There are many benefits to contracting such as the opportunity to expand your skills and knowledge set in your chosen area, variety in projects and clients, and more freedom in terms of when you work. However, contractors are more susceptible to periods of unpredictable income.
To overcome this instability, some contractors and freelancers favour retainer agreements to provide a stable income for a set amount of time.
What are retainer agreements?
Retainer agreements are regular payments by a client to a contractor or freelancer. They give the client ongoing access to the time and skills of the service provider, usually in a pre-agreed schedule.
The client is not purchasing a single product or service – rather a certain amount of the contractor’s time each month, an ongoing level of service or certain tasks to be completed each month.
Retainer agreements do not suit all contractors or freelancers but they are often used by lawyers, consultants, and highly specialised IT and engineering professionals.
Examples of retainer agreements:
If an IT contractor has built a complicated internal system for a client, they may enter into a retainer agreement with the client. The client may want the system to be maintained and to have troubleshooting support should something go wrong, but will not need to employ someone full-time to do so.
Retainer agreements are also common in law, for example, if a client has engaged a lawyer to represent him or her in a case. The client may need a lawyer for a long-term relationship and a retainer agreement is used to commit the contractor for a fixed period of time should a legal issue arise or for the duration of the case.
Different types of retainer agreements
Retainer agreements have progressed to cover a variety of different models to benefit both the client and the contractor or freelancer. The following are examples of different retainer agreements:
Time-based retainer agreements: The client pays a specified fee each month in exchange for access to the contractor or freelancer for a certain amount of time. If the time is not used it can either be rolled over to the next month as additional time, or it is simply ‘lost’. There are normally no additional fees unless the time used is significantly larger than agreed.
Value-based retainer agreements: The client pays to have access to a contractor or freelancers and their services whenever they need. These are either to carry out a set number of tasks each month or whenever a task arises. These retainer models are usually set monthly fees.
You need to be aware of any possible IR35 implications where retainer agreements are concerned, particularly relating to the Mutuality of Obligation (MOO) and Direction and Control clauses.
A retainer agreement to gain access to a contractor or freelancers services: The client pays the contractor or freelancer a set fee per month simply for client privilege. If the client requires any services from the contractor an additional fee will be charged.
There are various ways in which contractors and freelancers can charge for retainer agreements. The first is a set monthly payment with no additional payments for the contractor or freelancer’s services – regardless of the tasks carried out or the number of hours worked.
The second way to charge for a retainer is to simply charge for the service that has been delivered. This fee will vary from month to month depending on the amount of work the contractor or freelancer has done for the client.
The final way to charge for a retainer agreement is a monthly retainer fee for access to the contractor or freelancer. Plus, an additional fee for any work that has been completed.
The benefits of retainer agreements
It is often very difficult to get clients to agree to retainer agreements, and both parties must be confident that the benefits of entering into such an agreement are mutually favourable. The following outlines some of the benefits of a retainer agreement:
- A retainer agreement guarantees upfront and ongoing payment for a set period of time in exchange for services. This is normally very rare for contractors and freelancers.
- Retainer agreements allow contractors to allocate their time and finances effectively for the duration of the project, making it easier to see when and where they can fit in new contracts alongside it.
- A retainer agreement is beneficial for a client as they are able to rest assured that they will have the contingent support they need.
- Retainer agreements are financially viable options for clients as they will not need to employ someone on a full-time basis.
- Retainer agreements establish good working relationships with trusted clients who may recommend your services to other businesses.
The downside of retainer agreements
There are many drawbacks to retainer agreements which often make them not possible:
- Clients do not view them as viable options and even suggesting them could compromise the possibility of a new contract.
- Contractors are often tempted to offer the work at a discounted price which can lead to them earning less in the long term, compared to margins they could be earning from normal contract work.
- Contractors can be put under pressure by clients to detail exactly what they have done or how they spent their time, and some clients may even demand more if they do not believe they are receiving the correct level of service.
How can you make retainer agreements work for you?
Retainer arrangements place a strong emphasis on trust between the contractor and the client. The client must be confident that the contractor will be available as and when needed, and that the services they will provide to the client are of real value. A client will be unlikely to enter into a retainer agreement if they will not receive the level of service they require.
Equally, a contractor must be careful that the level of service they are offering is understood by the client, and the client does not start to make unreasonable demands.
As retainers are different to normal contracts it is advised you use a legal professional to write up the contract. This will ensure both parties are clear on the agreement they are entering into and no party is taken advantage of.
Churchill Knight has over 20 years’ experience in the contractor industry
Whatever your contractual agreements may be Churchill Knight & Associates Ltd has a range of accountancy services to suit your individual business’s needs. Using a specialist contractor accountant can remove some of the administrative burden associated with operating through a limited company, leaving you with more time to focus on your contract work.