Retainer fees are one of the many ways to be compensated for your work. Commonly used by lawyers, retainers can be used by any kind of project-based work and can be used to hire firms or individuals. Although retainers involve up-front costs for clients, it also provides them with guarantees of service and increases the rates of project success.
Retainer agreements are often very highly customized to create the right balance of incentivization and consideration for the client and the contractor. For attorneys, retainers can help firms pay up-front costs of doing business and remain competitive, and for freelancers, a retainer agreement can pave the way towards working as a salaried employee, with a secure paycheck.
You’ll need to do all of the proper research and homework first, but this template will give you a head-start and a good framework. You should always consult a lawyer though before finalizing any contracts.
Although commonly used for the work of an attorney to a client, retainer agreements can also be used for the work of freelancers and other project-based workers. A retainer differs from other types of hiring contracts, because it does not stipulate a salary, and typically involves an up-front payment. The amount paid is usually constant and covers the majority of the work. It is paid into a third-party account, such as a trust, and then can be withdrawn by the contractor as work is completed and expenses are incurred.
Retainers are often heavily negotiated, and depend on a lot of factors. For instance, the amount of risk for the contractor- if higher, the retainer may need to be higher to justify the contractor entering into the agreement. If the contractor has a higher reputation or better qualifications, they also will probably charge a higher fee. Retainers generally cover a particular period, so the amount of work to be performed needs to be estimated well. Underestimates and overestimates become costly for the client, so the client is strongly incentivized to understand how much work will be required within a given time period, such as within one month.
There is also typically some leftover amount at the end of the term of the period, which can be an unused balance or additional amount due. Unused balances are often taken as profit by the contractors. For this reason, more client advantage can be had by retainer fees that are slightly less than the overall scope of work. When the retainer amount runs out, the work converts to an hourly rate, but only a small amount. In comparison to this overage rate, the retainer equivalent is usually discounted (for buying in bulk).
When a contractor works on smaller jobs, it is common to work hourly-postpaid. This arrangement allows for very small jobs and somewhat larger jobs, and for clients to pay very little if anything at all up front. However, for clients, the risk is higher than jobs will not be completed. For smaller clients that can’t afford to pay up-front though, the hourly route is the only way to go. Retainer agreements can incorporate hourly pay, although generally, it makes more sense to try to front-load payment to reduce the risk for parties at least a little.
When payments are made up-front, contractors focus more on the project, and long term project success rates are higher. Retainer contracts are likely to scare away less serious clients and attract larger projects. Freelancers and firms need to be ready to offer a higher level of professionalism that will be required in their work, but also be ready to see an increase in their reputation. It’s well known that a freelancer that can say that they are “on retainer” to several large firms, is a freelancer with a good reputation and a healthy, in-demand business.
A retainer contract always includes a few sections, to make the contract legal and make sense for both parties. First, there is always a project section. The project section defines the scope and nature of the acts to be performed or caused to be performed by the contractor. Some projects can be quite complex, with many specific terms, and other contracts can be simple, with a pre-determined package. Freelancers and firms often place their work into packages to make things easier to understand and create advantageous choices for their clients. For example, a photographer may know that clients often want to re-shoot if they didn’t have a hair and makeup artist do touchups before a portrait job, and so put the hair and makeup by default in the portrait package. By making choices for customers, the contractor makes things more simple and reduces the risk of failure later on.
When defining a retainer contract, one of the most important things is the fee. Depending on what type of job, there are several options and ways to mix and match, in order to fit the type of work. Once the project is well defined, the type of fee which should be used is more or less evident. For example, there are fixed or flat fees, which apply to packages or parts of work that are very well defined. These flat fees can include a number of hours, or specify on a project basis instead. If you choose to specify hours, such as 30 hours during a 30 day period for $1000, then you should also include what happens if the number of hours is not met or is exceeded. Some contractors include the ability to roll over hours, like a data plan on a cell phone, to entice clients. This can lead to the contractor doing more work and spending more money and resources than intended though, so it’s something to be extra careful about.
If your fee is a percentage of the amount earned on a project, such as the profit over the lifetime of a particular asset you helped create, then you need to use what’s called a contingency fee. These range from 10% up to 45% of gross profits, depending on the industry, your company’s skills, experience, and reputation, and risk of liability. But generally, they are considered to be success-driven, giving incentives to both parties to win whatever the project’s success criteria are. If projects are highly risky, though, these pure contingency fees can result in large losses for firms.
A hybrid style called “modified contingency” is then used, where some contingency is defined, and some hourly, flat fee, or expense related fee is defined. This allows profits to be separated from costs a little more, and to reduce risks to the contractor for projects where success is unlikely.
The last fee style is hourly. This type just means that payment is made upfront if it is considered an hourly retainer. It’s good for projects that are highly unpredictable, but generally not discounted well, and clients exchange a lot of added expense for the flexibility it provides. If the flexibility of hiring a very large amount of work or a very small amount, without additional contract negotiation, is really worth higher rates to the customer though, then it might be the only way to go.
Negotiations on these kinds of contracts should be done in person, and contracts need to be delivered to the client, meaning that enforceability and reduction of future disputes are made much better by clearly explaining the contract before it is signed, not just sending it by mail to the client. If both parties are careful and professional, a retainer agreement can provide the right incentives and balance to accomplish hiring for very difficult work. Use it to empower your business and increase your efficiency, with our free template to get you started today!