Selecting the right provider is important, but the next step of drafting and negotiating the service contract is just as crucial. A well-crafted contract sets forth each party’s responsibilities and expectations and each party’s rights if those expectations are not met.
Identifying Risks
Before drafting your contract, identify the risks and ask yourself what is the worst scenario if something goes wrong? Some service providers can mean third party employees may have access to your premises and information. Temporary staff and consultants working on your premises can get injured and expose your company to claims. Allowing someone access to your data and computers means exposing your company to theft of trade secrets and other confidential information, deleting or corrupting data. Unfortunately, the worst scenarios can and do happen: An outsourced technology provider gains access to trade secrets and provides them to a competitor. The service provider has financial difficulties and cannot complete the project despite the fact that you have a deadline and have already paid for most if not all of the work. Service providers can cause damage to your property and can injure others. These types of risk exposure should be addressed in the contract. Failure to make a risk assessment can be a sure recipe for a poorly executed project.
Service providers will frequently offer you their own form contract. Generally, that contract will attempt to limit the service provider’s obligations and risks. Whether you are drafting the contract or faced with modifying the service provider’s contract, it is important to make sure that your expectations of the service provider are properly contained in the contract and you are protected from unnecessary liability exposure.
Key Issues and Terms to Address in Your Contract
The following are just some of the crucial issues that should be addressed in order to both protect your company and help insure a successful project:
Scope of Work
It is crucial to include a Statement of Work (SOW) in every service contract. You and your service professional might have a different understanding regarding the scope and the quality of workmanship that is expected. The rule of thumb in drafting the SOW: identify everything you expect from your service provider. Be clear and explicit about all details of the expected work. General descriptions just won’t cut it. Scope omissions open the door for unplanned change order requests and disputes. Further, the SOW should contain objective measures for determining the quality of work to be performed.
Common problems to be avoided in drafting the SOW include lack of sufficient detail, unclear expectations of service levels, no clear completion dates, and requirements changing without modifying the scope of work before the contract is signed. Be very clear with your expectations. Additionally, use language such as “must” or “shall” when it is mandatory that the service provider perform certain tasks. It’s also a good idea to develop an SOW checklist for use in all your projects.
Project Schedule and Contract Duration
Service contracts are normally performed either on a project basis or ongoing term of support. In a per project basis situation, the contract should contain an expected start and completion date. Both parties should plan, discuss and agree upon the schedule prior to signing the contract. Project delays are the subject of countless lawsuits, plus it can cost you lost profits, lost customers or lost time in completing your work. If you delay the project, the service provider may intend to look to you for compensation for items such as overtime, additional travel expenses and other costs associated with delays. Without a clearly written schedule, your right to expect a specific completion date can be seriously weakened.
Alternatively, if the services are contemplated to take place over a period of time, it is important to include measurable performance standards for such services. For instance, if you contract for landscape services for a period of two years, the scope of work should contain criteria for which you can measure whether the service provider is meeting your expectations for aesthetics, water usage, green initiatives and other energy mandates, quantity and quality of foliage. In addition, the contract should not contain an automatic renewal provision. It should be your decision as the customer to extend the contract term.
How the Contractor Will Perform its Work
It is crucial to identify the terms and conditions under which you expect your contractor to perform. The following are some key terms and conditions to address and incorporate into your service contract:
Price. The price and payment terms should be not susceptible to misunderstanding. There are various pricing methods used for service contracts, including cost plus fixed fee, time and material and lump sum among others. Conditions for payment must also be identified. For instance, the provider should tender a detailed invoice with back-up documentation of work performed. If the service provider estimates the time required to perform the work, be sure to negotiate a “not to exceed” price. Ascertain the exact rates you will be charged for each employee.
In addition, the contract should contain all conditions and documents required for payment as this is a frequent subject of disputes. Depending on the service type, conditions for payment can include time sheets, material costs, bills of lading, lien waivers, required reports, proof of insurance and invoices.
Confidentiality/Data Ownership. Because your initial conversations with potential providers may have contained confidential information, be certain that the confidentially clause addresses all conversations and documents shared prior to the commencement date of the work. Your company should reserve its ownership rights in all documents and data provided to the service provider and all such information should be returned to you upon the project completion. Also, your contract should contain language that grants you rights to copyrightable material created by your service providers under the scope of their work. This protection is known as “Works For Hire” under Federal Copyright laws.
Acceptance. Acceptance of the work varies depending on the type of project. For instance, in construction projects, final acceptance can occur after a punch list is completed and after you have obtained a certificate of occupancy from the applicable building department. Acceptance criteria is important to address in the SOW whether for a product or a service. Acceptance is especially critical in technology agreements. Service providers normally strive to include a short acceptance period in its contract. Give yourself ample opportunity to test the software or system in order to discover whether it is, in fact, free from defects.
Warranties. Every contract may contain express and/or implied warranties regarding workmanship and quality of services. An express warranty can include a statement that you are relying upon the skill, experience and expertise of the provider, and that the provider shall be responsible for the professional and technical accuracy of the work. Likewise, your contract can include an express statement regarding the quality of the workmanship. In addition, warranty periods should be clear.
Insurance/Indemnification. The service provider should also agree to indemnify your company for any injury to persons or to your property caused by them. Service providers working on your premises should have insurance that covers their employees, such as worker’s compensation, and insurance that covers damage to your property and personal injury to others. Request that the service provider add your company as an “additional” insured and that they provide a copy of their certificate of insurance prior to their commencing the work.
Damages/Liability. Many service providers may attempt to exclude consequential damages, punitive and/or liquidated damages. If the project schedule is crucial, liquidated damage clauses should be considered to help insure timely project completion. A properly written liquidated damage clause can entitle you to a specified amount of compensation for every day the project runs over schedule.
Other Considerations. Make sure the service provider has the appropriate licenses and credentials to perform the work, including the service provider’s subcontractors. Your contract should also explicitly state that the service provider will observe all applicable Federal, state and local law with respect to employment, taxation and withholding of wages, building codes, employee privacy, and any other laws applicable to the work. Termination normally occurs under two categories: for cause and convenience. It is recommended that you include both termination provisions in your contract. While it may not be cost effective to have your attorney review smaller size contracts, it is recommended that you consult with your attorney and insurance provider when entering into larger contracts, projects that contain multiple risks and contracts with long durations.
© Michelle F. Kantor, Esq. McDonald Hopkins, LLC 2012
