Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I am Hélène, and today we will be discussing how to build the right consulting agreement?
However, before that, let me give a recap of last week’s session.
Purchasing consulting service is an important part of any company’s business strategy.
This can be difficult, with many companies choosing one extreme or another – some treating them like any other purchase while others blindly following principles no matter what the situation may entail; however there are still best practices that all firms should follow so as not only to make sure your investment pays off but also to reduce risk involved in doing so.
When purchasing consulting services, you’re purchasing more than just the service; you’re comparing what’s on the inside, their approach, and the methodologies they’ll employ.
When you buy a tangible product, it won’t matter to you how it’s made or anything, but when you buy consulting, you care about almost everything. And that’s what makes it so specific.
Listen to the complete podcast about, purchasing consulting services: what’s so specific?
However, this week, I want to discuss about how to build the right consulting agreement?
What is consulting Agreement?
First things first, let me define a consulting agreement.
So, a consulting agreement is a contract between a company and a consulting firm or individual consultant. The consulting agreement’s goal is to specify the consulting services to be delivered, the payment conditions, and other key aspects.
Businesses frequently employ consulting agreements to outsource certain jobs or projects. A client could engage a consultant to assist with marketing research or product development, for example.
Individuals who are self-employed or have their own consulting firm can also use consulting agreements.
The consulting contract in this scenario would specify the consulting services to be given as well as the price arrangement. But there are many other aspects that you should add to your consulting agreement.
How to build a right consulting agreement?
No matter what type of consulting work you need, it’s important to have a clear and legally binding consulting agreement in place. And I would recommend working with your legal team, and if you work regularly with consultants, to have a consulting agreement template.
Without a consulting agreement, there could be confusion about expectations or misunderstanding about the terms of the work, which could lead to conflict down the road.
In most cases, a consulting agreement has four dimensions:
The first one being the statement of Work, which outlines what will be accomplished during the project. This is the first step when you draft a contract. You need to transform the proposal into a SOW that will lay down the expectations for the project.
The purpose of this SOW is to ensure that the Consulting providers commit to the results rather than the means. If the performance does not meet your expectations, the elements in the contract will serve as a reference in a potential litigation.
This document outlines the scope of the project, the deliverables, the schedule, and the expected outcome. It also includes governance and escalation procedures in case things go off track.
The statement of work forms the basis of the consulting agreement, so it’s important to get it right. Once you’ve got a draft document, sit down with your consultant and go through it line by line.
Make sure they understand what’s expected of them, and that you’re both on the same page about the project deliverables.
You may go on to how the Consulting Firm will be compensated once you’ve specified what they’re intended to perform.
And this brings us to our second dimension of framing the right consulting agreement,
The Payment Terms, or how and when payments will be made.
The contract should spell out exactly how the consultants will be compensated. Make sure you understand the quantities and the conditions that come with them.
For instance, if you opted for a flat fee, be clear on the total amount to be paid. If you are using hourly rates, which I don’t recommend for management consulting work btw, include the precise amounts for each type of consultant, the type of cap (hard or soft), and the number of hours required to meet the cap.
And finally if you want to have a risk sharing model, define the variable compensation, the metrics on which the variable compensation is based, and how they will be monitored.
Make sure the terms you’re negotiating are in line with your company’s policies. A little tip here for the beginners, the price stated in the contract is often the net price (before sales tax).
Set a deadline for when payments must be made. Standard terms are generally 30 to 60 days from the date of invoicing, but it can be longer. Make sure they respect the local regulations though. Some countries like, those in the EU, have started limiting the payment terms.
Define the payment schedule such as weekly, monthly, phased, lump sum, milestone-based or deliverable-based. Large projects, spanning over six months, should examine the monthly timetable for instance
You can also add the fees description in the appendix.
Another tip is to use an incentive for early delivery and/or a penalty for late delivery while working on a time-sensitive project.
And this brings us to our third dimension of building the right consulting agreement, which is delivery guidelines, which include how the job will be completed.
Starting with the first guideline, the confidentiality agreement.
You don’t want the consultant to inform everyone about the project you worked on. Examine the contract’s intellectual property and confidentiality terms carefully. The wording of these provisions should be determined on a project-by-project basis.
If you have any worries about a particular type of sensitive information, set it down in plain English in the contract. Make sure you’re aware of the restrictions of confidentiality agreements, especially if you work internationally.
Confidentiality is approached (and regulated) differently in each culture or country. You should also be aware that secrecy should be limited in both time and place.
If you operate with sensitive data, you’ll almost certainly have stringent security needs, which you should specify in the contract.
The components can include, for example:
Data and information management such as (Information Security policies). Any consultant present on your premises and/or working on your data must be onboarded and vetted like in (Vendor Onboarding and/or Vetting standards). Or that Ensuring the consultants’ safety while on your site and we are talking about (Health and Safety policies)
Intellectual property is also a very important topic. The customer owns the materials created during the project (presentations, reports, etc.).
The Consulting Company’s techniques and tools, on the other hand, may be built on pre-existing Intellectual Capital established over time by the firm.
In that instance, the IP will remain the property of the Consulting Provider, and the customer should negotiate the right to freely utilize the results.
You should also request the data obtained on your behalf during the project, such as the models created for the project and the interview transcripts. Don’t be satisfied with only the finished results.
You’ll also need to figure out how to deal with third-parties. The majority of consulting firms collaborate with outside partners and subcontractors. You have the option of being notified if a third party is working on the project.
Furthermore, you have the option of having them sign a specific NDA or trusting the Consulting Firm to ensure that their partner or subcontractor follows the NDA they signed with you.
If the Consulting Provider is already working with a rival or a customer of yours on some sensitive projects, there may be a conflict of interest. You can negotiate exclusivity, but it usually comes with a hefty price tag.
You might provide a list of individual firms or a wider description of your rivals in your contract. You must add a non-compete provision if you do not want the Consulting Firm to work with your competitors AFTER the project is completed.
And finally we have our fourth dimension which is escalation measures, including what will be done if a problem arises.
Because you’ll be thinking about “what-ifs” and “worst case” situations and coming up with numerous solutions, successful and effective planning will help you create the strategy and obtain a more holistic perspective of the project.
When you start a project, everything may seem to be going well. But many things can change during the course of a long project. You should keep the changes to a minimum and make sure the terms and conditions stay the same.
If any change occurs, you should track all modifications to avoid future arguments. A clause stating that the contract can only be altered in writing is recommended.
The next thing is a contract’s governing law, commonly known as “option of law,”. It is an important component. If a problem occurs with your consulting service, keep in mind that your contract is always the first point of reference.
You should confer with your legal counsel and ask yourself, “What law would best safeguard our interests in a consulting agreement?”
Your consulting firm may have certain requirements on that front as well. Don’t take them for granted, and include them in the negotiations if required.
In a Consulting Agreement, you will often see a Limitation of Liability each party can incur and a Disclaimer of Warranty. As a rule, you need to limit the risk for your company while entering this agreement.
Consulting agreements are routinely used by companies working with consultants to define, in details, the services to be provided and the terms and conditions. I strongly recommend to work with a legal counsel to dictate the terms of the contract instead of using blindly the template from the consultant.
Your consulting agreement should include 4 important elements:
- The Statement of Work which outlines the expectations and how success will be measured
- The Payment Terms , including how and when payments will be made .
- The Delivery conditions, including the confidentiality , Intellectual property, Liabilities and warranty aspects
- And The Escalation measures, including what will be done if a problem arises.
And that marks the end of our podcast. Next week, I want to talk about why measuring the performance of consultants matters? So, stay tuned.
Till then, stay safe and happy sourcing!
If you have other questions about building the right consulting agreement, remember you can always contact me directly on LinkedIn or by email because I am always game for a chat!
Bye and see you next week! Au revoir!