Looking to create a consulting agreement for your new consultant?
You’re probably wondering how it differs from an agreement you make with an independent contractor. Let’s explore the main differences between the two, and go through a checklist for some of the main clauses you should include when creating a consulting agreement from scratch.
This article is part of our guide on independent contractors’ agreements.
What’s the difference between a consulting agreement and one with an independent contractor?
It’s true that many people use the terms contractor and consultant interchangeably. However, there is certainly a difference in the way that they work.
You hire a contractor for a specific predefined task or set of tasks, where you tell them the work that they need to complete, and usually include a deadline or a schedule to keep to. They regularly work alone, and usually, choose the location in which they work.
On the other hand, a consultant will be hired to provide their own expertise and knowledge to the business in a much broader way. They may take an audit of what needs to be done, plan the scope and tasks involved in the project, and will generally work alongside an internal team (often in the same office) to support them in this work.
Think about the difference between Jamie, a consultant who comes into your company for 6 months – 1 year, to oversee a team that will shift your B2B solution from on-premises architecture to the cloud, and Sasha, the contractor who designs the marketing materials that will explain the new solution to your customers. Jamie may work in the office, will have a lot of communication with various departments and stakeholders, will lead decisions in terms of strategy and process, and will certainly have access to a lot of sensitive and privileged information about the business. Sasha will be given the brief for her specific task, she will probably work remotely and only be told exactly what she needs to know to complete the design of the marketing materials. In fact, Jamie might even be the person directing Sasha in the work that needs to be done.
As a result, you’ll need to put a lot more thought into the consulting agreements that you create, than you do for a simple contractor agreement.
A checklist of items to include when drawing up a consulting agreement
Need some help with what to include in your consulting agreement? Look no further! Here’s some clauses to consider.
#1 Duration and termination
This is an important clause of any consulting agreement, as you can’t simply have an open-ended agreement with a consultant, or you’ll risk misclassification. Make sure to specify a start date and an end date, and the way that either party can go about extending or terminating the agreement. For example, you might say that the consultant needs to provide 2 months’ notice before they can leave, or that any breach of contract on either side will result in termination. Bear in mind that a consultant may request the inclusion of a “kill fee”, so that if you terminate the project early, they are compensated for the loss of work.
#2 Compensation terms
It’s much more common for a consultant to charge for their work on a large, per-project basis, while independent contractors are more likely to charge an hourly fee. Speak to your consultant about how they prefer to be paid, for example, a day rate, a retainer amount per month until the project is complete, (similar to a salary) or 50% up-front and then 50% on completion. Remember that it’s common to pay a premium for consultants, as they usually have more experience and expertise under their belt. To ensure you have a tight rein on costs, you might want to factor in success-based fees, where a consultant is awarded an extra payment on completion of a specific milestone, such as for completing a project by a given date or within budget.
#3 Intellectual Property
Did you know that without an IP transfer agreement in place, your service provider will hold all of the intellectual property rights to the work they complete? Many companies believe that the work their consultants produce comes under the “works made for hire” clause of the copyright act, but this is a complicated clause that doesn’t include commonly outsourced work, for example – software or code. It’s therefore important that you outline exactly who owns the work that your consultant is producing in the agreement from day one.
As a consultant moves from company to company, usually within the same industry – a non-disclosure agreement (NDA) could protect some of the sensitive “trade secret” style information that they could be privy to while working under your roof. Remember, you can’t protect thoughts and ideas, and of course, your consultant will become more skilled while they work for your organization. They can’t help but use that as a bargaining chip when they move to their next project. You also can’t protect anything that is in the public realm. However, what you can explicitly protect even once the relationship is complete, is the use of proprietary information. This includes your documents, data, reports and plans for the future, and outlining these items specifically in your consulting agreement ahead of time ensures that these aren’t shared with your competitors.
This one is a toughie. A consulting agreement is by nature a short-term arrangement, and while it could be as much as 1-3 years, your consultant is going to want to move to a new opportunity once the project is complete. Making a consultant sign a non-compete, (where they can’t work with anyone in the industry for a set amount of time after your project is complete) might be enough to turn them off from working for your organization altogether. On top of that, non-competes are famously difficult to enforce in order to protect the consultant’s own business and profit. You may therefore decide that your non-disclosure, confidentiality, or non-solicitation clauses will be enough to cover your own business interests.