A management services agreement is an agreement between a business in need of management services and a management consultant who will provide the services.

What Is a Management Services Agreement?

With a management services agreement in place, both involved parties can feel confident that their objectives and expectations are clear and understood. Additionally, the agreement will outline finer points such as fees, conduct, and deadlines. Using this agreement can help your business determine if executives and management are on the path to success. In general, the document will be created by the consultant responsible for providing guidance and the business seeking the guidance. This type of agreement can help an organization increase efficiency while reducing operational costs.

With a management services agreement in place, a company is guaranteed to have its needs met through the professionals offering the service. These professionals should specialize in specific areas and be equipped with experience and knowledge to handle the tasks outlined in the agreement.

When to Use a Management Services Agreement

A company or business owner should use a management services agreement when hiring a company that offers management services. Additionally, a company that offers management services to other businesses should use management service agreement documents with its clients.

Pros and Cons of Hiring Outside Managers

By choosing to hire external managers to handle certain operational aspects of the company, you can save money, since the cost will be less than that of hiring a full-time employee. Not only does this option save in terms of obvious compensation requirements, including salaries and bonuses, but hiring an external management company can also reduce other business costs. For employees, a company must invest in such things as equipment, office space, benefits, insurance premiums, and payroll taxes.

When a company hires an outside manager to handle a specific task, the potential legal issues associated with recruiting, hiring, and firing are also eliminated. You can choose an expert to perform certain tasks as needed, eliminating the necessity of providing additional training to employees to take on different roles.

Using an external management company does come with some risk. One of the most significant risks for a business owner is that those working for the company will be reclassified as employees under IRS regulations. Therefore, that company must reimburse the state tax authority and/or the IRS for any penalties, interest, and delinquent employment tax. Although businesses can't be completely protected from contract audits or reclassifications, having written management service agreements in place can offer a certain level of protection.

Do's and Don'ts of a Management Services Agreement

Before you start drafting the first exhibit in your management services agreement, the first step should be to make a decision about the goals of the agreement. The terms should include anything that both parties have agreed on, such as:

  • Milestones
  • Tasks
  • Goals
  • Expected end products

Both parties should have plenty of time to review the agreement and Exhibit A of the agreement. By offering enough time for review, it is less likely that one party can claim they didn't understand certain terms or the agreement overall. Even if a party does claim they didn't understand, the efficacy of those claims will be lower. The parties should also have a chance to review the final agreement to make sure that any points that are relevant to the deal are included. In legal documents, it's always better to include too much detail than not enough.

No terms or expectations should be assumed if they aren't expressly stated in the agreement. The written agreement should be the first step in establishing independent contractor status by an individual or business. After signing the agreement, both involved parties are legally bound to follow the exact terms to maintain legality.

State laws vary around independent contractors. In the recent past, some states have increased restrictions regarding independent contractors, making it more difficult for people to qualify. Some of the restrictions concern how much control an outside manager can have over a company. Make sure to sign one copy of the agreement for your records and a second copy for the other party.

If you need help with a management services agreement, you can post your legal need 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, Stripe, and Twilio.