article
Contract basics for IT contractors
4 March 2009
7 questions to ask in respect of your contract
As a contractor, the agreement with your client (or agent) is
more than just a legal document. It forms the whole basis of your
relationship and should (if drawn up correctly) prevent the scope
of a project from growing out of control, prevent disputes from
escalating and, most importantly, make sure that you get paid, on
time and with as little aggravation as possible.
As a lawyer specialising in commercial and IT contracts, I have
seen a wide range of arrangements, disputes and settlements but
have set out below some of those that commonly apply to individual
contractors, contracting with companies.
Whose contract is this?
You may often find that you do not have the option to work on
the basis of a contract of your own as many companies (and most
agents) have standard documents that they will provide to you in
order to start a project.
Where you are working on your client’s (or an agent’s) standard
terms, it is still worth reading through and checking to make sure
that those should properly apply to the particular project that you
intend to work on (particularly, as issues such as payment, scope
and ownership of the results may change from project to
project).
Alternatively, for a relatively low fee, a decent solicitor*
should be able to provide a contract that you can use with your
customers and which sets out clearly in your terms the basis on
which you intend to work, how and when you should be paid, what you
should (and should not) be responsible for and the ownership of
assets after termination
If you are able to, using your own contract to start
negotiations, can give an impression of professionalism and also
puts you at a significant advantage, not only during the project
itself but also in terms of any negotiation before the contract
starts and your rights once a project is over, so it is well worth
taking the time to put this together.
How and when will I be paid?
This is perhaps the question on most Contractors’ minds and
deserves to be set out as clearly as possible in the agreement. In
particular, one issue to get right at the start is whether the
contract is for a fixed price or is on a “time and materials”
basis.
Fixed price contracts
The contract may provide for a “fixed price” to be paid either
at once or, more likely, when particular milestones are met or
acceptance tests passed.
Where this is the case, you will need to be confident that you
can provide the work required and are clear about what will trigger
payment of the fixed price, as ultimately this is all you will
receive, no matter how many hours it takes or costs involved.
An advantage is that, where you are able to provide the services
for less than the fixed price there is no legal obligation to
charge any less. You know how much you will receive, no more, no
less.
Because with fixed price contracts, the contractor takes the
risk of the project scope being unclear or unmanageable, a contract
of this kind is only advisable where the scope of the contract (the
services that you are required to provide) are clearly set out and
there is also a clear “trigger” for payment (e.g. delivery of the
particular software or services to the customer), which is not
dependent on a third party or something subjective. (Wording such
as services being provided “to the satisfaction of the client” or
acceptance tests requiring the software is to perform “to the
customer’s satisfaction” should therefore be avoided for a fixed
price contract).
For fixed price contracts therefore, the Contractor should make
sure that the scope is clear and manageable and that any
assumptions are set out in full (together with the consequences of
those assumptions not being correct). That way any changes to the
scope can be clearly documented (and priced into) the agreement
between the parties.
“Time and materials” contracts
One common alternative to working on a fixed price contract is a
contract on a “time and materials” basis (i.e. the customer pays
for your time involved in providing the particular service and also
for the goods, software or other materials that you have had to
purchase in order to provide that service).
This arrangement is more suitable for projects where the scope
is unclear at the beginning of the project or where the proper
solution to a problem has not yet been determined. In this
situation there is still some scope for ambiguity however, for
instance, will “expenses” be recoverable? If so, what limits are
there on expenses, do these cover rail travel, overnight
accommodation, meals taken when away from home…etc? For the
purposes of working out payments due you may even have to define
how long a “day”, or a “week” is for the purposes of the contract.
A contract paying a rate based on 8 hours work, 5 days a week will
be much more favourable than one where the rate is based on 24
hours work, 7 days a week (and the sums payable adjusted
pro-rata).
A combination of fixed price and time and
materials
Many contracts include an element of “fixed price” and some
elements of “time and materials” e.g. a basic payment for time and
materials but reward payments on particular milestones being met or
on final acceptance. From a contractor’s perspective the points to
watch out for are a combination of the above (certainty of
milestones, scope and triggers for payment and certainty as to
whether expenses will be covered).
What is the scope of the service to be
provided?
This might sound an obvious point, but I have seen many
contracts where Terms & Conditions are provided, yet nothing is
set out describing what a particular project will involve, or
indeed what the Contractor’s part in the project will be.
Clearly, where payment is dependant upon a particular milestone
being met, or upon actions of other contractors, the scope needs to
be as clear as possible. In particular if changes would mean that
your time
Who owns the (Background and Foreground) Intellectual
Property Rights in the materials?
As a Contractor you may be bringing some of your own knowhow,
software, designs, confidential information, processes or other
property in which you have Intellectual Property Rights with you to
provide the services.
Typically, you might anticipate using these Intellectual
Property Rights when you have finished the contract and start to
work for another client. This is not always the case however and,
unless the agreement separates “background Intellectual Property
Rights” (i.e. the Intellectual Property Rights either party had
before entering into the contract) and “foreground Intellectual
Property Rights” (i.e. the Intellectual Property Rights created
during the course of the project) then it is likely that the
customer will require all Intellectual Property Rights to be
assigned or licensed exclusively to the customer. This may not
always be appropriate, particularly where you intend to use similar
knowhow, built up over a period of time in order to act for
multiple customers.
In order to set out the basis upon which you may work for other
customers after any given customer, the agreement should set out
how Intellectual Property will be dealt with and in particular,
whether Intellectual Property Rights are assigned or licensed and
the terms upon which that licence operates. (A customer may for
instance be willing to allow you to use materials created provided
that you do not use those same materials for a competitor). Such a
licence however, would need to be agreed as part of the
arrangement.
What could I be sued for?
One of the risks of being an independent Contractor, rather than
an employee is that you are more likely to be sued where things go
wrong. Unless your agent has assumed this responsibility it is
therefore advisable to have insurance in place to cover this
risk.
If you were to cause death or personal injury through your
negligence when providing the services or were to act fraudulently
you would not be able to limit your liability for losses that are
suffered as a result. In respect of other losses however (for
instance, where you damage the property of a customer, unwillingly
cause the customer to lose an important contract, suffer a computer
virus, suffer a security breach or otherwise suffer damage
resulting from your failure) you may be able to limit your exposure
in the contract.
One common provision which you will want in place is a “force
majeure” clause, dealing with your responsibilities in the event
that you cannot supply the service for some reason beyond your
control. Without this clause you might find that you are liable for
your client’s loss, or face an extremely difficult legal battle to
show that the contract has been “frustrated” (rendered impossible
to perform).
What happens on termination?
When you’re ready to start a project it might seem strange to
contemplate its termination, but this is another key area to get
right if you want to continue providing services as a
contractor.
Receiving sufficient notice of termination by the Client should
give you the chance to seek the next project and to prepare for the
end of the agreement.
Agreeing upfront any restrictive covenants and IP issues will
help you to get the future contracts and continue to win work in
the same sector. Again, if these issues are not dealt with
explicitly in the contract then you cannot rely upon them.
How formal do contracts need to be? What about “oral
contracts”?
Some contractors believe (often wrongly) that if they do not
sign an agreement that has been supplied by the client, that they
are not bound by it. There is, however, no need for a signature for
a contract to be binding, or indeed for any written terms. However,
if written terms are provided and work has started on the contract
then it is likely that you have already accepted and to be bound by
your client’s terms, whether or not you have signed them. (An
exception to this is where the agreement is marked “subject to
contract” or provides that it will not come into force until
signed)
Contracts entered into by email are binding in the same way as
if made on paper, however if no written document is used then a
contract may still have been made between you and the client as a
result of a conversation or simply through the course of providing
the services over a period of time. The problem with such “oral
contracts” is that they are inevitably difficult to prove.
Inevitably, when it comes to a dispute, contractor and client
remember things differently. As a result the costs of resolving the
dispute are escalated and frequently the Contractor finds himself
in a very weak position.
A well drafted contract can be a valuable tool for a contractor,
can allow you to recover monies that are rightly yours (together
with interest), to get paid on time without arguments as to scope
and costs and to avoid being liable for risks associated with the
wider project. It is therefore worth spending the time to make sure
that the contract you have is suitable for the purposes you need it
for.
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