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.