From the July 1998 issue of Entrepreneur

Need some good advice? You're not alone. Businesses large and small are turning to consultants for help in strategic planning, technology, personnel management and other specialties. According to Linda Wessels, president of the Association of Professional Consultants Inc. in Costa Mesa, California, hiring a consultant can be a good idea any time you move outside your area of expertise. That might mean bringing in a consultant to draft an employee handbook, design a computer system, or help with public relations or crisis management. If you're planning to go public, a consultant can help strategically position your company. If you're moving into the global market, an international business consultant can help you establish the right contacts.

Just be sure you look before you leap. Focus on choosing the right consultant for what you need done, then clarify your goals and expectations with a carefully prepared contract.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Laying The Groundwork

Start by deciding what you need, then look for someone with the expertise to meet those needs. A consultant may have already approached you with a sales pitch. If not, you can ask other business owners for referrals. You might also find names in the Yellow Pages or on the Web--but be sure to ask for a client list and talk to some of the people who've worked with the consultant. Did the consultant deliver according to expectations? A trade association such as the Association of Professional Consultants may be able to help you check people's reputations.

Finding a good match, however, is just the start. "You need to lay out the expectations," says Wessels. One of the best ways to do that is by preparing a contract. To ensure a smooth relationship, both parties should know what they're getting into, what their responsibilities are and how to proceed in case of a disagreement.

The use of contracts for consultants varies widely, Wessels says. Some companies retain consultants without using any sort of contract, while others insist on complex, multipage contracts. Typically, a consultant will provide a proposal stating what he or she will do, how long it will take and how much it will cost. Some companies respond with a letter of engagement that refers to the proposal.

Contract Guidelines

Whether you opt for the simple or the complex, be sure your contract addresses your particular situation. Standard contracts, which the consultant might present, should be used only as a starting point. While the standard contract might cover a wide range of issues, they aren't necessarily the issues you need to address. A standard contract, however, can remind you of points to tackle. Discuss the following issues with the consultant, then draft a contract that includes:

  • Description of services. Put in writing the services expected, as agreed upon during your preliminary discussions. Will the consultant's firm do all the work, or will your employees help as needed?
  • Compensation. State how much the consultant will be paid for the services listed. If you'll pay an hourly fee rather than a flat rate for a job, ask for monthly billings so you can monitor how much the consultant is costing you. Also, spell out whether or not your company pays expenses and, if so, exactly what kinds of expenses are included.
  • Independent contractor status. Make sure the contract states that the consultant is an independent contractor, free to decide when and how the work will be performed. Otherwise, a court might consider the contractor your employee for tax or liability purposes.
  • Subcontractors. Address whether the consultant will be allowed to hire others to perform part of the work. You might want to retain the right to approve any subcontractors.
  • Ownership of material. Unless it's specified otherwise in the contract, the consultant automatically retains the ownership rights to anything he or she creates for you. (For more information on ownership rights, see "Legal Aid," June.)
  • Confidentiality. Include a clause stating that the consultant will not disclose confidential information--so the consultant doesn't sell trade secrets to your competitors.
  • Use of your company name. Can the consultant tell others your business is one of his or her clients? Are you willing to have your company's name or logo included in the consultant's promotional materials?
  • Insurance. Does the consultant carry business insurance? Make sure he or she is covered, or your company could be liable for any damage the consultant causes.
  • Conflicts of interest. One of the advantages of hiring a consultant is getting advice that's not biased. If the consultant recommends a supplier or service provider and receives a commission for doing so, it's not an objective recommendation. Include a clause that states all conflicts of interest must be disclosed in writing.
  • Written reports. The consultant's recommendations should be made in writing. If it's a long-term contract with a monthly bill, require a progress report to be submitted with each bill.
  • Evaluation meetings. Especially if your consulting arrangement will continue for some time, be sure the contract requires periodic meetings for evaluation and communication.
  • Term of contract. If the consultant is to complete a project, include a completion date in the contract, with final payment tied to satisfactory completion. If the consultant is to provide ongoing management advice, state the term of the contract.
  • Mediation or arbitration of disputes. If your consulting arrangement turns into a nightmare, how will you resolve the problems? Litigation can cost tens of thousands of dollars. Consider a clause requiring mediation of any disputes, which means finding a neutral third party agreed upon by both parties to help you talk things out. Another option is requiring arbitration, in which a trained arbitrator listens to both sides and issues a decision, either binding or nonbinding, depending on what you've agreed upon in advance. Be aware that binding arbitration cannot be appealed to a higher court.

Read your contract carefully before signing it, and have your lawyer review it (or, better yet, help draft it in the first place). If there are provisions you discussed that don't appear in the contract, get them in writing to prevent trouble later.

Contact Source

Association of Professional Consultants, (800) 745-5050, http://www.consultapc.org