6 Mistakes to Avoid When Creating Client Contracts
Experience is the best teacher ... unless you're willing to learn from others' mistakes. Most of us learn by doing, but the lucky few can take the easier way. Observing the actions, words and experiences of those around us can teach us what to do -- and not do.
I've been consulting on marketing and strategy for startups and emerging businesses for the last eight years, expanding to full-time two years ago. As both the founder and principal consultant of Promise Consulting Group, LLC, I've handled my own contracts, invoices, accounting, taxes and more. With more than 20 clients over the last couple of years, I've certainly had my share of learnings. As a new consultant, contracts and ultimately getting paid can be tough to navigate -- especially when just starting out. My hope is that sharing not just my missteps along the way, but their solutions, can help others facing similar challenges.
1. Not having a written agreement
Does the saying "my word is my bond" mean something to you? It does to me and to many others as well, but unfortunately it's not enough. Verbal agreements should be taken as the first step of any new client engagement, but they are not the end all, be all.
Always have your agreements in writing. Create a contract and have it signed by both parties (both you and your client). Any changes to the agreement should be in the form of written amendments, or at a minimum, an email documenting the changes.
2. Using the wrong rate structure
There was once a time when I was setting a weekly number of hours with clients to appropriately allocate my time. Then, when the week came, and the work was in progress, I wouldn't hear from my client on a critical ask. What this meant is that I couldn't continue work, and so I couldn't bill because I wasn't completing the time. That makes it nearly impossible to anticipate your annual (or even weekly!) income.
Create a billing structure that works for you. In my example, that meant billing on a retainer basis versus hourly. We agree on completion of work up to a certain number of hours for a flat rate. I'm ready to fulfill the agreed time in full provided I have everything I need from the client, but I'm not penalized when I'm left hanging.
3. Not having an out clause
It can be challenging if you have client engagements in place, and then an agreement is unexpectedly terminated. In the consulting world, it's anticipated that projects end, and often full-time hires are brought in. My goal has always been to fill that gap, but it's nice if I have time to fill my own gap for the lost project.
Out clauses allow time to replace work. The client provides notice when they'd like to end the agreement, and so you can use that time to prospect for new projects. Thirty days is my standard and also for the industry, so it's rarely unexpected or unacceptable.
4. Not establishing payment terms
As a full-time, corporate worker, you would likely receive regular weekly or bi-weekly paychecks. Not everyone treats consultants in the same way, though -- at some companies, it feels like "third parties" are the last to get paid. Their full-time employees come first. And so, your net 30 (or worse) agreement becomes two, four or more weeks late. Next thing you know, work you did in May isn't paid until July at best.
I've learned to bill net 15. Just because you're a consultant, there's no reason your payment terms should vary from a full-time worker -- it's still your full-time job. Payment for two weeks worth of completed work is both reasonable and fair.
5. Not including a clause about late payment
I've had clients that have been anywhere from a few days late on an invoice payment to a few weeks. The worst case was almost six months. Because of my accounting method (accrual), I had already paid taxes on it, and it was not an insignificant sum. (Be sure you've researched the benefits and detriments of accounting methods before you start out, too!)
Don't just have a dispute resolution clause in your agreement, but specify what happens in the case of non-payment. You shouldn't be expected to continue work if you aren't getting paid, and collecting unpaid debt can be a real challenge. Include a clause about debt collection, either through an agency or a lawyer -- that cost should be on the client, not on you.
Related: Get Business Agreements in Writing
6. Not using a contract template
Most of the time, my template contract is the one used for any new client engagements. I'm familiar with it, and it protects my interests and also those of my client. I've had a few cases where I've worked off client agreements because they were large companies that required it, and when an issue came up, it was more challenging for me to understand my options to resolve. I've learned it's better to always work off your own agreement where you can. You'll better know the terms if the need arises. If you can't, make sure your key terms are represented. Don't just look for glaring red flags in their version, but ensure you're protected in case things go awry.
Following these lessons learned in your own agreements can help you to avoid unnecessary challenges. If you prepare yourself for the worst case, you will rest easier knowing you are protected. The more involved you are with your accounting, contracts and general inner workings of your business, the better equipped you will be when entering new engagements. You'll also come across as more professional and established to potential clients. But, don't be afraid to ask for help -- always consult with a lawyer or a trusted mentor if you are in doubt.
Every new endeavor is a learning experience, and we get better as we go. Starting your own business is a big undertaking, but also a rewarding one. Ask, observe and share -- we're all in this journey of entrepreneurship together.