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Key Issues in Service Contracts for Startup Businesses

Starting a BusinessLegal

If your company is providing professional services as opposed to selling a product, you may find that you need a good Agreement for Professional Services. This type of agreement lays out the terms and conditions under which your business provides certain services. Examples of such services include accounting, engineering, consulting, software development, and property inspections.

Here are the key points to keep in mind when drafting or negotiating an Agreement for Professional Services:

  • Services to be rendered: Clearly set forth the precise services to be rendered in the contract. Avoid broad or ambiguous language, such as “Company will provide all services necessary to make the Client’s computer operations work quickly and efficiently.” This type of language only leads to problems or litigation. Rather, consider language that specifically and narrowly describes what you can actually do, such as “Company will provide up to 50 hours of consulting time to assist Client in modifying its computer network to operate more quickly.”
  • Fees: Spell out the compensation that you expect to receive and when you expect to receive it. Do you expect an up-front retainer? Do you charge a lump sum for the project or prefer to be paid by the hour? When are payments due?
  • Reimbursable costs: If you expect the client to reimburse your out-of-pocket expense or other costs, make sure that your contract specifically states this expectation.
  • Nonsolicitation of employees: Consider adding a clause that prohibits your customer from soliciting or hiring away your employees who are working on the project. This clause is especially important if you have employees with valuable technical skills.
  • Late charges: Use the contract to ensure that if the client doesn’t pay their bill on time, interest begins to accrue. Typical late charges accrue at 1% to 1.5% percent per month on unpaid sums.
  • Liability limitations: Ideally, you want your contract to limit your liability in a number of ways. One typical provision is to say that the maximum amount of liability exposure you have is the amount of your fees. (After all, if your risk is greater than your fees, the job may not be worth taking.) Also consider a clause that states that you are not liable for consequential, punitive, or speculative damages or lost profits. Of course, various laws may limit the enforceability of such provisions, but you generally have little downside in including them in your contract.
  • Period for bringing claims: Another way to potentially limit your liability is to limit the time period when a dissatisfied customer can bring a claim against you. For example, your contract may state that if the customer becomes aware of any problem with the services provided, then the customer has to notify you and bring a legal proceeding within one year of discovering the problem or else waive the right to complain. The intention of this clause is to keep someone from bringing a claim against you after your memories about the work have faded.
  • Time to perform services: Be wary of an absolute deadline by which you must complete the services. If you don’t complete the work by the deadline, what rights does the customer have? You may be in a disastrous position if you find out that the customer can terminate the contract or withhold paying fees just because you are late finishing a project.
  • Suspension of services: You typically want your contract to say that if you are not being paid on time, then you have the right to immediately terminate or suspend performing further services.
  • Force majeure: This legalese clause says that if you are prevented from doing or completing your work by an act of God or unforeseen events (power failure, labor strike, earthquake, and so on), then your inability to perform the work will be excused—at least for a reasonable time.

For a sample Agreement for Professional Services, see the Forms and Agreements section of AllBusiness.com.

Be sure to also read Key Issues in Sales Contracts for Startup Businesses.

Copyright © by Richard D. Harroch. All Rights Reserved.

Profile: Richard Harroch

Richard D. Harroch is a Senior Advisor to CEOs, management teams, and Boards of Directors. He is an expert on M&A, venture capital, startups, and business contracts. He was the Managing Director and Global Head of M&A at VantagePoint Capital Partners, a venture capital fund in the San Francisco area. His focus is on internet, digital media, AI and technology companies. He was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, Fox Business and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He is the co-author of a 1,500-page book published by Bloomberg on mergers and acquisitions of privately held companies. He was also a corporate and M&A partner at the international law firm of Orrick, Herrington & Sutcliffe. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached through LinkedIn.