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What Makes for a Good Consulting Agreement?

As the chief executive officer for your small business, there are going to be instances when your company may need the services of a consultant. Whether the consultant is hired to assist in providing sales and marketing support or whether the consultant is retained to assist in rendering financial assistance, consultants can help a business tackle a variety of challenges whether your business is just getting off the ground or is already established. The main reason for hiring consultants is that they provide business-related expertise on a wide variety of matters such as sales, marketing, or management and are viable alternatives to purchasing expensive, unnecessary technologies.

Recently, I had represented a company that was sued over a consulting "contract" that was, for lack of a better description, incomplete and ambiguous. In fact, the contract was created by various invoices submitted by the consultant to my client while the consultant was rendering services. One of the many issues, in this case, was that my client did not realize that it was responsible for certain fees and costs as part of the consulting arrangement. By the end of the project, the consultant's fees totaled $33,000.00 and then, after the parties failed to reconcile the outstanding balance, the consultant brought suit. The parties to this "arrangement" had no underlying contract and the agreement was performed largely on a handshake. Had the parties taken the requisite time to construct a workable consulting agreement this entire problem may have been avoided. The following is a shortlist of those items that need to be included in any consulting agreement:

A. Do your due diligence when hiring any consultant even when you receive a referral for that consultant.

B. Make sure that the objectives of the parties in any consulting agreement are well defined. 

C. The agreement must contain a tightly defined "scope of services" provision. In this section, the consultant's specific duties and responsibilities must be laid out with particularity.

D. A sign-off provision that enables you, as the client, to sign-off on each stage of the project in order to ensure that you have been satisfied with the work as it progresses. In the case above, my client was unhappy with the work and was getting billed along the way by the consultant. It was only until later on that my client realized that the consultant had charged her a lot of money for otherwise poorly performed services or services that my client did not approve of in the first instance. Also, the consultant, in that case, had charged my client for lunch meetings and extra fees that were not part of the deal. Had my client had a "sign off" provision the charges and fees would have been realized much earlier. 

E. All professional fees, costs, and expenses to be charged by any consultant must also be articulated in detail. For example, is the consultant charging for travel time to and from your office? Is the consultant to be paid for other expenses in the normal course of providing consulting services to your business?  Are certain projects going to bill on a fixed fee basis? These are just a few of the questions that need to be addressed right from the start of the relationship.

F. A specific timeline for when the project will start and when the project will end and must include when all payments to the consultant will be made during the course of the project. Often, consultants will demand they be paid on a retainer basis. With that said, you can structure the relationship as one where certain retainers are paid at certain times and that if your business is not satisfied with the work being done by the consultant then you provide a clause to terminate the consultant before the next retainer is due. In this way, your business limits its exposure against spending more money on an ineffective consultant, and, at the same time, your company may avoid litigation for unpaid fees as what happened in my client's particular case.

G.To the extent that the parties wish to continue their relationship beyond the time frame set forth in the initial project then the parties can either amend the existing consulting agreement or execute an entirely new agreement altogether.

H. Consultants are considered independent contractors and they should be treated as such. Massachusetts has recently undertaken many changes in defining the role of independent contractors so it would be wise for your company to understand how these new laws affect your relationship. As long as the contract is clearly delineated as a consulting agreement and the consultant is not treated as an employee your business will be in violation of Massachusetts law. Under Massachusetts law, there are three basic considerations that determine whether a consultant is acting as an independent contractor as follows: 1. The consultant is to be free from the control and direction of your business. 2. The consultant performs the work outside of the usual course of the business and 3; The work that the consultant is performing for your business is the same work the consultant normally performs as part of his consulting business.

I. Does your consultant carry errors and omissions insurance? This might be a factor in your decision to hire a consultant depending, of course, on the nature of your business.

J. A confidentiality agreement must be included in the agreement which prohibits the consultant from divulging any trade secrets, designs, ideas, and other confidential business information to any third parties or competitors. Moreover, the confidentiality agreement must include a provision for monetary penalties in the event that the confidentiality provision is violated and;

K. A non-compete provision that the consultant (again, this depends on the nature of the consulting services provided) will not work for any competitors to your business within a certain geographical range and for a period of no more than one year.

As a sophisticated business law firm, we can assist your business in taking the right steps in hiring your next consultant. Please call the Katz Law Group at 508-480-8202 for further information as to how we can protect your business and legal interests.

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