant Agreement Contract
The second format that a consultant agreement can take is the traditional contract form. At the top of the contract the consultant will include a statement that indicates when the contract will become effective and for how long. The next paragraph will contain information about the general services that the consultant will perform. A section that contains the terms and specifics of the contract will follow this section.
The term section should include how long the contract will be effective for, and if there is a way that either party can legally terminate the contract. This may include written notice and termination penalties and fees.
The next paragraph will detail the services that the consultant will offer to the company. Their responsibilities including what materials they will provide and when they will need to deliver certain reports will be outlined in this clause.
A liability clause will also be included in the consultant agreement contract. In most cases this clause will release the consultant from any liability in regards to the services that they provide to your company. Depending on the type of service that is provided by the consultant, you may need your lawyer to revise this section of the contract to protect the interests of your company. If the consultant will be developing intellectual material for your company, or it they will come in contact with sensitive company information you may want to have your attorney draft a separate non-competition and statement of confidentiality in order to protect the interests of your company.
Next the compensation clause will outline how much the consultant will be paid, as well as when they expect to be paid. Periodic payments may be requested, or a one-time payment may be requested. This clause can be negotiated before a final draft of the contract is delivered. You can ask the consultant to restructure this clause to reflect your company’s invoicing and payment procedures.
The retainer clause is optional, and usually based on the consultant’s preferences. A retainer is usually a percentage of the overall contract that is paid in advance to help defray start up costs for the project. It is like a down payment on their services. A retainer is usually about 10% of the total contract value.
The arbitration clause is used to provide instructions about how disputes between the consultant and company should be handled. Instructions about who will be responsible for the legal fees and maximum damages that can be awarded are also outlined in this section.
The final section is the signature section. Space will be made available for the consultant to sign and date the contract, and space will be made available for the company representative or representatives to sign and date the contract. Once signed this document is a binding contract and the terms set out within the contract will need to be followed.