How much thought do you put into your consulting agreements with clients? If the answer is little to none, we get it. Drawing up legal agreements is not most IT consultants' forte. But if you slap a contract together just for the sake of getting something in writing, you could expose your business to liability issues down the road.
We spoke to contract lawyers and the president of an IT consulting company to get their take on the most important things you should know about your IT consulting contract.
1. You Might Not Even Realize You're Making Mistakes
If you aren't using contracts, chalk that up as mistake number one.
"The biggest mistake IT consultants make is thinking they don't need a contract," says
(@tektonicutah), an IT consulting company. "Some IT consultants may think a contract is just to cover themselves in the event of a worst-case scenario. But it's also a great way to legally define your responsibilities as a consultant."
But there are other issues that frequently trip up IT consultants when it comes to drafting consulting agreements, such as making sure the contract is specific enough.
"The most common problem is there's a lack of clarity, a lack of specificity," says attorney
Richard Reice, a
partner at the law firm
Hoguet Newman Regal & Kenney
(@hnrklaw). "They [the contracts] lack foresight as to what is going to happen if a project is more challenging and time-consuming than the consultant, or even the client, anticipated."
According to a report by McKinsey & Company, that happens fairly often: large IT projects run 45 percent over budget and 7 percent over time on average. So it's a pretty safe bet that when you take on a project, it's going to take longer and potentially cost more than you think. That's why it's important to address those potential issues in contracts. Spell out who is responsible for delays and whether the cost will increase if the client is responsible for the delays.
2. The Contract Should Mirror the Length and Complexity of the Project
There is no "right" answer to how detailed a consulting agreement should be, but the consensus is that it should reflect the nature of the work.
"It's not the length of the contract that is the issue," says Reice. "It's whether you articulate in the agreement what needs to be done."
So say a client wants to hire you to set up a new employee's computer. There is probably no need for a 10-page contract for that job. But if you handle a client's data migration to the cloud, that complex task requires more details in the contract.
"I prefer a relatively short 'terms and conditions' with a more detailed 'specifications' describing what the client and consultant expect from each other," says attorney
Stanley P. Jaskiewicz, Esquire,
member at the law firm
Spector Gadon & Rosen, P.C.
Jaskiewicz says you really don't need to go overboard.
"I have done many IT contracts, for both clients and consultants, from multi-page forms for corporate consultants to the equivalent of the 'back of the envelope' contract for smaller firms," says Jaskiewicz.
3. The Contract Should Cover the 5 Ws
If you've ever taken a journalism class, you may remember the "Five Ws" of reporting: who, what, where, when, and why. You should take a similar approach when drafting contracts to make sure you cover the project's necessary information.
Reice says that the goal of any consulting contract should be to address the following issues:
- What is the work?
- Who is doing the work?
- Where is the work to be performed?
- When is it due?
- How much will it cost?
- Who will own it when it's done?
"The real purpose of this agreement will be to set forth the project in detail so that if there is a dispute between the parties, the contract will help settle that dispute because it would have been clarified up front," says Reice. "That agreement is protection for the consultant when the client says, 'You promised me X, Y, and Z by a certain date, and it was supposed to do the following functions, and it doesn't work, or it's not what I thought I was buying, or it's late.' A good consulting agreement allows that consultant to pick up that agreement and say, 'No, we agreed to A, B, and C, and that’s exactly what you got.'"
4. The Contract Should Spell Out Who Has Liability for What
As the president of an IT consulting company, Anderson is in the trenches when it comes to drafting IT consulting contracts. He says limiting your liability with clients is one of the most important components of any IT consulting contract.
"One of the largest sections in our contracts is limitation of liability," says Anderson. "It mainly covers releasing us from any liability if there is any data loss in the course of us performing any sort of service for a client."
Anderson says he sometimes gets pushback on that from clients, but most clients are understanding once he clarifies why his company won't accept liability for data loss.
"We explain to our clients that we do our best to limit the danger of data loss and any sort of issue that may arise from moving data from one place to another," says Anderson. "However, we also explain that we can't be responsible for every possible outcome related to that data. We tell them that the amount of money we would have to charge to be liable for that data would exceed any amount that they would be willing to pay."
Anderson says that usually settles the matter.
Pro tip: Don't be afraid to protect your interests in contracts. Clients may push back, but it's important that you don't take on more liability than you need to. You also might want to purchase Errors and Omissions Insurance. If a client isn't satisfied with a project's outcome and sues, your insurance can help pay for your legal expenses. For more on that topic, read "What Is Contract Negligence?"
5. All Parties Must Sign the Dotted Line
You could spend hours, even days, refining and rewriting contracts. But what's more critical than having the perfect contract that covers every contingency is having a contract, period.
"The most important point, from my perspective, is to get the contract signed," says Jaskiewicz. "As a sign at Facebook's headquarters once read, 'Done is better than perfect.' That way you at least have something that you can use in court if necessary."
Sometimes IT consultants are hesitant to bring up the subject of contracts with clients, thinking it will put them off. But that couldn't be further from the truth, according to Anderson.
"Clients that we work with want us to have contracts," says Anderson. "If you go in there without a contract, or you don't go through the contract with your client, it's actually seen as negative."
If you're new to IT consulting or have avoided using contracts so far, we have some sample contracts you can use as a jumping-off point. If possible, have a lawyer help you draft a basic template that you can adapt as needed.
About the Contributors
Marshall Anderson is president of Tektonic, a managed service provider and IT consulting company based in Salt Lake City, Utah. He's been involved in the IT industry for more than 15 years and has expertise in IT outsourcing, network security, and improving businesses through technology.
As a member in the corporate law department of Spector Gadon & Rosen P.C., Stanley P. Jaskiewicz assists and advises privately-held and family-held businesses on a wide range of legal matters, including contracts law, secured lending and negotiated acquisitions, Internet and technology law, corporate governance, intellectual property, regulatory counseling, fine arts law, and foreign law.
Richard Reice, a partner at Hoguet Newman Regal & Kenney LLP, is an experienced labor and employment law counselor and litigator with both law firm and in-house counsel experience. He has considerable expertise in negotiating employment contracts, collective bargaining agreements – litigating employment discrimination and restrictive covenant / IP protection matters both locally and nationwide.