A professional services contract is the agreement used when hiring an independent contractor to perform a specialized, project-based service. Examples include editing, graphic design, software design and development, web design, translation, auditing, marketing, program evaluation, and lab analysis.

Types of Professional Services Contracts

  • Fixed fee contracts are the simplest type of professional services contract and provide a fixed payment for a specific project. It's important to delineate the scope of work for this type of contract to indicate when change orders will be required.
  • Hourly not to exceed contracts allow the contractor to charge a specific hourly rate up to a set limit. This type of contract is most advantageous when you are confident you can get the job done without exceeding the limit.
  • Percentage contracts are similar to modified fixed fee contracts. The fee is based on the percentage of a fixed amount established in the contract terms. For example, if a client receives an insurance settlement for 75 percent of your normal contract amount for that type of project, you would agree to work on a 75 percent modified fixed fee.
  • Recurring with cap is a fixed-fee contract in which clients can pay the fixed fee in several amounts over the life of the contract.
  • Hourly contracts are those in which hours are tracked and billed accordingly. Although these are often attractive since you're paying for the actual work you do, if you're experienced and can do the work quickly you may lose money compared to a project-based fee.
  • With a cost plus percentage contract, customers are billed a fee on top of the costs. For example, if you have a $10,000 contract of this kind and your fee percentage is 10 percent, you would charge the client $11,000. This covers your time and expenses.
  • Cost plus fixed fee is similar to cost plus percentage but the additional fee is fixed.
  • With recurring contracts, you bill a fixed amount at regular intervals until the contract is complete.
  • Recurring plus expense contracts mean that your costs are added to the recurring charge.

Professional Liability Coverage

If you act as a consultant, professional liability insurance covers the costs if a client sues you for damages caused by negligence. Having this type of policy prevents your firm from going out of business if you are ordered to pay damages, especially if your business does not have assets that can be sold to cover the cost of a legal judgment. Most cases of this kind are settled out of court; only 2 to 5 percent of cases go to trial.

Some contract promises are considered uninsurable, which means they aren't covered by this type of insurance policy. One example is lofty promises such as "best possible outcome" or "highest standard of care." Although perfection is desirable, it isn't necessarily realistic and using this language can lead to potential disputes and insurability problems. Consultants are not legally required to produce work that is perfect or free from errors; the legal standard is that professionals should offer the same judgment, skill, and care reasonably offered by others in the same profession in similar situations. This standard is applied even when it is not delineated in the contract.

Indemnification is another potential insurability issue for this type of contract. While the contract may state that the consultant must indemnify the client for damages, these clauses are not typically covered by professional liability insurance.

While the insured's defense is covered by professional liability insurance, the defense of other parties is not. In contrast, construction contractors add the agency as an insured party on their general liability policy. As a professional contractor, if your firm is named as a co-defendant in a suit, the insurance company will not pay for its defense.

If the damages in question are not considered to be caused by negligence, they will not be covered by a professional liability policy. It's important to have all professional services and insurance contracts reviewed by a qualified attorney to ensure that you are using the correct wording to adequately protect your personal interest from a potential lawsuit and that all contract language is insurable.

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