Retainer agreements: final considerations for contractors

(Continued from Part One)

What are the common pitfalls of retainers?

For most contractors, the promise of guaranteed regular income, payment upfront and even the possibility of then charging extra for work actually completed all make retainers sound extremely attractive. But they are far from a panacea that will solve every payment and contractual challenge a contractor faces!

The biggest drawback to retainers is that clients will very often not see them as a favourable option. The main battle contractors face is therefore getting a client to agree to one in the first place. Put yourself in their shoes -- if they are happy paying on completion of work, knowing they can pick and choose when they need a particular service, why would they switch to a guaranteed recurring fee?

For many companies looking to hire third-party contractors, what they most prize is flexibility and cost-effectiveness. The idea of having to pay out even if they have no work to offer in a certain month is a big red line. Some businesses might also worry about quality of work with upfront payments, or even work not being delivered, and may have had negative experiences in the past.

Even if you get a client to agree to a retainer, the experience can end up being a long way from what you hoped for or expected. The temptation to offer discounts for long-term time-based bookings is strong, but it can quickly mean your margins are eroded and you chain yourself to earning less than you could with shorter term, 'payment on delivery'-type arrangements.

Having their cake and eating it

Sometimes offering a discount can backfire completely -- clients will pay the retainer for a while and then decide they want to go back to a more flexible arrangement with less commitment on their part, but will now expect to pay at the discounted rate! Have your cake and eat it, mister client?

For time-based retainers, contractors can find themselves under pressure to justify how they have used their fees and see their admin burden increase considerably, as they produce detailed accounts of how they have used their time. On services-based retainers, some clients can see a contract as carte blanche to demand whatever they like! For example, they might expect a contractor to be at their beck and call, meaning they’ll argue the toss whenever a supplier (sometimes quite rightly) suggests a request does not fall under the terms of the retainer agreement.

In some cases, offering retainers for unlimited services can see you more or less restricting yourself to working for one client. A common pitfall is not setting your fees high enough to compensate for this. Another risk is signing retainer deals with several clients simultaneously and then struggling to provide adequate service to all of them.

How to make retainers work for you

These potential pitfalls should not scare any contractor off from offering retainers to clients! But they do underline that careful thought needs to be given about when to offer a retainer, who to offer it to and which retainer model to adopt.

In general, all three of the following conditions should apply before you even consider suggesting a retainer to a client:

• You already have a well-established relationship with them; and
• They provide you with a steady stream of work that does not vary much month-by-month; and
• You are confident of your role as a trusted and valued supplier.

It is very difficult to get new clients to agree to retainers and you might simply be doing yourself out of work by suggesting them straight away. Retainer arrangements have to be based on a degree of trust, especially if you are thinking in terms of charging for access rather than commitment to services.

So again, think of it from the client’s perspective -- to agree to pay up front, they have to trust the quality of the work that will be delivered. And to be prepared to pay just to be able to pick up the phone and ask for your help, they have to trust that you will then offer advice or assistance that is of real value to their business. This can only happen if you have already proven yourself to them. Or perhaps you have an outstanding reputation in your field.

It is also important to balance the value you can provide to the client with your own interests. Just as a client will be reluctant to pay up front if they are unsure about guaranteeing you work every month, it makes no sense for you to offer too much at too low a rate. Offering unlimited or ‘all inclusive’ deals on a retained basis is risky unless you are confident you can charge premium prices. Equally, don’t undercut yourself with discounts by focusing too much on getting the deal signed -- offer value in other ways, such as flexibility in allowing unused time to be ‘rolled forward.’

No shortcut

Ultimately, the best retainer arrangements emerge when both client and contractor understand one another very well, and can strike a deal that matches their mutual needs. There is no 'one-size-fits-all' approach to retainers, and trying to adopt a particular model without due consideration of the circumstances of both you and your client is where problems can occur.

Whether it is an agreement based on commitment or access, time or services, the right retainer is only something you and your client can thrash out. Good luck!

Editor's Note: This is part 2 of a two-part guide on Retainer Agreements for Contractors, by Adam Home of Safe Collections, a debt recovery specialist serving contractors. Read part one.