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Key Considerations

■ As an initial consideration, potential contractors should be vetted through a due diligence process to ensure they have the necessary skill set and personnel to perform the required services. This can be accomplished through a formal process, such as a request for proposal (RFP) or request for information (RFI), or informally through discussions with the contractor.

■ Due diligence of potential contractors may also extend, depending on the type of services to be rendered, to information about the contractor’s information security measures, disaster recovery preparedness, intention to use subcontractors, and staff-turnover rates.

■ If information disclosed during the diligence process is key to your decision to select a vendor, the contractor’s specific responses may be included as an exhibit to the agreement with a clear statement that you are relying on those responses in entering into the agreement.

■ Another key preliminary consideration is whether to use the contractor’s form professional services agreement or one of your own. Unlike many other types of vendor engagements, it is not uncommon in professional services engagements for the customer to insist on the use of its own form agreement. The following section covers key provisions that should be considered in each of your company’s professional services agreements.

Essential Terms

Term and Termination

Most professional services agreements are written with an open-ended term. That is, the agreement will continue until all SOWs are completed and one of the parties gives written notice of its intent to terminate. In some cases, the parties may also include a minimum base term of one to five years, with optional renewal terms of, for example, one year each. In any case, however, the agreement will not expire while any SOWs are pending.

■ Termination rights include the following: termination for material breach of the agreement; the contractor becoming insolvent, ceasing to do business, or becoming the subject of a bankruptcy proceeding; and the contractor assigning the agreement without the customers authorization.

■ Termination for convenience, without cause, may be appropriate for many types of engagements. Ordinarily, these provisions permit the customer to terminate, without penalty or further obligation, on prior written notice (such as thirty calendar days) to the contractor. Any attempt by the contractor to make the provision mutual should be rejected. The parties are not in the same position vis-à-vis each other. A contractor termination right could leave the customer with a half-completed project.

Acceptance Testing

Acceptance testing is one of the most critical protections in a professional services agreement. It is the procedure by which services and deliverables are tested to ensure they materially conform to the specifications agreed upon by the parties in the applicable SOW. In most cases, the acceptance testing procedures are defined in the main agreement, and the specific criteria against which acceptance testing will be measured are set forth in the relevant SOWs. The acceptance testing procedures describe how the parties will test the relevant services and deliverables, how nonconformities will be addressed, and the remedies available to the customer if nonconformities in the services and deliverables are not resolved within a specified period of time (e.g., the customer may terminate the agreement with respect to the nonconforming services and deliverables and receive a refund of fees paid for them). It is important to ensure that work performed by the contractor to remedy its failure to deliver conforming services and deliverables be rendered at no additional charge to the customer. It is also important to include a specific limit on the time a contractor can take in correcting a nonconformity (many contractor form agreements afford the contractor unlimited time to correct a nonconformity).

■ Most contractor form agreements lack any form of acceptance testing. Customers should insist on at least some form of acceptance testing in all engagements. The only potential exception would be instances in which the professional services engagement is essentially a contingent workforce or staff augmentation engagement. That is, the contractor is furnishing personnel who will perform services solely at the direction of the customer (i.e., the contractor personnel are acting as supplements to the customer’s own workforce). In such cases, the customer essentially controls whether or not the services are successful. This would not, of course, relieve the contractor of liability for work negligently performed.

■ Fees should be linked to acceptance testing. In many cases, 20% or more of the overall fees for a particular service or deliverable are withheld until acceptance is achieved. This ensures the contractor will have an appropriate incentive to perform.

■ For the protection of both parties, acceptance criteria should be objective and clearly identified in the relevant SOWs.

 
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