How do I charge a monthly retainer? 5 tips for contractors

'I have been asked by my client to offer a monthly retainer, how do I charge my clients a monthly retainer?'

It's a common query contractors have. Well, there are five considerations to explore: Scope; Scope Creep; Carry Over; IR35, and Documentation. 

And for the purposes of this article advising contractors of five tips to follow when creating a monthly retainer, a ‘retainer’ arrangement,  is one where:

• a contractor guarantees a client a degree of availability over time (e.g. 2 days per month) – or, perhaps, a particular volume of a particular type of task during that period, and;
• the client guarantees payment for that, on a pre-agreed basis (possibly discounted).

There would generally also be an agreed framework for additional work, outside the scope of the retainer; that might be for different types of work, or just for greater volume. That additional work might be paid on a different basis, or at a different rate.

So, writes Roger Sinclair, legal consultant at Egos Legal Limited, here are five tips that the wise contractor will follow:

1. Scope

There needs to be clear agreement as to the scope of the retainer. 

I would expect this to include not only the amount of time / volume of work for which the contractor guarantees availability, but also the type of work that may be done for the client in the course of the retainer (which may be a sub-set only of the contractor’s overall work offerings). 

There may also be limits to days, and times of day, when services can be called for under the retainer. 

The contractor may wish to be able to pre-specify periods when (s)he might wish to take holiday, and so not be available .

2. ‘Scope Creep’

What happens when the client wants work which is outside the scope of the retainer, whether because the guaranteed available time  / volume for the current month has already been used up, or because the type of work requested is outside the scope of the retainer? 

Either way, a price needs to be agreed; this might be a rate pre-agreed at the outset, or a fixed price agreed at the time. 

And it should go without saying that the client’s request and the contractor’s agreement for that additional work should be documented appropriately.

3. ‘Carry Over’

What some might call ‘underage,’ or perhaps ‘carry over,’ regardless, there needs to be a clear commercial understanding as to what happens to any unused retainer time / capacity that the client has paid a retainer for. 

The arrangement might simply be ‘use it or lose it. ’ Sometimes, parties might agree that this can be carried forwards, for a limited time;  and, if so, the contract needs to make that clear, specifying it can only be used against future ‘overage’ during that limited period. 

And what happens to any ‘carry over’ if the contract ends before it has been used up? Similarly this needs to be considered and documented.

4. IR35

A guarantee of payment, in return for a guarantee of availability, represents a degree of mutuality of obligation, which exceeds that in a more conventional ‘IR35-sensitive’ engagement. 

Other things being equal, a retainer arrangement should not of itself significantly increase exposure to IR35-related risks, provided the contractor has significant other concurrent clients, and that any one client on a retainer arrangement represents no more than a minor part of the contractor’s current portfolio. 

If, on the other hand, the total income from this client accounts for, say, more than half of the contractor’s income, then I would say caution is called for -- the presence of the guaranteed retainer may have a negative effect on the engagement’s IR35 position. 

Particular care may therefore be required to other factors which might significantly affect the IR35 position.

So, the wise contractor will be selective about the circumstances and clients in / with which (s)he will enter a retainer arrangement.

5. Document the arrangements

It is of course always important to ensure that any arrangement for providing services is properly documented;  and particularly so, when considering an arrangement with mutual commitments to ongoing obligations.

In addition to the usual reasons, this may be particularly crucial, from two viewpoints:

• First, to minimise risks of commercial misunderstandings spoiling what the parties both see as an ongoing relationship.
• Second, to ensure that the documentation is supportive of the contractor’s preferred IR35 position, particularly taking into account the additional mutuality of obligation. 

Finally, it's nice work if you can get it!

I’ve had contractor clients for whom retainer arrangements have represented the start point for a new era of growth; if you find yourself with that opportunity, it may work for you too -- good luck!