Negotiate Your Consulting Contracts Like a Pro

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Having worked for a couple of consulting firms, it occurs to me that there are things that everyone should consider while negotiating a consulting contract.  The hefty disclaimer:  I’m not a lawyer, and this shouldn’t be construed as legal advice.  Outlier is a consulting company, but I’ve worked to build a model that’s different from the status quo.  I’m not saying that we’re perfect, or that it doesn’t pay to shop around (in fact, I encourage it and will happily provide names and contact information for other companies that do the same type of work that we do).  I am saying that it pays to be informed, and to ask the right questions before you sign an agreement.  This is my “top 10 list” to help you negotiate your consulting agreements.

1. Can the contract include fixed fees for deliverables instead of hourly rates?

Negotiating fixed-fee contracts is something that big companies, like banks, do on a regular basis.  The irony is that small businesses can benefit just as much, if not more, from using this strategy.  Fixed-fee contracts benefit you by forcing the consultant to be extremely clear about the deliverables (what you are getting) and to be mindful about the scope of the work they’re doing and the time that it will take.  In essence, with a fixed-fee contract you’re agreeing to pay for a clearly defined product or service rather than for someone’s time.

The vast majority of Outlier’s contracts are fixed-fee, because I believe that this will benefit our clients the most.  As a business owner, I understand the value of knowing what you are paying for and how much you will pay before you get started.

2.  Who will be staffing the project?  What are their qualifications (and rates)?

Some firms have a tendency to advertise the experience of top tier professionals, when in reality junior staff (with little or no experience) complete most work.  If your project requires specialized skill sets, the firm that you are hiring should be able to tell you exactly who will be working on your project, what experience they have and what rates you’ll be paying.

3.  What work will a partner be doing on the project?

In many large firms, partners “sell” work, but aren’t actively involved in the management or execution of the project (doing the work).  Sadly, in some cases this doesn’t stop partners from billing clients for their time (including the time that they spend selling).  Since these are the people with the highest hourly rates, it helps to understand what their role will be early on.

In some cases, there may be a requirement for one or two partners to review documents before they are shared with you.  If this is the case, get an estimate of the time that this will take and the rates that will apply (or negotiate a fixed fee contract).  If you think that you may have been billed for something that doesn’t make sense, ask for detailed records that include a description of the work that was done, when and by whom.  In some cases, asking for this alone may reduce the size of your bill.

4.  Who will be managing the project (the point person)?  When and how should they be contacted?

We’ve already covered the fact that the person that is “selling” the work may not be the same person that is actually “doing” the work.  Aside from knowing who will be working on your project, you should know who is coordinating the consulting firm’s efforts.  If this person can be in the room when you’re setting out terms like timing, it’s nice, but that isn’t always possible.  At the very least, you should know who this person is, and how you can reach them.  You’ll want to connect with them early on to make sure that your expectations are clear (especially if this is not the same person that was “selling” consulting services).

5.  Will subcontractors be used?  If so, who, how many and from what companies?

Even big consulting firms will use subcontractors (either independent consultants or consultants from other firms) when there is a need for very specialized skill sets.  This isn’t a bad thing, but comes back to knowing who is working on your project and what background they have.  This can also be relevant if the subcontractors haven’t had the same types of background checks as other employees.

6.  What happens if a key staff member leaves the firm while the project is underway?

This isn’t something that can be easily predicted and it does happen.  The consulting firm should solve for this at their expense, not yours.  This means that if new staff need training in order to work on your project, this is not time that should be billed to you (if you are paying hourly rates).  In some cases, a more senior person may need to step in to cover some of the work, and if this happens, you can ask to continue paying the (lower) rate that you would have paid for the more junior team member (don’t worry, the consulting firm will still be making money; they’ll also be a lot more careful about the amount of time that they bill to your project).

7.  Is there any part of the work that your staff can do internally?

I would always rather work with internal staff members as part of my project team when I can.  It means that I’ll be in a better position to understand your organization and it’s culture.  It can also save you money if you have people on your payroll already that can do some of the work.  In these cases, the roles and responsibilities for each person should be clear.

8.  Are you paying for travel time?

Travel time has been a contentious issue, especially when firms charge a full hourly rate.  Charging for travel time makes sense if the person traveling is also working, but can get a bit dicey when they aren’t.  I’ve had the not so heartwarming experience of being ordered by a partner to bill a client for time that I was sleeping on an airplane at my full rate.  It was a debate that I fought on the client’s behalf, because it seemed absurd to me that anyone would want to pay several hundred dollars an hour for me to sleep.  Ultimately, the partner in question chose to bill the client, and I decided that firm was not a great fit for me ethically.

So it pays to ask, under what circumstances will you be required to pay for a consultant’s travel time?  How much (what rate) will you pay under each applicable circumstance?

Bonus tip:  You can also set per diems (daily limits) on travel related expenses like food and lodging.  I encourage my clients to apply the same standards to my expenses that they would apply to their own staff, including the submission of all receipts.

9.  What additional work are you paying for?

Any additional work that you will be billed for should be approved before it is conducted.  This is true especially if you are paying for services on an hourly basis.  Here’s the situation that I’ve seen time and time again:

Client:  Asks a question.

Consultant:  Offers to research the answer and create a memo; does this and bills the client for the time.

Client:  Is unhappy to receive an invoice for the time spent researching and creating the memo.

Consultant:  Reminds the client that he or she was following the client’s instructions.

There’s a balance that’s often missed here.  The client wants to be fair and compensate the consultant for their work, but feels that the price isn’t justified (or is something that should have been discussed in advance).  The consultant feels like they were following the client’s instructions.  They shouldn’t be at cross-purposes here, but it can feel that way.

One way to avoid this is to get pricing for any extra work (anything that isn’t specified in the original agreement) in advance and in writing (via email is often fine for this purpose).  Again, it can be useful to ask for fixed fees here.

10.  What are the consequences if you don’t get your deliverables?  What if you don’t get them on time?

Most agreements have some sort of timing included, but what happens if you don’t get what you paid for on time (or at all)?  If you have deadlines that you need to meet, it makes sense that you should have assurances that your consulting firm is able to help you meet those deadlines on time.  You can ask for penalties to be built into the contract if you don’t receive your deliverables on time (or bonuses if they are).  Remember that these should be fair and that in many cases your consultant’s ability to deliver on time is based on inputs that come from you (so you need to stick to the schedule as well if you’re putting this type of agreement in place).

There’s also the worst-case scenario:  what if you don’t get a deliverable?  In general, you shouldn’t pay in full before you see the final product.  You can structure your agreements so that your final payment is due when you receive your deliverables.  If it is a long project with more than one deliverable, the contract can be structured so that there are payments when each deliverable is complete.

Finally, when you’re hiring a consultant or consulting firm, you should have a clear idea of what you want before you sign a contract.  It’s up to you to know what you need, and what you’re willing to pay for it.  Make sure that your agreement clearly sets out the deliverables and timing.

If you’re feeling ready to hire a consultant and want to test your new negotiating superpowers, please feel free to contact us.

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