Project Management

Heinous consulting contract gotchas

Deb Shinder discusses some of the most heinous terms in independent consultants' contracts and offers tips on how to deal with those clauses.

 If you're a consultant who works as an independent contractor, you've probably encountered more than your share of "standard" contracts provided by the companies for which you work. If your experience is typical, some of those contracts will be simple one page documents that lay out the scope of the work, deadlines, and payment terms. Other contracts (obviously drafted by overzealous attorneys with far too much time on their hands) may drag on and on, with so many sections and subsections and clauses that it makes you dizzy.

Many consultants yield to the temptation to sign a contract without reading the entire document, or at least without reading it carefully and understanding exactly what they're agreeing to do. Unfortunately, the longest and most complex contracts often contain some of the most heinous terms hidden amongst all the legal mumbo jumbo. The safest route is to have your attorney look it over, but if you can't afford or don't have time for that step, at least be on the lookout for some of the most common clauses that can come back to bite you later. Let's look at a few of those contract gotchas.

Vague and broad terminology defining your obligations

When the contract specifies that you're obligated to "operate within the policies, procedures, guidelines, bylaws, and directives" of the company --without providing you with any of those documents -- you're basically operating with a blindfold on; you have no way of knowing whether you're meeting your contract terms. This language is likely there to protect the company in the event that you do something that opens you, and them, up to civil liability or criminal charges and, in most cases, it will never be used otherwise. However, just as the company can't be faulted for protecting itself, you are completely within your rights to protect yourself by asking to see those policies, procedures, guidelines, etc. with which you're agreeing to comply.

Compensation

Many years ago, my husband took on a project at an agreed-to rate that he assumed meant U.S. dollars; however, it turns out the check came out of Canada, and this was at a time when the exchange rate was not nearly as favorable as it is today. When he deposited the check for X amount, the payment shrank substantially. The people he was working with were good folks and they made up the difference, but since the contract didn't specify what currency payment would be made in, they could have claimed that the misunderstanding was all his fault and not made good on the extra amount.

In addition to clarifying the currency issue, your contract should specify when payment will be made (for example, 30 days net after completion of the work or after you submit your invoice or some other definable milestone). Contract clauses that give the company the right to pay you whenever they feel like it (whether explicitly or by omission) can put you in a real cash-flow bind.

Also watch out for contracts on lengthy projects that require you to wait until the end of the entire project to get paid. Some of these projects can stretch out for six months or longer. Negotiate to split the payment up with specified amounts to be paid upon completion of interim milestones (for example, upon submission of your first draft of a report that will undergo extensive editing and revision before it's finalized) or on pre-defined dates.

Noncompete clauses

Probably one of the most potentially damaging clauses in any contract is the noncompete. Some companies have no qualms about putting language in these clauses that almost completely prevent you from doing work in your area of expertise for anyone other than their company -- effectively treating you like an employee without any of the benefits of employment.

Be especially wary of contract terms that attempt to limit your work for others not only while you're working for the company, but for a period (often years) after you terminate your relationship with them. Obviously the company wishes to prevent you from stealing its clients, but these clauses should be drafted very narrowly to apply only to those clients you were introduced to by way of your work for the company. If the contract prohibits "directly or indirectly" providing services "similar to" the work you're doing for the company to anyone else, negotiate to get it removed altogether or to drastically narrow the scope of its applicability.

Be aware, too, that noncompete covenants are automatically considered invalid in some jurisdictions (such as the state of California, with limited exceptions). Even in other areas, the broader the noncompete, the more likely it will be voided if challenged, as the courts have generally held that an individual can't be barred from an occupation in which he/she has training and experience except to the extent necessary to protect the employer. Traditionally, "reasonable" restrictions were deemed to be limited to specific geographic locations. The advent of the Internet complicates that, but in many cases, courts have held that the company must show that the noncompete is not unduly oppressive in restricting a person's ability to earn a living.

Ownership of work

In most cases, the contract will state that the company that's paying you owns your work product, including any patents, trademarks, copyrights, and other rights. Watch out for clauses that are worded (either deliberately or due to sloppy drafting) to say that the company owns title to all work performed by you for the duration of the project. If interpreted literally, this would prevent you from working for any other clients during that time period and would mean that the company had a claim to work you created for other clients or for yourself, on your own time, completely outside the scope of the project for which you're being paid. If you run across this clause, ask that it be changed to clarify that the company owns only the work you create under the scope of the statement of work for the project.

Insurance requirements

Some contracts will require that you maintain an insurance policy with a stated amount of coverage. I've seen contracts that said it exactly this way, not even specifying what type of insurance was being referred to in the term. The presumption is that this refers to errors and omissions/professional liability insurance; however, if the wording only says "an insurance policy," technically a life insurance policy or homeowner's policy in the stated amount would satisfy the contract terms.

Some companies will tell you that the insurance clause is "just a formality" and that you need not comply. In this case, ask to have the clause removed from the contract. Most contracts include a standard clause that says that the agreement supersedes any other oral or written agreements between the parties and that no modifications are binding unless in writing and signed by both parties.

Termination and assignment

Some contracts state that the company can terminate the agreement at any time with no notice or on short notice, while requiring you to give 30 or 60 days' notice to terminate or not even giving you the right to terminate at all. Likewise, many contracts give the company the right to sell or assign their interest in the agreement but prohibit you from doing so, or even from subcontracting any of the work. This is definitely something to watch out for if you're running a small business in which you don't personally perform all of the work yourself.

Summary

These are just a few of the gotcha clauses that pop up all the time in contracts provided by companies to their independent contractors. Most companies are not trying to cheat you -- they are just looking out for themselves and presenting you with a contract that is biased in their favor. That's just part of doing business, and their obligation to their owner(s) and/or stockholders is to get the very best deal for the company.

It's your obligation to represent your company's interests. One of the most difficult things for many independent contractors is to take seriously their own status as a company and operate as a company does. Even if you're a sole proprietor, your business is a company, and you are the one in charge of getting the best deal you can for you.

I have never encountered a client company that refused to negotiate on contract terms; in many cases, they accepted my requested changes without even a token protest. Companies often operate on the "it doesn't hurt to try" principle, first presenting you with the contract that is ideal from their point of view. This is often a winning strategy because, amazingly, many independent contractors sign those one-sided contracts without even trying to negotiate better terms, either because they dislike confrontation, because they don't realize "standard" contracts can be changed (and are, all the time), or because they never even read the thing in the first place.

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About

Debra Littlejohn Shinder, MCSE, MVP is a technology consultant, trainer, and writer who has authored a number of books on computer operating systems, networking, and security. Deb is a tech editor, developmental editor, and contributor to over 20 add...

12 comments
Bucky Kaufman (MCSD)
Bucky Kaufman (MCSD)

I no longer negotiate contracts. If the trust isn't there to start with, the contract won't matter anyway. Sure you may recover a few bucks, but if it got that far, the problem wasn't the really with the contract. Better to use a boiler-plate business contract, and do due dilligence before it's signed.

tclguru
tclguru

Very useful article, thanks!

casey
casey

I think "heinous" is a bit of a reach but other than that a decent overview of Consulting Contracts 101. One note re: insurance. It is rare for a cleint company to insist on E&O insurance as it will typically not do anything to protect them. Usually they are looking for comprehensive or liability coverage.

reisen55
reisen55

NOT to steal or attempt to steal another companies clientele. And reciprocate that they refrain from poaching on my turf. That is as far as I go but I believe it to be fair and proper.

blarman
blarman

Having worked as a contractor, this article was spot on. If you are a software developer, it is also critical that you maintain copyright to your work - code is reusable in many instances. You should also try and limit the ability of the other company to claim patents and "ideas" that come out of your work as you work for them that aren't strictly tied to industry trade secrets. The reason is that your code may solve problems in multiple industries. One good way to do this is to put a rider in that says you won't use the ideas you develop specifically for this company within the same industry as long as the company continues to employ you. This makes sense for both of you: the company gets the benefit of your ideas without hiring you but has an incentive to continue supplying you with work, while you aren't shackled if the company ends its relationship with you and you have to go elsewhere.

mafergus
mafergus

Good article and excellent resources. If you don't protect yourself nobody will.

Sterling chip Camden
Sterling chip Camden

It aligns closely with my experience. Even if your client won't agree to removing some wording, you can usually get them to compromise on terms that are less drastic, especially regarding ownership.

HanksComputer
HanksComputer

Great Article? One of my largest clients once put a contract together for an application they wanted my company to develop for them. The contract included a clause that I would indemnify them from any problems that would come up in the design and/or development of the application. I would have to defend all legal actions brought against them and pay any judgments against them from anyone either on the design or developed application. Well it was a CICS application with their staff doing all the design work and my team doing the programming. Needles to say I would not sign a contract with a clause and possible giving away the store. Come to find out their design term had spent a few months looking at what was available on the market and was using a database design from one company and the CICS screens from several other companies. When I found out that little piece of news I felt good about turning down the contract.

jck
jck

Sign another contract with a no-compete clause. I learned my lesson. In 2001 when my company laid me off and it didn't release me from the 6 month non-competition clause, I couldn't go to a company I had worked for 3 months earlier and apply for a job I know they wanted to hire me for when I was contracting there. It bit the big one. And, the corp I was a contractor through was cutthroat enough to cut me even though I had been a profit maker for them in the 500-700 percent margin range for almost 3 years. I guess that's why their stock went from $8 down to $2 as well. They cut their own throat cutting their staff rather than non-profiting, higher-pay management types. But, no one ever ties my hands again like that.

willy
willy

Just for your information, if you sign a non-compete and are relieved of your job, you're pretty free to seek employement. You have the right to work and virtually any judge will rule for you over a non-compete as long as you have acted in good faith.

jck
jck

I could work in the industry. Judges won't keep you from that under a non-compete. However, the specific company I would have gone to was still involved in various contracts with my former employer. Hence, there would have been some difficulty there. A judge won't keep you from working in your IT field under a non-compete. However, they might stop you and enforce the non-compete, since you are going back to a former workplace to become a direct competitor to your former employer. I talked to my legal firm I keep on retainer. They said it would be a toss-up as to whether or not I'd win, and would cost me more than it would be worth in legal fees. As to whether I would win, my contract said I agreed to have any things heard in the State of New York. And, that meant I would probably have been involved in having to be in a court room in their city and having to pay for hotels, travel, meals, etc. Being I'd just lost my job, was on unemployment, and had to cash in my retirement accounts to pay my bills. Well, I wasn't in any position to fund a legal battle with a corporation.

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