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Professional Services Agreements


Preliminary Considerations

□ Due diligence process

□ Form of professional services agreement

General Requirements

□ Term—open-ended or limited

□ Termination provisions

  • - Material breach of agreement
  • - Insolvency/cessation of business
  • - For cause

□ Acceptance testing

  • - Procedures
  • - Criteria
  • - Remedies at no cost
  • - Timeframe for failures to correct
  • - Payment of fees linked to milestones and testing completion

□ Personnel requirements

  • - Minimum skill requirements
  • - Interview process
  • - Naming of key personnel
  • - Replacement procedures; no charge for overlap and ramp-up
  • - Efforts to ensure consistency of personnel
  • - Turnover penalties
  • - Supplier has sole responsibility for personnel

□ Use and identification of subcontractors

□ Warranties

  • - Material compliance of services
  • - Compliance with applicable laws
  • - Workmanlike manner
  • - Timeliness
  • - Disabling devices
  • - No IP owned by third parties
  • - Compliance with data security and privacy laws

□ Indemnification

  • - Intellectual property infringement
  • - Violation of applicable laws
  • - Personal injury and property damage
  • - Breach of confidentiality
  • - Procedures to permit supplier control of claim
  • - No settlement without customer consent
  • - Exclusion from limitation of liability

□ Limitation of liability

  • - Mutual
  • - Exclude indemnity obligations
  • - Exclude gross negligence and willful misconduct
  • - Exclude confidentiality and data security breaches
  • - Tie cap to all fees paid under agreement

□ Intellectual property ownership

  • - License to use preexisting materials
  • - Who owns IP developed under the agreement
  • - If supplier owns, restrictions on use (competitors)
  • - Identification of third-party IP and fees associated with third-party IP

□ Change order process

□ Confidentiality and information security

  • - Simple provision (basic information)
  • - Detailed provision (sensitive information)
  • - Information security requirements depending on nature of data

□ Force majeure

  • - Ensure proper scope
  • - Avoid overbroad provisions to include staffing problems, unavailability of materials, and failure of third parties
  • - Right to terminate
  • - No payment for services not rendered

□ Nonsolicitation of supplier’s employees

□ Insurance tailored to customer’s requirements

□ Fees and costs

  • - All fees expressed in contract, statement of work (SOW), or change order
  • - Payment schedule for all fees
  • - Fixed fee vs. time and materials
  • - Overall cap for time and materials projects
  • - Ensure estimates are accurate
  • - Specify percent over estimate to be paid by supplier
  • - Specify percent over estimate to be shared by both parties
  • - Rate card for future services
  • - Allocation of taxes (customer pays only for tax on services received)
  • - Payment of fees tied to performance
  • - Holdback if payment based on passage of time
  • - Travel and expenses tied to customer’s policies
  • - Financial audit rights

Relationship to Other Agreements

□ All contract terms in a single agreement

□ If multiple agreements, ensure termination rights across agreements

□ Acceptance testing of services linked to acceptance testing of related software and hardware

□ Limitation of liability caps accounts for fees paid across agreements


Professional services agreements are used for a wide range of service engagements, including software development, implementation work, outsourcing services, website development, and many other activities for which services are rendered for an agreed-upon fee. While these types of agreements are frequently entered into on a stand-alone basis, they are also commonly part of larger engagements. For example, a software license agreement may also include a professional services agreement or component (i.e., professional services terms, or a professional services exhibit, included in a software license agreement) for customization work or implementation services. Similarly, a hardware purchase agreement may include a professional services agreement or component for installation services. Depending on the nature of the engagement, it may be appropriate and more protective in these larger engagements to combine the agreements into a single contract with uniform provisions. In that case, the agreement would be appropriately called, for example, a master license and services agreement or a hardware purchase and installation agreement.

Every professional services contract is composed of at least two parts: the main agreement, containing the legal terms and conditions, and at least one statement of work (SOW) describing the specific services to be rendered by the contactor. In general, the main agreement is written to permit the parties to enter into any number of subsequent SOWs. Each SOW is usually sequentially numbered and specifically references and is incorporated into the main agreement.

While there are many key issues in a professional services contract, two are frequently the most critical: project management and work description. The first relates to ensuring the project has proper oversight to keep the project on target from both a scheduling and a cost perspective. The second relates to the most foundational aspect of professional services. Without a clear description of the specific services to be performed, the other protections in the agreement are largely useless. The service description (i.e., the specific tasks to be performed by both parties, the project schedule, milestones, deliverables, and pricing) all must be set forth in a detailed SOW. Chapter 5 provides a separate discussion of the critical issues involved in drafting SOWs.

As a frame of reference, in the last few years, the number one cause of disputes and costs overruns involving technology contracts have arisen out of poorly drafted SOWs. Pay very close attention to the recommendations in this chapter and in Chapter 5-

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