Client Service Contract: Everything You Need to Know
A client service contract, also known as a contract services agreement, creates a legal relationship between a client and a service provider.3 min read
2. Different Types of Professional Service Contracts
Updated November 25, 2020:
A client service contract, also known as a contract services agreement, creates a legal relationship between a client and a service provider. Anyone who needs to hire a service professional should insist on a service contract so that all parties understand their responsibilities.
Why You Need Service Contracts
A strong service contract is crucial because it concretely outlines the relationship between the client and service provider. Having a service contract in place can make dealing with unexpected events much easier, and can also reduce the risk of a dispute and resulting litigation between a client and customer.
When drafting a client service contract, you ask several questions:
- What will you do if your service provider misses a scheduled appointment?
- How often and by what method will you and your client communicate?
- When and how will the payment occur?
- Will there be a penalty for late payments?
- Will it be possible for either party to end the contract early?
Businesses using a client service contract to hire a consultant or other type of service professional should spend some time thinking about how to protect their intellectual property (IP). IP can be extremely valuable, so you need to decide how your service professional can use your property. At the end of your service contract, there will likely be several boilerplate clauses, which are standard clauses found in most contracts. The main purpose of boilerplate clauses is to protect both parties in the contract and to avoid confusion or misunderstandings.
Different Types of Professional Service Contracts
Professional service contracts can come in many forms, and each type of service contract will have its own structure. The structure of your client service contract is important because it can impact several factors:
- Which party assumes the risk in the contract.
- When payments should be made and which party makes the payments.
- How the terms of the contract are to be fulfilled.
When drafting a service contract, you should be very careful about how you structure the agreement, which is why it's important to understand the pros and cons of the different available structures.
A time and materials contract is a very common type of service contract. With this contract, billing service providers is much easier. The structure of a time and materials contract focuses on tracking the work that's done and then billing for the work at a previously agreed upon rate. Service providers will also need to track their expenses and then provide an invoice to their client for reimbursement.
One of the biggest benefits of the time and materials contract structure is that it's easy to track contract performance, invoicing, and revenue. Also, both parties share a portion of the risk.
When using the time and materials structure, there are also some disadvantages that you should keep in mind. If the project deadlines aren't being met, for example, order changes may be required, and the client will likely need to have a difficult conversation with their service provider. Conversely, if the project is completed ahead of schedule, the final amount of revenue and cost to the client could decrease.
There are two situations where you should consider using the time and materials structure. First, if it's possible that the scope of the project will change over time, using this structure can be beneficial. Second, if there is a high demand for the services your business needs, this contract structure can help you secure these services without exposing yourself to risk.
Fixed price service agreements are steadily growing in popularity, especially in environments where vendors have to assume the additional risk when engaging with clients. In a fixed price service contract, the service provider will receive a fixed price for their services. Because the prices in these contracts are set in stone, the service provider assumes more risk, as they will need to complete the contract no matter the amount of work required.
Fixed price contracts can be beneficial to service providers because clients will agree to these contracts more readily. While there is more risk involved, these contracts can also result in strong returns for the provider if they are correctly managed.
If you need help drafting a client service contract, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.