So far in this Vendor Contract series, we talked about T&M (Part 2) and Fixed Price (Part 3) SOWs. In this last post, I describe two final contract types that you can’t afford to miss: Retainer and Staffing SOWs.
In a Retainer SOW, a Vendor commits to providing ongoing, on-call services to a Client in exchange for a flat monthly fee. Retainers typically define the type of services to be rendered and the duration of the contract. But they do not specifically define the deliverables (as in a Fixed Fee contract) or the number of hours of work (as in a T&M contract).
Retainers are great for Clients who will be using the same kind of services from a Vendor consistently throughout the year. It allows them to reserve the Vendor’s services on an ongoing, as-needed basis. SOW approvals can be difficult and usually take a long time. Therefore, Retainers can work great for Clients who know they will be heavily using the Vendor’s services and don’t want to enter SOW negotiations every time they call the Vendor or request a new deliverable. On the Vendor side, Retainers can help you secure utilization for your team throughout the year and smooth out cash flow.
Whereas T&M and Fixed Fee are most common with project work, Retainers are most common for consulting and support services. Common examples include:
- Software support contracts – For example, the Vendor agrees to provide on-call support for a given software product to anyone on the Client’s team, including technical support, troubleshooting problems by phone, and/or being on site within 24 hours in the case of technical failures.
- Marketing agencies – For example, the Vendor agrees to manage the Client’s social media marketing, including developing and launching campaigns, responding to consumer comments on Facebook and Twitter, and providing monthly reporting on consumer engagement.
- Legal services – For example, the Vendor agrees to be on-call whenever the Client needs legal advice, contract review, etc.
In the case of consulting services, a Retainer SOW should specify an Account Manager to be the main point of contact on the Vendor side and to manage all Vendor activities.
Key Watchouts for Clients:
1. Date before you marry: Retainer contracts generally cover long periods of time (i.e. several months or even years). This is a big commitment, so make sure you’ve done enough previous work with the Vendor to be comfortable with their responsiveness and the quality of their work. You might want to start with a short Retainer SOW as a trial before engaging in a longer, more committed one.
2. Know what’s covered: Make sure you understand exactly what the Vendor will include and exclude under the Retainer SOW. Usually, a retainer will only cover the Vendor’s employees’ time, but not any other kinds of expenses incurred as a result of their work. Common examples include travel expenses (e.g. for Client meetings and research trips) and printing or production of any physical materials. Make sure you set aside a chunk of budget for the items not covered in the Retainer. And make sure you inform your Vendor what that budget is. It’s also a good idea to require the Vendor to get your approval before incurring any expense outside the Retainer scope, including an estimate for their upcoming travel expenses. That way, if they plan to stay at the Ritz Carlton next time they visit your office, you can steer them toward the Holiday Inn instead.
3. Termination Notice: Be sure that in the case that you become unhappy with their work and can’t resolve the situation, there’s a way to get out of the contract relatively quickly without a penalty. Retainers should specify how many days’ notice you need to give to break the contract, and you want this number to be as low as possible.
Key Watchouts for Vendors:
1. High maintenance Clients: This type of SOW can cause late, late nights at the office. It’s nice to have that monthly check coming in, but remember that you and your team are on the hook for whatever your Client wants, whenever they want it. If you’re working with a Client for the first time, it’s a good idea to do one or more smaller T&M or Fixed Fee projects before agreeing to a Retainer, so you can see how much Account Management they need, and how many rounds of revision are typical for them. Armed with that information, you can better project how much it will cost you to provide them ongoing, unlimited services. Another approach is to set some boundaries in the retainer to protect you. For example, set the expectation on the minimum response time your Client should expect. Avoid the situation where lack of planning from the Client creates an emergency on your end.
2. Watch your costs: Even though this isn’t a T&M project, you should budget how many hours you expect to spend on the Client’s account and track planned versus actuals. This is where an Account Manager or Project Manager is indispensable. He/she should be the main point of contact for the Client, keep track of the budget, and allocate all work and time to your team. That way, you can ensure you don’t overrun your budgeted hours. Plus, when the contract is up for renewal, you’ll know whether you need to up your price or not.
3. Plan for the break-up: If your Retainer Clients are a significant part of your yearly revenue, then what will happen to your company if they go away? Make sure you are cultivating your other Clients and prospect list, as well as building your cash reserve so that you’ll still be able to make payroll if they leave. The key here is planning. Break-ups are expected and are a part of doing business. Just don’t be caught off-guard.
With Staff Augmentation SOWs (a.k.a. staffing or contract labor), the Client temporarily adds people to their team. You can use a Staffing Vendor that will provide you with the appropriate resource(s) or you can contract somebody directly (i.e. freelancers). This is the simplest of all Vendor relationships.
This type of contract is very useful when you need extra manpower but your company is not in a position to hire the people you need. Reasons to engage in Staffing SOWs include:
- You need a skill set just temporarily and this is not a skill that the company is willing to invest in long-term. Common examples include contracting a Visual Designer, Design Research, Q&A tester, Technical Writer, etc.
- Your company is not financially ready to increase the full-time staff. Therefore hiring temporary resources is a good way to manage work spikes.
Key Watchouts for Clients:
1. Work for hire: I recommend that all work done by contractors is treated as “work for hire”, meaning you own all the IP of anything that is produced by the resource(s) for the duration of the project. This needs to be clearly stated in the SOW.
2. Non-compete: Freelancers tend to work with many companies for a short duration of time. If you are concerned about a contractor doing work for a competitor and sharing some of your proprietary information, make sure your contractor agreement includes a clause about this. It’s not uncommon to specify that they can’t work for X or Y companies for a specific duration of time. This might be a deal-breaker for some contractors, so it’s up to you to assess the risk/reward.
3. Know your Vendor: If you decide to hire a company for your staffing needs (as opposed to freelancers), make sure that this company is set up to work this way. Many project-based companies will agree to a staffing engagement just to get their foot in the door. After that, their Account Manager will be constantly asking you for the better, bigger engagement that can be managed as a full project. This might not be a bad thing; just be aware of what you are getting into. Also, project-based companies will have much higher rates than companies that specialize in Staffing. Make sure you understand the type of work you need and the type of company that will provide the work.
Key Watchouts for Vendors:
1. Non-compete: If you are an independent contractor, it’s a good idea to fully understand the non-compete clause of the Client’s SOW. Some contracts are very aggressive and can ban you from all other possible Clients in your city or your field of expertise. The reward here is not worth the risk.
2. Plan for rate increases: From time to time, you might need to adjust your rates due to inflation or market pressures. In this case, it’s always a good idea to include a clause in the SOW that allows you to increase rates every so often. I’ve seen situations where a Vendor agreed to a low rate SOW just to get in the door. They didn’t set the expectation for rate adjustments and after a few years, they were losing money on the engagement. Not a good place to be.
I’ve covered a lot of ground in these posts. Now that you are familiar with the main SOW types, you are ready to engage Vendors/Clients and start your project! The main take away from this series is to be aware that there are many types of Vendor contracts, and there is no right or wrong one. The important thing is to make sure you clearly understand what you are after, and make sure that the type of contract you select is the one that is most conducive to the success of your project.
So where do you go from here?
Now that you’ve gone through Part 4: Retainer & Staffing Contracts, it’s time to look at the other articles in the series:
Part 4: How to Negotiate Retainer & Staffing Contracts