August 5, 2013-
As a business attorney representing small business owners and entrepreneurs, I am frequently called upon to send demand letters, and even file lawsuits, in order to collect money on behalf of my clients from their delinquent customers. In each of these situations, my clients had one thing in common: none of them signed a Retainer Agreement before starting work on their projects. Instead, they mistakenly believed that the proposal they drafted, or the e-mails they sent back and forth, constituted a “meeting of the minds” as to the project details.
More than likely, both parties will have a different understanding of how much the project will cost, when it is due, how many changes can be made, and what is considered an acceptable work product.
A carefully crafted Retainer Agreement is a contract that sets forth each party’s rights and responsibilities as they pertain to the project. While enforcement of a contract may require a court judgment—and collection of that award is by no means guaranteed—a Retainer Agreement records the parties’ intentions and may save the parties tens of thousands of dollars in attorney’s fees and costs to litigate the parties’ understanding of particular details.
Often, e-mail negotiations sent over a period of time lead to uncertainty and misunderstandings. For example, one party may claim that she only offered to pay $5,000 in total for the entire project, while the other believed he would be paid $5,000 in two installments, for a total of $10,000. If the parties had used a Retainer Agreement, this distinction would be clearly discussed and addressed at the outset of the job.
Keep these 5 tips in mind before starting your next project:
- Always, always put your agreement in writing. Even if you plan to work with your friend of twenty years, put your agreement in writing. I have seen numerous relationships sour over money, even though the parties were friends or worked together for decades. Think of this agreement like a prenup: it is better to work out the terms of the unthinkable now, when you can’t wait to be together, than later, when you may end up squabbling over useless items because you feel wronged.
- Scope of Work– Be sure to specify exactly what is included under the Agreement, and if there is potential confusion, describe what is not included. If additional phases of the project or changes will incur additional costs, discuss what those costs are, and how they will be calculated.
- Example: If your Agreement allows for a certain number of drafts or changes, identify the amount. Otherwise, the client may request endless proofread and edits. This is especially important if the project is on a flat-fee basis.
- Identify the hourly rate or cost per item for any incidental charges or additional changes to the project that the client may request.
- Amount of Retainer– Specify the number of payments and the amount of any deposits you require. For larger projects, you may want to arrange to get paid a portion of the total amount after certain milestones are achieved. This also keeps the lines of communication open as to the client’s satisfaction with the work performed.
- Practice tip: Include a description of costs that will be passed on to the client, such as parking, mileage, postage, printing, etc.
- Choice of law clause– This clause is especially important if you are doing business with a client in another state or country. It means that the Agreement is governed by the laws of the state you choose. If you ever need to bring legal action to collect money from your client, do not leave it up to chance to have your case heard in a foreign jurisdiction. Choose a state in which it will be easy for you to hire counsel and attend court hearings, if necessary.
- Signatures of the parties– When parties put pen to paper to sign an agreement, it adds an additional level of formality to the process. It is much more likely that the parties will be aware of the terms of the agreement if they put their signature on a formal document, than when they are communicating more casually in an e-mail or over the phone.
A customized Retainer Agreement is one of the best investments you can make in your business because it increases the likelihood that you will actually be paid for the brilliant work you do.
Have you ever had difficulty getting paid because you did not have an agreement in writing? Let us know your story in the comments below.