Protect Yourself: How to Structure Your Consulting Contracts
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This excerpt is part of Entrepreneur.com's Second-Quarter Startup Kit which explores the fundamentals of starting up in a wide range of industries.
In Start Your Own Consulting Business, the staff at Entrepreneur Press and writer Eileen Figure Sandlin explain how you can start a profitable consulting business, no matter whether your consulting business will focus on HR placement, computer troubleshooting, or anything else you can dream up. In this edited excerpt, the authors discuss the importance of contracts to your consulting business and what they should include and why.
Now that you've laid the foundation for your new consulting business, it's time to think about two important tools you'll need to be an effective consultant: the consulting contract and the client report.
A contract is a legal document between two or more parties that involves what attorneys call "an exchange of value." That is, if something of value (money, goods, services) is provided in return for something else (in your case, consulting services), then the agreement is considered to be a contract. And it doesn't matter if the task or service you're performing is quick and easy, or complex and time-consuming. You must always protect yourself by creating a contract the client will sign. After all, this is your livelihood at stake, and if something goes wrong, you'll need solid legal documentation to make sure you get paid.
Contracts protect both the contractor and the client. To make sure there are no misunderstandings, you must be sure every contract you write is clear, specific and detailed enough to cover all the important points or clauses. Your contracts should be written in plain language, which is clear and easily understood prose. This doesn't mean, however, that you don't need an attorney to look over your contracts or help you create a template you can reuse.
In addition to spelling out all the terms of your agreement, a contract can help you avoid what's often referred to as "project creep," in which you begin with a specific task that morphs into more work than you agreed to as the project proceeds. Having a signed contract that details exactly what you've agreed to do will help you rein in projects before they take on a life of their own.
Contracts can be very simple one-page documents, or they can be 100 pages long, depending on the subject matter and how many complicated issues they cover and in how much depth. They also can take the form of a letter of agreement, which is shorter and less formal but is just as binding as a formal contract.
Here's a short list of what should be included in every consulting contract:
- Full names and titles of the people with whom you're doing business. Be sure they're all spelled correctly.
- Project objectives. Making a list will help you achieve the project goals and figure out when the job is done and you can stop. ("Project creep" can go both ways.)
- Detailed description of the project. Write a global description that specifies every aspect of the task you've been asked to do.
- List of responsibilities. Record exactly what you'll be expected to do or the major steps you'll take to complete the project. It can be helpful to create a list of checkpoints you can refer to as you work. You might also want to have the client sign off on each phase of the project to ensure his/her satisfaction with the work as it progresses. If so, the sign-off process should be included as an item on your list of responsibilities.
- Fees. In addition to mentioning the agreed-on fee, you can include a payment structure.
- Timeline. Specify the start and end date of the project, and indicate any pertinent dates in between (including those dates on which you wish to have the client sign off on your work in progress and/or payment dates).
- Page numbers. This might sound basic, but the idea is to keep the client--or you, for that matter--from adding pages to the contract that not everyone has agreed upon.
This is not an all-inclusive list. Your attorney may recommend including other information, such as legal definitions, legal recourse in the event of nonpayment, nonperformance clause (as in what will happen if either party reneges on his or her obligations), and so on. This is just one more reason why it's a good idea to have your legal eagle draw up your contracts or give the ones you write the once-over before they're presented to clients.
In addition to the details discussed above, every contract has three key elements that must be present for the contract to be valid:
- The contract must contain an offer. An offer is simply something proposed by a person or business. For example, an offer for one of John Riddle's fundraising clients may include language like this: ". . . JR will act on behalf of the XYZ nonprofit organization as a fundraising consultant to raise the necessary funds required for . . ."
- Each contract must contain acceptance. Acceptance is when one party accepts the terms offered in the contract. It's usually a good idea to put a time limit on any contract or letter of agreement you offer a client. For example, you might state that the offer will expire in a set number of days unless it is signed and accepted.
- Each contract must contain consideration. This is the amount you'll be paid. For example, the contract language could say something like ". . . in exchange for a monthly payment of $5,000."