A good service agreement can set the stage for a good client relationship— one that is mutually profitable and lasts for many years. This article is the first in a two-part series on using service agreements for your consulting practice.
Ten years ago, service agreements (contracts or, as is so common today, service level agreements or SLAs) were far less common among small technology consultants. Today they are much more common, in part because of the managed services trend.
We normally don’t think about the complexity in our client relationships, but as you can see in the diagram, these relationships are at least layered between the following:
- Your business
- Services you sell
- Services purchased by your client
- Your client’s business
- Your client
You also need to consider the various government agencies you each deal with as individuals and as businesses. Service agreements allow you to define these relationships so that all parties (including government agencies) understand them.
One good way to think about what you’re accomplishing with a service agreement is to think about your will. When it comes down to it, the sales pitch for having a last will and testament is very simple: If you don’t specify how your assets will be distributed when you die, the government will. In other words, there are laws in place to make the “decisions” you did not make.
Client relationships are very much like this. If you do nothing, there is still a contract between you and your client, but it is very messy. Some things are defined by state and federal law. Other things are determined by the understanding between you and the client. But since nothing is written down, your understanding and the client’s understanding may not be completely consistent.
Even if you are a sole proprietor, you should treat your business as a separate legal entity for purposes of a contract. This is important for keeping your personal affairs and finances separate from your clients’ affairs and finances.
Some people say that they only do business on a handshake. That’s very quaint, but it’s also a lie. Your clients all have contracts for their rent, Internet services, photocopier maintenance, janitorial service, bank accounts, loans, and so forth. Each of your clients has probably executed dozens of contracts during the last twelve months.
Do not think of a service agreement as a negative thing or a barrier in your relationship. Quite the opposite is true. The key benefits of a service agreement are the elements that protect you and your clients mutually. For example, every service agreement should include the following:
Agreement that the entire relationship with regard to this subject matter is defined in this document. This means that previous contracts no longer apply and makes it easy to see what the agreement is. This is much better than having your “contract” consist of notes on an invoice, terms in a letter of engagement, miscellaneous letters and emails, or something written on an endorsed check.
Statement that you are a contractor and not an employee for tax purposes. This is very important for you because it makes your status very clear for tax purposes. It is important for the client because it means they cannot be held responsible for your taxes and various employee expenses such as workers comp. There are several criteria for meeting the Federal IRS standard on this, but you simply address each of them in your service agreement.
Statement that your employees work for you and not for the client. Again, this is a nice clarification for tax purposes. It also fulfills one of the criteria we just discussed.
Beginning and ending dates for the agreement. Is the agreement for a set period, such as twelve months or thirty-six months, or does it renew every thirty days? You also need to define how each of you can terminate the agreement if necessary.
Cost of services. Even if you will be raising rates during the term of the service agreement, you need to state what the rate is at the beginning of the agreement and how rates can be changed. This is the place to state your standard after-hours rate as well.
Description of services. In the old business school terminology of “gives and gets” this is the place where you define what the clients get for their money. You might have some items that are very specific, but also include a catch-all for work not defined in the agreement.
Mutual non-disclosure agreement. Both you and the client benefit from a non-disclosure with regard to information and methods.
Mutual non-solicitation of each others’ employees. This is one of the very few areas that I hear about consistently as a problem between consultants and clients. Set reasonable limits and a reasonable financial penalty for violating it.
Mutual agreement about what’s included/covered and what’s excluded/not covered under a managed services agreement. If you’re providing any flat-fee service, state what is and is not included. Once you both understand this, it will be very easy to categorize specific work.
And of course there are a few things that are strictly for your benefit, such as limitations on your liability, and the payment terms under the agreement.
You should go over you agreement with the client so you both understand what it says and agree on the definition of your relationship. Think of the service agreement like a checklist. There are lots of topics you should address with your client. The service agreement simply makes sure that you address each of them.
In my next post we’ll talk about the various kinds of service agreements you might have with clients.
Legal Disclaimer: I’m not a lawyer. Nothing in this article is to be considered legal advice. You are responsible for all actions you take and any decisions you make.
photo credit: RambergMediaImages via Flickr