Banking

The keys to crafting a successful retainer contract

Retainers give you stability, but remember that clients want flexibility. Ken Hardin offers pointers for the retainer contract development stage.

I had the good fortune last year of working on an hourly monthly retainer for my primary client. I say "good fortune" because the arrangement worked out well for me and -- at least I believe -- my client. We got the business requirements and functionals knocked out on about five substantial projects and a handful of iterative releases, all at a retained level of 48 hours a month, leaving me plenty of time to scare up additional work or, given my personal inclinations, re-watch season two of Night Gallery for the umpteenth time.

That's not to say I billed exactly 48 hours each month. In any business, particularly an SMB such as this client, projects come, go, and get retired somewhat unpredictably, so workload varied pretty substantially.

However, businesses, particularly SMBs who are managing cash flow discretely to post quarter-to-quarter growth, want a sense of predictability in their expense categories. Nobody likes to get a huge bill out of the blue, whether from a telecom provider or a freelance business analyst.

So, striking a balance between meeting the client's somewhat unpredictable demands and not freaking out Accounts Payable is a key issue, both as you craft a retainer arrangement and as you manage your monthly billings. Before I discuss some pointers I've found useful in the contract development stage, let me first cite the two underpinnings that must be in place before you even consider a retainer arrangement with a client:

  • A high demand for multi-project flexibility by the client: If your specialty is CRM vendor review, congrats -- you are going to bill at a crazy high rate, and you are going to have to develop a highly detailed, deliverable-driven Statement of Work (SOW) that outlines your client engagement. Hourly retainers are a pretty flexible way for clients to secure metered (i.e., part-time) help without the bother of Social Security withholding and PC tech support. If you are a business analyst, QA specialist, or general-purpose coder, retainers can be a great anchor for your client portfolio. But really big-ticket projects are always going to come with a SOW, a necessary evil for both consultant and client.
  • A sense of trust between the consultant and client: You are not going to be put on a retainer on your initial engagement with a client. It takes a couple of years to develop a comfort level that you will bill accurately, and that your client will not try to wring 40 free hours a month out of you. In my own case, I had previously been an executive with my client, so I was kind of cheating there -- a sense of trust was built in.

So, with these two key factors in place, here are four components that I have found to be essential in crafting a successful retainer contract.

  • Set the billing period at a month: This may not work for every client, but I have found that monthly billing allows you to play catch-up on projects that are slipping and then balance out the total to the retained baseline.
  • Offer to submit a monthly detailed breakdown of your billable hours: This can be a little (well, a lot) tedious as the month goes along, but most clients will end up asking you for this, so go ahead and put it on the table as a show of good faith.
  • Set the overage rate at the same level as the retainer hourly rate. Different schools of thought suggest that hours over your retained level should be billed at your standard rate (assuming the retained rate is a discount) or at an even deeper discount, as a show of faith that you are not getting fat on over-billing. I think it's best to bill at a single rate, assuming that ...
  • Allow unused hours to roll forward to the next billing period. If you end up not working the full allotment of your retainer for the month, allow unused hours to roll as credits into the next billing period. This gives you a steady income base, your client added flexibility, and Accounts Payable that coveted sense of predictability.

Next week, I'll give you advice on how to manage your billings to further ensure your client is happy, and you stay engaged.

About

Ken Hardin is a freelance writer and business analyst with more than two decades in technology media and product development. Before founding his own consultancy, Clarity Answers LLC, Ken was a member of the start-up team and an executive with TechRe...

2 comments
thinkincap
thinkincap

hi guys am a student - and we(my friend and i) have been lucky enough to land a job to design a radio website. Now though we have not yet discussed about the maintenance- they want us to finish the website first. Based on the scope of project they would eventually want a daily updates of news, content etc What kind of price range would you recommend as retainer for a radio station website? Thanx

PMPsicle
PMPsicle

Beware of roll forwards. If you allow the hours to roll forward then you can't recognize the earnings (i.e. spend them). Otherwise you are likely to end up not having your expected income while you still owe time. For example, let's say you bill $1250 in retainer and $1250 in regular billings every month for roughly 150 hours of work (leaving 10 hours free). One month you have 30 hours rollover. The next month they use the rollover and their regular allowance (i.e. 105 hours). That means you have only 55 hours for regular billings rather than the usual 75 + 10 free. Your regular billings will drop by $200 (or roughly 10% or the total $2500), Which is a fairly sizeable loss in billings. If you allow rollovers to accumulate the situation gets worse. You could very easily end up owing more hours in a month than you have available. If you do allow accumulation then you need to consider the retainer(s) as your income and any regular billings as bonus. Which can put you back in the role of salaried employee again. Glen Ford http://www.vproz.ca