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Change Order

Tire agreement should include a change order process that requires any changes to the SOW to be expressly set forth in a writing signed by both parties. In particular, all change orders should identify any fee increases or alterations to the project schedule.

Confidentiality and Information Security

Confidentiality protections should be included that are appropriate to the sensitivity of the information to be disclosed. If only basic business information may be shared, a relatively simple confidentiality provision may be used. If highly sensitive trade secrets or personal data may be disclosed, far greater specificity may be required regarding the parties’ confidentiality obligations. In some cases, additional provisions may be added regarding information security protections the contractor must implement to ensure the customer’s data is adequately secured. Depending on the nature of the data to be shared, applicable laws and regulations may mandate specific information security and privacy protections be included in the contract.

Force Majeure

Typically, force majeure clauses cover natural disasters or other “acts of God,” war, and similar occurrences. They become problematic when they are broadened to include staffing problems, unavailability of materials, or the failure of third parties (e.g., suppliers and subcontractors) to perform their obligations to the contracting party. These broader provisions would excuse the contractor for almost any problem. Force majeure clauses should be limited only to major occurrences, such as those mentioned in the first sentence of this section.

■ If a contractor’s performance becomes the subject of a force majeure event and it cannot perform for a specified period of time (e.g., fourteen days), the customer should have the right to terminate the agreement without further obligation.

■ Another important protection is to ensure the customer never pays for services that are not being rendered. This can be accomplished by including language like the following: “In the event Contractor’s performance of the Services is the subject of a force majeure event, the fees to be paid by Customer will be equitably adjusted to reflect the period in which Contractor’s performance was effected.”

Nonsolicitation

Many vendor form agreements include a clause preventing the customer from intentionally soliciting the vendor’s personnel to leave the vendor and join the customer. While not generally objectionable, care must be taken to ensure these provisions are limited to vendor employees with whom the customer actually has contact in connection with the services and do not prevent the customer from hiring employees who independently approach the customer or who respond to a general solicitation the customer has made in a newspaper, magazine, or on the Internet. Beware of loosely written provisions that prevent the customer from soliciting not only the contractor’s employees, but also their contractors (which might include even large companies with which the contractor does business).

Insurance

Some customers have minimum insurance requirements for their contractors. If so, those requirements should be included. At a minimum, the contractor should be required to carry workers’ compensation insurance consistent with applicable law and commercial general liability insurance. Professional errors and omissions coverage may also be appropriate in certain engagements.

Fees and Costs

■ The agreement should make clear that the contractor will only be compensated for services that are expressly authorized in a SOW, change order, or other writing from the customer. Without that express authorization, any work rendered by the contractor will be deemed gratuitous and no compensation will be made. This is to ensure the customer is obligated to pay for only what it actually has authorized.

■ All fees should be clearly defined in the relevant SOWs, including when those fees become due (e.g., on completion of a milestone, on acceptance of a deliverable).

■ As a general rule, fixed-fee engagements are preferred to time and material engagements. In a fixed-fee engagement, the contractor is obligated to complete the services for the agreed-upon fee, regardless of whether the actual fees the vendor incurs in completing the work is in excess of that amount. Time and materials engagements provide for the contractor to be compensated on an hourly or daily basis with no guarantee the work will be completed within any fixed amount.

■ Time and materials engagements are frequently used when the exact services cannot be well defined and in instances where the customer will be specifying on an ongoing basis, the exact level of resources it will require from the contractor.

■ Time and materials engagements place the majority of risk for achieving a project within budget on the customer.

■ If a particular project cannot be well defined from the outset and the contractor is not comfortable proceeding on a fixed-fee basis, the parties may consider entering into an initial “scoping” SOW in which the contractor will be given a defined period of time to better scope the services necessary to complete the project. At the end of the scoping phase, the parties will either agree on a fixed fee, agree on further time and materials work, or terminate the agreement.

■ All time and materials engagements require the customer to aggressively manage the project and require frequent reports from the contractor detailing hours spent, fees incurred, and expenses.

■ If a time and materials engagement cannot be avoided, all work should be subject to an overall fee cap that cannot be exceeded without the customer’s prior written authorization. In addition, except in limited instances (e.g., where it really is impossible for the contractor to predict the level of resources needed to complete a project), the contractor should ensure that the overall cap for the engagement is not a guess, but a good faith estimate based on the contractor’s experience and knowledge about the project. Additional protection can be obtained by adding incentive language to ensure the estimate is made in good faith. This can be accomplished by including a risk-sharing mechanism in the event the overall cap is exceeded by a substantial margin. For example, if the contractor exceeds the cap by less than 10%, but completes the work, most customers would agree this result reflects nothing more than the inherent “play” in an estimate. On the other hand, if the cost to complete the project exceeds, say, 20% of the original estimate, this suggests the original estimate was nothing more than a guess. In such a case, the excess cost should be shared by the parties (e.g., each party will pay 50% of the excess fees). In some cases, it may be appropriate to shift the risk of a guess entirely to the contractor. Consider the following example provision:

Seven hundred hours of Services at the rate of $200/hour represents contractor’s best, good faith estimate of the professional services fees required to fully complete all services and deliverables described in this SOW. In the event contractor’s aggregate fees exceed the estimate by less than 10%, customer will be responsible for such fees; provided contractor has first obtained customer’s prior written authorization to exceed the original estimate. Contractor will bear all professional services fees in excess of 10% of the foregoing estimated amount (e.g., if contractor’s fees to complete the services and deliverables are 15% greater than the original estimate, customer will pay the first 10% and contractor will pay the remaining 5%).

■ If the contractor will be involved in rendering services over a long period under several SOWs, the customer should require the contractor’s rate card of professional services rates be attached as an exhibit to the agreement and those rates be fixed for at least two to three years. Thereafter, rates may be allowed to increase on a yearly basis, subject to a cap tied to the consumer price index or a simple percentage (e.g., 4% per year).

■ Tire contract should make clear the customer will only be responsible for those taxes based on its receipt of the services (excluding any taxes based on the contractor’s revenue or personnel taxes). In some states, there are no taxes on professional services. Consult your tax professionals for counsel on these issues.

- If the contractor is located offshore (e.g., in India, Russia), local tax laws may change during the performance of the agreement, resulting in potentially substantial increases in the tax on services. In such cases, the agreement should address who bears the risk of those increases (e.g., the risk is entirely on the vendor of any increases during the pendency of the current statements of work, the parties equally share the increase).

■ In general, fees should be tied to performance (e.g., achievement of milestones, completion of deliverables, acceptance). Avoid fees tied only to the passage of time. If that cannot be avoided, consider a holdback of 10%—20% of each monthly invoice, payable on final acceptance.

■ Travel and living expenses should be subject to the customer’s then-current policies for vendor expenses. If the customer does not have a policy, basic language like the following can be used:

In the event that customer requests contractor to provide services at a location away from the metropolitan area of contractor’s regular place of business, customer will reimburse contractor for reasonable travel and living expenses incurred by contractor that would not have been incurred in any event if such services had been performed at contractor’s regular place of business. Receipts or reasonable evidence thereof is required for commercial travel, car rental, parking, and lodging. Contractor shall submit monthly expense reports to customer. When contractor employees visit more than one customer on the same trip, the expenses incurred will be apportioned in relation to time spent with each customer. Contractor shall obtain customer’s prior written approval, which shall not be unreasonably withheld, before incurring any expenses exceeding, in the aggregate, one thousand dollars ($1,000.00). All air travel shall be coach class on generally scheduled commercial flights. Contractor shall use commercially reasonable efforts to make airline reservations for travel sufficiently in advance of the travel date so as to obtain the lowest airfare.

■ To provide the contractor with an incentive for accurate billing, the agreement should include language permitting the customer to audit the contractor’s records to ensure bills are correct. Tire customer generally bears the cost of the audit, unless the audit reveals, for example, overbilling in excess of 10%. In that case, the cost of the audit would shift to the contractor.

Relationship to Other Agreements

■ If the professional services agreement is entered into as part of a larger engagement (e.g., as part of a software license or hardware purchase arrangement), the customer should strongly consider requiring all contract terms to be reflected in a single agreement. If that is not desirable or cannot be negotiated, it may be appropriate to link the agreements together with respect to the following:

■ A termination of one agreement will result in termination of the other agreements (i.e., cross-default). This will ensure that if a vendor breaches a software license agreement, the customer won’t have to continue to pay under a professional services agreement to implement software it can no longer use.

■ Acceptance testing of the services is linked to successful acceptance testing of related software or hardware (i.e., cross-acceptance).

■ Limitations of liability in the relevant agreements should reflect the level of fees paid under all agreements. That is, if the vendor defaults under the license agreement, but has performed the professional services properly, under most vendor agreements the customer would only be able to recover damages under the license agreement, which would be limited to the fees paid for the software. If the agreements are linked, the liability cap in the license agreement would, potentially, be increased to reflect not only the license fees, but also the implementation fees.

Summary

Professional services agreements are used to govern a wide range of potential services, from software implementation to custom development to outsourcing engagements. Tire most important elements of these engagements include proper project management and a clear description of the services, deliverables, project schedule, and pricing. Without the foregoing, even the best drafted professional services agreement will provide little protection.

 
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