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A
Primer on Consulting Agreements
by
James
A. Berberick, CPA
Most
business managers will hire a consultant sooner or
later. When the time comes, both you (the client) and
the consultant should approach the consulting engagement
like any important business relationship. In most cases,
there should be a written agreement between the
parties. In the following paragraphs I will explain why
a written agreement is important, and what should be
covered in the agreement.
A
written agreement is important.
The
process of hiring a consultant is very much like dating.
You can usually get referrals to one or more consultants
from friends or colleagues. Then you must decide which
of the consultants to invite to the dance. When an
agreement is reached, both parties hope for a pleasant
experience. After all, you hope to benefit from the
consultant’s services and the consultant hopes to
retain you as a long-term client.
My
years of consulting have taught me that, except for
limited scope engagements, a consulting relationship
based only on a verbal understanding and handshake is
headed for trouble. A month or two later, neither the
client nor the consultant can remember exactly what they
agreed upon. This situation often results in different
opinions as to the scope of services to be performed,
expected outcomes, and fees to be paid. A written
agreement before work begins is the best way for both
parties to avoid unpleasant disagreements down the road.
What
should be covered in the agreement?
At
a minimum, the consulting agreement should adequately
describe: (1) the consulting services to be provided and
anticipated outcomes or work products; (2) timing of the
services and work products; and (3) consulting fees and
payment terms. Depending on the nature of the services,
it may also be important to describe where the
services are to be performed. Some agreements may also
include stipulations as to confidentiality, non-compete,
termination, and other legal issues.
A
good rule of thumb to use in drafting any business
agreement is: If you can’t write down the terms of
your agreement to the satisfaction of both parties, then
don’t do the deal. That rule is especially applicable
to a consulting agreement because the benefits derived
from consulting services are typically intangible and
hard to measure. In that regard, the most important
element of the consulting agreement is the first one
listed above – description of services and work
products. If the consulting services and work products
are satisfactorily described, then drafting the rest of
the agreement should not be a problem. But if the
consultant can not satisfactorily describe his or her
services or the anticipated outcomes or work products
for you, then both parties are better off parting
company at that point.
You
can obtain a comprehensive form of consulting
(contractor) agreement, which contains embedded advice
and instructions at www.smartagreements.com.
Frequently
Asked Questions
How
do I decide between two consultants who appear equally
good?
You
could hire both consultants to perform a limited scope
preliminary engagement, then select one or the other
based on their performance. However, I suggest that you
rank each consultant against some predetermined
evaluation criteria on a scale of 1 to 5, then hire the
consultant who ranks highest. Evaluation criteria may
include: perceived understanding of your needs and
objectives; knowledge of your industry or type of
business; prior relevant experience; client references;
consulting fees; and so on. This approach is beneficial
in two ways: (1) it helps you focus on factors relevant
to the decision; and (2) the ranking process helps you
be more objective and more thorough in evaluating each
consultant.
But
what if the scope is unclear, i.e. the problem has not
been clearly stated?
This
may be a situation where you engage more than one
consultant to perform a preliminary assessment, then
evaluate the results to decide which consultant to use
in the long term. In this case, you should limit the
scope of the initial consulting agreement to analysis of
your current situation, statement of the problem and a
recommended course of action. Then you and the selected
consultant can proceed with a better understanding of
what must be done, anticipated results or work products,
timing, cost, etc.
What
should I do if I become dissatisfied?
Even
if you have taken all the right steps to prepare and
execute a comprehensive consulting agreement, you may
become dissatisfied with the consultant. If that
happens, then you should immediately discuss this
situation with the consultant. Be frank and specific
about your dissatisfaction. Most consultants do not want
a bad client relationship and will be very interested in
resolving the dissatisfaction quickly. Chances are, if
you are dissatisfied, the consultant already knows
things are not going well.
What
if I have made progress payments and received the final
report, but it is not acceptable. What are my options,
practically speaking?
That
depends on why the report is not acceptable. First, make
sure that you got what you paid for, i.e. review the
terms of the consulting agreement relating to services
and work products. If the consultant has performed all
of the services called for in the agreement, but you are
not satisfied with the outcome, you should tell the
consultant why you are unhappy. If the consultant is
unwilling to resolve the problem, you can litigate, but
such action is hardly ever taken. However, you can
withhold final payment if you feel that the consultant
has not satisfied all terms of the written agreement.
Bottom line is, if you are an unhappy client, you and
the consultant both lose.
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