How to Negotiate Your First Consulting Agreement

By Cliff Ennico

July 24, 2012 6 min read

"I was laid off last year from a corporate job and after several months of rejection decided to set up my own consulting practice.

I have just landed a one-year consulting assignment from a very large corporation in my industry. They have just sent me their form of consulting agreement to sign — it's a 50-page monster with all sorts of legalese I don't understand.

Can you give me some guidance as to the 'gotchas' that might exist in this contract, whether you think I should retain an attorney to review this agreement and how much I should pay?"

First of all, congratulations!

Second of all, I think you should have an attorney review this agreement and explain it to you. Even if you've read the agreement and think you understand it, there may be important provisions missing from the document that you would not know about unless you've lived with these agreements for a while. After you've done a couple of these, you may be able to handle some of the negotiations yourself — in my experience, the same issues crop up over and over again in these agreements.

Generally, there are two parts to a consulting agreement — the "statement of work" (SOW for short) and the actual legal contract.

The "statement of work" describes the services you will be responsible for, some things you will NOT be responsible for, a list of the deadlines (called "milestones") you will be required to meet, a list of the work product (called "deliverables") you will be required to produce, your compensation for services, and any special provisions relating to this particular project that may not be covered in your client's general form of contract.

The SOW should NOT contain any legal provisions or language — anything like that should be in the consulting agreement. There should also be a "traffic cop" provision in both the SOW and the agreement saying that in the event of a conflict between the general agreement language and the more specific SOW, the SOW will govern.

As for the agreement itself, here are some "gotchas" you should look out for.

—Timing of Payment. Most consulting agreements are very specific about the services that will be performed and the fees the consultant will be paid for his or her work. You would be amazed, however, at the number of contracts I look at that don't say anything at all about when payment is due! This is how you will be paying your bills, so you need to know with 100 percent precision when your client will pay you. If the client insists on being able to "review and approve" your invoices before making payment, make sure to include language that the review must be completed within X days, and that you have the right to stop working if payment is delayed for an unreasonable amount of time.

—Insurance. Most large companies will require you to maintain some form of "errors and omissions" insurance in case you foul up the job and they suffer damages. Make sure the amount of coverage is reasonable and that the client is not requiring you to obtain insurance that is not appropriate (for example, worker's compensation insurance if you have no employees). Also make sure there is a clause in the agreement saying you are not responsible for "consequential" (also known as "ripple effect" damages), as many errors and omissions policies will not cover you for these.

Indemnification. Most consulting agreements will require you to indemnify the client for anything that might go wrong during the consulting assignment, but if you are working on the client's premises, there should be an exclusion for damages caused by the "acts or omissions of Client, its employees and agents." They should be indemnifying you if one of their employees goes postal and attacks you while you are on the job.

Assignment of Work Product. Any work you create for the client should become their property only after you have received payment for it. Also, be sure to exclude tools, templates, form documents and other materials you have created yourself and use when performing services for all your clients.

—"Noncompete" and "Nonsolicitation" Clauses. A consulting agreement should never, ever contain a "noncompete" clause saying you can't work for other companies. As an independent contractor, you must legally have the right to do so. If the client insists on a "noncompete," you should insist that the client identify the specific companies you cannot work for.

If the client asks for a "nonsolicitation" clause saying you can't solicit their customers or employees for X years, make sure the clause is limited to customers and employees you actually dealt with while working for the company.

As for how much an attorney should charge you for reviewing a consulting agreement, one to three hours of his or her time is standard, depending on how many questions you ask and how much education you need.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

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