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What Makes for a Good Consulting Agreement?

As the owner of a small business, you are going to face financial, business, and legal issues where you could use the services of a consultant. Whether the consultant is hired to assist you with sales and marketing support, to provide financial assistance, or something else, consultants can help a business tackle a variety of challenges.

Finding the right consultant is only half of the battle. Crafting an effective consulting agreement that ensures you get the services you want for the costs you expect is important. The small business contract attorneys at the Katz Law Group can help in Massachusetts.

Why You Need a Consulting Agreement

Whenever you contract with a service provider for your business, getting the terms of the deal down in writing is essential.

It is even more important when you hire a consultant. 

Consultants hold themselves out to be experts in their field. You should be able to expect them to perform at a high standard, even if that means paying a premium for it. However, the potential for a consultant to abuse their position, put little effort into the endeavor, or bill your company unscrupulously are very real. An effective consulting agreement is a contract that can keep that from happening.

Imagine, for example, a company that hires an online marketing consultant. Rather than using a written contract, though, they agree to a "handshake deal," also known as an oral contract. The consultant then bills the company using invoices that show the basic terms of the deal, including the services provided and the payment amounts and terms. However, the consultant then adds fees and other costs to the invoices, claiming them to be a part of the consulting arrangement. By the end of the project, the consultant's fees total over $30,000 and then, after the parties failed to reconcile the outstanding balance, the consultant sues the company for breach of contract.

Had the parties taken the time to construct a workable consulting agreement, this entire problem may have been avoided.

What a Consulting Agreement Should Cover

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.

However, hiring a consultant always comes with the risk that their services are overpriced. Additionally, consultants can use what they learn about your company to take advantage of it.

To get the benefits of a consultant's services without the risks that can come with it, business owners should craft a consulting agreement that works for them and their particular needs. While every agreement will be unique, and you should absolutely consult with a business attorney before finalizing one for your company, there are some issues that are likely to come up more often than others.

Objectives of the Agreement

Make sure that the objectives of the parties in the consulting agreement are well defined. At the very least, these will help to interpret the other provisions of the agreement.

The Scope of the Consultant's Services

The agreement should contain a tightly defined “scope of services” provision. In this section, the consultant's specific duties and responsibilities must be laid out with particularity. This both limits the consultant's conduct to what you need for your business and establishes expectations for what those services will be.

Sign-Off Provision

A sign-off provision 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 real-world example provided earlier, the company was unhappy with the work and was getting billed along the way by the consultant. It was only until later on that the company realized that the consultant had charged a lot of money for otherwise poorly-performed services or for services that the company did not approve. Additionally, the consultant had charged the company for lunch meetings and extra fees that were not a part of the deal.

By having a “sign off” provision, you can avoid the charges and fees or at least realize what is going on much earlier. 

Detailed Fees and Expenses Information

All professional fees, costs, and expenses to be charged by any consultant should be articulated in detail. For example, the consulting agreement should answer questions like:

  • 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 be billed on a fixed fee or an hourly basis?

These are just a few of the questions that need to be addressed right from the start of the relationship.

Project Timeline

It is generally wise to include a specific timeline for when the project will start and when the project will end. This should 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 may be able to structure the relationship as one where certain retainers are paid at certain times. Additionally, you may include a provision that states that, if your business is not satisfied with the work being done by the consultant, then you have the right to terminate the consultant before the next retainer installment 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.

Modification Requirements

The agreement should state how modifications to the contract can be made and ratified.

This can help if you and the consultant wish to continue the relationship beyond the timeframe set forth in the initial project timeline. It lets you either amend the existing consulting agreement or execute an entirely new agreement altogether.

Employment Status

Consultants are considered independent contractors and they should be treated as such.

This is especially important now because Massachusetts has recently undertaken many changes in defining the role of independent contractors. Before hiring a consultant, it may be wise to brush up on 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 comply with Massachusetts law.

Under Massachusetts law, there are three basic considerations that determine whether a consultant is acting as an independent contractor:

  1. The consultant is free from the control and direction of your business
  2. The consultant performs work that is outside the usual course of your business
  3. The work that the consultant is performing for your business is the same type of work that the consultant normally performs as part of his or her consulting business

Treating your consultant as if he or she were an employee can open your company to a costly misclassification lawsuit.

Confidentiality Agreement

A confidentiality provision, or a non-disclosure agreement, should be included in the agreement, as well. This prohibits the consultant from divulging any of your trade secrets, designs, ideas, and other confidential business information to any third parties or competitors. Moreover, the confidentiality agreement should include a provision for monetary penalties in the event that the consultant violates it.

Non-Competition Agreement

You may also want to include a non-compete provision. Depending on the nature of the consulting services being provided, this can keep the consultant from working for any of your business competitors within a certain geographical range and for a period of up to one year.

Other Considerations When Hiring a Consultant for Your Business

Hiring a consultant can pay huge dividends for your company. However, there are also significant risks involved. Always do your due diligence when hiring any consultant – even when you receive a referral for that consultant.

Before finalizing the agreement, make sure to ask the consultant if they carry errors and omissions insurance coverage. This insurance can pay for your financial losses if your consultant makes a mistake. Whether they have this coverage or not should be a factor in your decision to hire them.

Massachusetts Business Attorneys at the Katz Law Group

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 or contact us online for further information as to how we can protect your business and legal interests.

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