Read the Fine Print - How to Review Large Contracts

Robert Patin Mar 31, 2021 10:00:00 AM

Agencies can go to extreme lengths to secure a large contract. But in many cases, that can backfire. Discover what happened to our client.

 

Recently, we found ourselves working with a client whose client asked for exclusivity on the contract. Unfortunately, that would have impeded the agency significantly. 

Considering the agency is fairly niched, the exclusivity contract would hurt their ability to scale. 

In communicating with our client, we had to go back and let them know about the dangers of entering into an exclusive contract. Because of the niche, exclusivity wasn’t really possible. 

That said, there were certain aspects of exclusivity that could have been considered, but with minimum spend amounts. 

The fact is that even when you’re presented with an MSA for a large Fortune 500 company or any client, you shouldn’t just look at the value of the contract.

You need to think about what’s best for your agency first and foremost. 

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That’s why you must always consider the impact and opportunity cost of entering an agreement. 

It starts by making sure to review your contracts closely. And you should check with a counselor or other advisors in the industry when it comes to these matters. 

How to Ensure Your Contracts Are Bulletproof

Define a Detailed Scope of Work

An ill-defined scope of work can cause you a lot of trouble. 

For example, if you don’t agree on the number of revisions that a client is allowed to ask, you could end up doing much more work than expected. 

You also need to define what your work actually means. 

Let’s say you’re doing website management. In this case, it’s important to list each and every aspect of website management to avoid doing extra stuff free of charge. 

Furthermore, it’s advisable to highlight the scope of work on the first page of your contract. Then, dedicate an entire appendix to the scope alone. Here are the crucial things you should be defining: 

  • Type of service provided 
  • Requirements on the client’s end
  • Specifics regarding the agreement
  • Number of revisions 
  • Deliverables and outcomes 

These are just the bare minimum, so you should add more depending on the service you’re providing. 

It doesn’t matter if your contract becomes lengthy because of all the details. You really want to avoid open-ended deliverables and scope because it can turn costly. 

 

Have a Well-Defined Payment Schedule

Late payments and invoices can seriously affect your cash flow. When that happens, it will limit your ability to grow the agency. 

To avoid this, you need to define a payment schedule as soon as you start working with a client. Of course, this doesn’t only apply to a large account but any client that comes your way. 

The payment terms within a contract should include: 

  • The amount owed 
  • Payment method
  • Schedule
  • Whether the payment is refundable 

Agreeing on a retainer contract means that the payment terms should be monthly. 

But if you have a contract for specific projects, it’s advisable to ask for advance payments. For example, the client should pay 50% of the total price for a project before you start. The rest is due upon completion. 

Another method is to set milestones or specific aspects of a project that are paid when finished. And going back to the website management example, a milestone could be improving the SEO and layout of your client’s home page.

 

And while no agency wants to have to use them, according to Sharon Toerek of Toerek Law, a law firm that focuses its practice on independent agencies nationwide, if your agency needs the option to charge late fees, collect interest, or recover its collection costs from a client, these need to be built into your contract language at the time of signing. Without them, these are choices the agency won’t have available for late or unpaid client bills.

 

Be Careful with Indemnification and Liability

To understand what’s behind the legal lingo, let’s consider a potential situation. 

Your client took a hit and lost some money because of your work. Nobody likes to be in such a situation, but it doesn’t mean major lapses aren’t possible. 

When it happens, your agency could take a financial hit as well if you don’t have an indemnity clause. And unfortunately, there are a lot of agencies that won’t be able to afford this. 

In other words, the indemnity clause is the difference between dodging the bullet and getting nailed. 

Therefore, it’s not surprising that indemnity clauses are quite complicated. That’s why you need to consult with your legal team or attorney to make sure your agency is well protected. Don’t assume it can’t or won’t happen to you, because sadly in today's world that is only true until it is not.

As for the liability, you need to limit it to what you’re paid and no more than that. 

Sharon Toerek points out that “it’s important not only to be clear about indemnification – in other words, which party will be responsible for legal claims – but also about liability limits. Work to limit the agency’s liability to no more than the fees paid by the client for a particular engagement or SOW. At most, your limitation of liability should be your professional liability insurance policy limits.”

It also pays to make the indemnification mutual. This means that if your liability happens because of your client’s doing, your agency is protected.  

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Get Clear on What an Exclusive Contract Entails

Exclusivity means working for a client exclusively. And under such a contract, it means you won’t be able to collaborate with the client’s direct competitors or anyone else in the niche. 

In case you’re going with it, make sure that your non-exclusive contract should define how you can work with other clients, including: 

  • Doing business with other clients in general
  • Working with clients from the same niche or industry
  • The type of services and deliverables you can provide for other clients 

There’s a possibility that your client might object due to a conflict of interest. So, how do you deal with that? 

You can include arbitration clauses that address potential conflicts of interest and other liabilities. And there’s an option to agree to not provide services for competitors, but be very careful since it may hurt your business.  

Lastly, it’s important to get the best possible legal help, which can get expensive. But, going on the cheap can cost you a lot more in the end. 

 
It’s All in the Fine Print

The idea of landing a major contract that may boost your revenue through the roof is exciting. But you don’t want to get caught up and agree to something that may jeopardize your agency. 

To recap, you need to be really careful with exclusive contracts. Then, you need to detail each and every detail of your collaboration. This means being very specific on the scope of work, payment schedule, etc. 

One of the best ways to be ready for your next contract negotiation? Have an agency MSA of your own. “It gets you to the bargaining table quicker in some cases, and will also serve as a benchmarking tool for reviewing a client’s proposed agreement before signing it,” says Sharon Toerek

Most likely, you won’t be able to cover all the aspects on your own. So make sure that you have the best legal team to support you. 


Want more tips on how to create bulletproof contracts? Schedule a discovery call with us.



 

 

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