Contractor’s guide to retainer agreements

There are many benefits to the life of a contractor. The perks and freedoms of being your own boss; variety in your work, opportunities to monetise your skills and knowledge in ways you would rarely get in conventional employment.

But one thing contractors are not always blessed with is income security, writes Adam Home, manager at debt recovery specialists Safe Collections.

Introduction

Swapping a regular wage for contract work inevitably carries a degree of risk, and times where lucrative new projects seem to just fall into your lap are inevitably followed by fallow periods where your focus has to turn to marketing, simply just to get your hands on the next gig!

Like running any business, contractors have to become adept at managing cash flow in order to ride out these peaks and troughs in income. And then there is the perennial worry of every small trader -- not getting paid on time, and perhaps not at all, for services rendered.

One solution regularly mooted to help contractors find a degree of stability and predictability in there potentially uncertain world is to use Retainer Contracts. 

‘Retainers,’ for short, are favoured by agencies, consultants, lawyers, freelancers and self-employed professionals of all types looking to put the client-supplier relationship on a longer-term footing and, crucially, guarantee at least a minimum level of income.

Which begs the question, ‘Why don’t all contractors use retainers by default?’ Despite some obvious benefits, retainers are not always the best solution if you are self-employed and carry some pitfalls too.

In this guide, we will further define what retainers are and look at the different types of retainer arrangement. As well as the benefits, we will explore some of the drawbacks which prevent use of retainers being universal throughout the contractor community, before looking at the circumstances when retainers do work best.

What are retainers?

In their original sense, retainer agreements carry a clue about their purpose and function in their name. Taken literally, a client paying a retainer fee is not purchasing a specific product, service or even amount of time from a consultant or adviser, but rather paying for the simple privilege of having access to -- or retaining -- their services.

Over time, retainers have evolved in nature so now it is common for clients to ‘retain’ a specific level of service, usually by purchasing a fixed amount of the supplier’s time each month, or else setting out certain tasks to be completed in the contract. Regardless of these differences, nearly all retainer arrangements differ from the usual contractor-client relationship in the following ways:

• Retainer fees are paid up front, not following delivery of a project or service.
• Retainers are regular and recurring, most commonly paid monthly, with no variation in fees according to work volumes.
• Retainers are paid for the service, not for the outcome.

For contractors, the benefits are clear -- retainers provide a regular, stable income that does not vary from one month to the next even if demand from the client does, much in the same way a wage remains the same. It avoids the risks of not getting paid for completed work, having to chase payments or getting into wrangles over quality.

For clients, retainers provide a guarantee of access to the services of a trusted consultant or specialist, especially helpful if they are in demand. They tend to lead to longer term relationships, meaning clients can trust the contractor will get to know their business inside out, and be able to deliver a higher level of service as a result.

What types of retainer can you offer?

Retainer agreements now encompass a sizeable family of different contractual arrangements. It is possible to group these different retainer types into two main sub-families -- retainers based on the purchase of time, and those based on the purchase of a service.

Time-based retainers

Arguably the default retainer type used by the majority of contractors these days is to sell a fixed block of time to a client per month. Whatever the amount of time is -- a few hours a week, a day a week, five days over the course of the month -- the agreement is that you will be available to that client exclusively for whatever they require during that period, or else clock up the requisite number of hours working for them.

There are a number of variations on this theme. Some contractors will specify that all work is done ‘by the clock’ and stop work as soon as the allocated time is completed. Others will agree to a looser ‘minimum hours’ arrangement, where they get paid up front for, say, 10 hours, but will then bill in arrears for anything extra they do. This type of arrangement is commonly used by legal professionals.

There is also a lot of variation around billing and what is included in the fee. Some contractors will offer an ‘all inclusive’ service, where the retainer fee covers anything they are required to do. Others will link the fee to the delivery of specific core services and charge expenses on top, e.g. for travel to a different site or for out of hours work.

It is very common for contractors to offer discounts on their normal hourly rates with time-based retainers, as they view the guarantee of income as worth offering an incentive to clients.

Service-based retainers

A distinction is sometimes drawn between retainers which offer a commitment of service and those which focus on access to service. Time-based retainers fall in the former category -- you are committing to deliver a fixed-service measured in time. You can, however, also commit to a level of service in other ways.

Across a range of professional consultancy services, it is common for agencies and freelancers to draw up bespoke lists of tasks they will complete or deliverables they will achieve in return for a retainer fee. This can also be used at greater depth to draw up schemes of work for longer term projects, with part of the fee paid as a retainer throughout the duration and the balance due on meeting the agreed final objectives.

Some professionals will also offer what might be called ‘Unlimited Retainers’ -- they essentially commit to doing whatever the client requires, without limits, usually in return for a substantial fee. Nice, lucrative work if you can get it ! But often with hard graft involved.

In their original and most literal sense, retainers do not have to be linked to any kind of commitment to a level or amount of service. A retainer paid on the basis of access to service is a much looser type of arrangement -- the client is effectively buying the right to request your support and expertise as they require. This shifts the balance of power even further in favour of the contractor. Access to service retainers often form part of an arrangement whereby the supplier will subsequently charge for whatever work they actually do.

Editor's Note: Check back for part two of this exclusive guide for ContractorUK, to discover the common pitfalls of retainers; how to get the most out of retainers and where retainers come into their own.