Contract basics for IT contractors

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.

1) 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 can be well worth taking the time to put this together.

2) 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).

3) 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.

4) Who owns the (Background and Foreground) Intellectual Property Rights in the materials?

As a contractor you may be bringing some of your own know-how, 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 (IPR) 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 IPR either party had before entering into the contract) and "foreground Intellectual Property Rights" (i.e. the IPR 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 know-how, 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 IPR 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.

5) 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.

6) 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.

7) How formal do contracts need to be, and 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 e-mail 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.

Richard Nicholas is an IT lawyer with Browne Jacobson LLP, with offices in London, Birmingham and Nottingham. Contact: [email protected]

Friday 1st Oct 2010
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