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How-to guides, articles, and any other content appearing on this page are for informational purposes only, do not constitute legal advice, and are no substitute for the advice of an attorney.

Consulting services agreement: How-to guide

From an accounting perspective, hiring consultants is cheaper than employing an individual full-time.

In addition to the obvious expenses of salaries, bonuses, and other compensation, employees can cost a company in more subtle ways, requiring further investments in benefits, payroll taxes, insurance premiums, office space, and equipment. Such additional costs aren’t required for consultants. Companies can use these individuals for specific tasks according to business needs and can avoid the legal minefields of hiring and firing staff according to the ebb and flow of the market.

Organizations can choose experts to perform necessary work when needed and can avoid the cost and hassle of providing additional education or training to current employees.

There are risks for businesses using consultants, the most dangerous of which is that those individuals will be reclassified as employees. If this happens, the company using those consultants will be required to reimburse the IRS or state tax authority for delinquent employment taxes, interest, and penalties. Although a business cannot insulate itself absolutely from reclassifications or contract audits, written consulting services agreements can offer a certain amount of protection from such charges.

This article covers the essential details of drafting a consulting agreement. However, you and your consultant must continue to discuss the terms of your agreement, settling questions about work parameters, payment, and responsibilities. Once you have agreed on contract terms and signed the agreement, each party can focus on its area of expertise: the company on developing its business and the consultant on the services to be performed.

What are the key aspects to consider in a consulting services agreement?

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A consulting agreement protects the parties’ rights during the contract term. Before finalizing the terms, however, it is important to discuss what services the consultant agrees to perform and the rates applicable to it.

Consultant’s services and payment terms 

As the hiring party, first, you must decide your goals. It can contain any agreed-on terms but should, at a minimum, include:

  • A description of the consultant’s tasks
  • The amount to be paid, the terms of payment
  • Deadlines for completion
  • The specific end products expected (if any)

Clarify the terms and conditions of your agreement before memorializing them in writing.

Review and revisions required

Allow each party to spend time reviewing the agreement once it is drafted. This will reduce the likelihood, or at least the efficacy, of a claim that a party did not understand any terms or how those might affect the agreement as a whole.

Basic guidelines to be followed

A written agreement is only the first step in establishing an individual’s independent contractor status. Once signed, both parties must follow its terms exactly to make sure that status is maintained.

While creating your consulting agreement, it is important that you review your state’s laws governing independent contractors. In recent years, many states have made it difficult for individuals to qualify, imposing absolute requirements about the freedom a consultant must have from company control.

Getting signatures and renewals

Once the agreement is drafted, the involved parties need to sign two copies of the agreement. One is kept by the hiring party, and the other is given to the consultant.

Keep a copy of the signed agreement for your records. You and the consultant can revisit its provisions at the end of its term and consider whether to renew.

Depending on the nature of its terms, you may decide to have your agreement witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

To create a consulting agreement, you can rely on a sample agreement template to start off. And with our straightforward template, you can get this done faster and easier. But, if your agreement is complicated, you can always seek an attorney's help to draft a document that meets your needs.

Understanding the clauses of the entire agreement

An image of 2 employees happily discussing an agreement in the office.

The following provision-by-provision instructions will help you understand the terms of your consulting services agreement.

Introduction

In this initial section, mention the relevant details of the involved parties and, if applicable, what type of organization(s) they are. The party who hires the consultant shall be addressed as the “company,” and the consultant is called the “consultant.” You also have to provide a brief description of the company’s business in the intro part.

Additionally, you need to provide the date on which the agreement will become effective (often the date on which it is signed).

Responsibilities

This segment lists each party’s responsibilities under the agreement. It means that the consultant agrees to perform services with adequate attention and care, and the company agrees to assist in this by providing necessary information and guidance.

You can even mention any additional obligations here. For instance, having a system where the company can provide regular feedback about the consultant’s services. Mention the person responsible for this task on the company’s behalf and include any other duties that should be taken care of by the consultant.

Nature of relationship

This part explains the relationship of the consultant with the company. It states that the consultant is not an employee or partner of the company and will provide services only in the capacity of an independent contractor. This is an important distinction for legal reasons, including requirements for health insurance coverage, liability, and taxes.

The agreement seeks to emphasize this divide, but both parties should take care not to blur the line between an independent contractor and an employee in the performance of their duties. Review your state’s laws governing independent contractors to make sure that the agreement follows all the local restrictions.

Confidential information

Defines confidential information for purposes of the agreement and explains how the consultant will treat such information.

Representations and warranties

Details the parties’ promises under the agreement, which means that the involved parties agree to enter into the agreement based on the conditions listed in this section.

Compensation

This section explains the payment terms as agreed by the parties in detail.

  • Indicates the amount of time the company has to make payments to the consultant. For many businesses, this will be about 60 days. Depending on the company’s procedures for accounts receivable, you may want to increase or decrease this time.
  • The circumstances under which no payments will be made.
  • Emphasizes that the payments outlined are the consultant’s only compensation for its services under the agreement.
  • Notes that the consultant will pay for its own expenses. This is another reflection of the fact that the company and the consultant function as separate entities (i.e., not in the capacity of an employer-employee relationship). For example, all the travel expenses incurred by the consultant will be borne by the consultant only, and the company need not pay the consultant for it or any such expenses.
  • Indicates that the consultant is responsible for paying its own taxes on the money it receives (i.e., it is not receiving a “salary” as an employee of the company, and the company will not withhold those amounts on its behalf).

Reporting

This part requires the consultant to provide periodic reports on its progress. You can designate a contact person at the company to receive these reports, indicate how frequently they should be provided, and specify the type of information to be supplied.

Work for hire

Grants ownership of all work performed by the consultant under the agreement to the company, including completed products and materials produced during creation. Moreover, if any work is owned by the consultant, the consultant promises to assign its interest in any such work to the company.

No conflict of interest

Here the consultant gives prior written consent that he/she is not currently working with any other company or product that competes with your company or business.

Term

Indicates that the agreement will last until termination or until the listed services are completed. This section allows the parties to set a deadline by which all services must be finished.

Termination

Explains that certain actions or events, including written notice or material breach, will cause the agreement to end out of time (i.e. before the services are completed or the end of the term, if any). Write in the notice period a party must give for an earlier termination or to notify the other party of a breach.

Return of property

This is an extremely important provision, and although it may seem obvious to you that the company’s products should be returned after the end of the agreement, this section makes that clear. Enter the time period within which the consultant must return the company’s property after the agreement is terminated.

You can also include information relating to any exclusive property the consultant might use during the agreement term. For this, you can pay the consultant. If you don’t want to bear such expenses, state in this section that the consultant is solely responsible for taking care of their property, and the company will not be held responsible for any claims arising for its damage. Also, this property will not need to be returned to the company at the termination of the agreement.

Indemnification

This provision allocates responsibilities between the parties if problems arise in the future and protects each party from the consequences of the other’s negligence or intentional conduct.

Use of trademarks

States the consultant will not use the company’s trademarks and intellectual property inappropriately or acquire a trademark of its own that is similar to the company’s. For example, an independent contractor for XYZ can not apply for a trademark on Sam’s XYZ Products. This section also states that the consultant may not continue using the company’s trademarks after the agreement terminates.

Modification

Indicates that any changes to the agreement are ineffective unless they are made in writing and signed by both parties.

Assignment

Explains that each party must obtain the other’s written permission before assigning its obligations and interests.

Successors and assigns

States that the parties’ rights and obligations will be passed on to heirs or, in the case of companies, successor organizations or organizations to which rights and obligations have been permissibly assigned.

Force majeure

Releases a party from its obligations if its performance is made impossible by an event beyond its control (e.g., flood, earthquake, etc.). This release is effective only if circumstances continue to prevent that party’s completion of its tasks.

No implied waiver

This explains that if either party allows the other to ignore or break an obligation under the agreement, it does not mean that the party waives any future rights to require the other to fulfill those (or any other) obligations.

Notice

Lists the addresses to which all official or legal correspondence should be delivered. Write a mailing address for both the company and the consultant.

Governing law

Allows the parties to choose the state laws that will be used to interpret the consulting agreement.

Counterparts; electronic signatures

The title of this provision sounds complicated, but it is simple to explain: it says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement. In a modern world where signing parties are often not in the same city - much less the same room - this provision ensures that business can be transacted efficiently without sacrificing the validity of the agreement as a whole.

With LegalZoom eSignature services, you can easily get signatures from all the parties involved and make your consulting agreement valid within the effective date mentioned in the document.

Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law is passed prohibiting choice-of-law clauses, it will not undo the entire document. Instead, only the section dealing with the choice of law would be invalidated, leaving the remainder of the agreement enforceable.

Entire agreement

The parties’ agreement that the document they’re signing is “the agreement” about the issues involved. Unfortunately, the inclusion of this provision will not prevent a party from arguing that other enforceable promises exist, but it will provide you some protection from these claims.

Headings

This section explains that the headings at the beginning of each section are meant to organize the document and should not be considered operational parts of the consulting agreement.

Frequently asked questions

What's a consulting services agreement?

A consulting services agreement allows you to benefit from the knowledge of an expert consultant for a stated period by helping you clarify the terms of their involvement in your business, such as efficiency analysis or expansion estimates. As an outsider or independent contractor, the consultant can maintain the necessary objectivity and bring a different point of view.

What key details should you know while creating a consulting services agreement?

To create a consulting agreement, some of the key details you need to know are:

  • Information about the company or business that is hiring the consultant
  • Details about the consultant, such as their name and contact information
  • Specifics of the services provided by the consultant, and the company's expense to hire them
  • Timeline set to finish the task or project for which the consultant is hired
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