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Article # 0068

Contractual Considerations for the Professional

by

R.L. Langley, P.E.




Introduction


Most professionals engaged in practice for hire are usually subject to written contractual agreements. This provides clarity and mutual understanding of the scope of work to be performed, expected deliverables, payment terms, handling of intellectual property and confidential information, indemnities, limits of liability, insurance requirements, employment status and other important matters.


Since this would likely be a legally binding document, it’s strongly recommended that qualified legal counsel first be consulted either in configuring an agreement for the engagement or responding to an agreement presented by the professional’s client.


Ideally, a proper agreement should be concise, well worded, easily understood, balanced (not “one sided”), and in the interests of both parties.

Scope

The scope of this paper is to provide a brief overview of salient areas to consider in a contract for the “Lone Ranger” type sole proprietor/professional consultant...


The Opening Paragraph

Usually the opening paragraph includes following:






Definitions


Defines the terms used in the agreement.




Services to be Performed


The description needs to be detailed enough to fit the situation. Generally, there are two types of descriptive methods;


Example: Consultant will review the Process Safety Management-Management of Change Process/Documentation for 2012-2015 year to date for the Birdwell, Texas Processing Complex. Provide findings, items of interest, and recommendations by January 1, 2016.



Example: Consultant shall review company’s current environmental, safety & health (ES&H) programs, policies and activities, and will assess company’s current and ongoing compliance activities, programs (at all locations) as relates to ES&H compliance, providing monthly reports concerning current status, recommendations on same. Project completion third quarter 2016.

In this section, there may be wording indicating that the professional represents s/he has the skills, training and experience to effectively perform the tasks and achieve the desired results. Also, it’s usually stipulated the work will be performed with best efforts according to industry standards in a workmanlike manner.


Unless the assignment is for very general “open ended” expert consulting services, it may be advisable to cast the Services to be performed as a separate exhibit in case the scope, deliverables, or timing of the work changes as the project unfolds.


Compensation/Invoicing


It’s suggested this be a separate exhibit in case changes are needed. This usually includes hourly and daily billing rates for the services, as well as how expenses (including mileage, per diem), travel time, etc. will be handled. For travel/living expenses, there may be stipulations on receipts required.


Also, this section may stipulate the invoice/timesheet detail requirements, and when it will be paid. It’s common for most companies to pay 30 days after receipt of an invoice, but for sole proprietorships, most companies will waive that standard to 10-15 days or so, or perhaps “payable upon receipt” under certain circumstances.




NOTE: What is well received with most client companies is that rate sheet changes be in the form of a request (with reasons stated) rather than an edict (in fact, the terms may specify company has to agree to any changes anyway.) Also, the rate sheet can stipulate inclusion of reasonable travel expenses at cost (suggest no markup), provide all receipts for single transactions over $25, charge mileage only at IRS allowable, and if charging travel time (vs. consult time)-suggest discount significantly. These type accommodations tend to go over well with the client. Finally, don’t include “fine print” on a rate sheet that’s duplicative or in conflict with the agreement itself.


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Term/Termination


Some contracts are a defined term, but often it’s an “evergreen” type arrangement whereby the “initial term” is specified as one year, and the agreement automatically renews month to month unless one of the parties chooses to terminate the agreement with specified notice. This is a convenience matter, but any implication concerns may need to be discussed with legal counsel.


Status as Independent Contractor


For legal and regulatory compliance reasons, most companies engaging professionals want the “Independent Contractor” or “arms length” relationship defined and maintained. From an IRS perspective, the agency is rather stringent on what’s defined as an independent contractor vs. employee for practical fiscal reasons. If a person is an employee, their employer is responsible for extracting the mandatory tax burden (Social Security, Medicare and unemployment taxes) out of each paycheck. If one is an independent contractor, s/he is on the “honor system” to pay these taxes as it’s contractually defined as his/her responsibility. The Government stands to lose billions in tax revenues if individuals are (improperly in the IRS view) classed as independent contractors (who may not properly file tax returns) that they’d rather see classed as employees-hence the Government being assured the tax revenues.


The IRS indicates three general aspects of the working arrangement that have to be handled properly to assure an independent contractor vs. employee relationship—i.e. financial control, behavioral control, and relationship between the parties. This subject is a discussion within itself, which we will not address here. The nuances of practical workplace application and detail on this issue are very involved. Please consult the IRS website (www.irs.gov) as a starting point to understanding why contractual terms read the way they do on this point.


Indemnification


Who has to pay and to what extent for property damage or injury if something goes wrong? The wording in this section can be “knock for knock” which is similar to “no fault” insurance. The thinking here is that determining the actual cause of an incident that results in injury or damage will likely take awhile, and it’s best for both immediately parties to immediately take care of their own issues, at their expense. Settlements may be down the road.


Another option may be fault based….i.e. each contracting party has the obligation to indemnify the other (and take care of their own restitution also) if it’s proven that party was negligent.


Certain states may have laws whereby property damage is negligence based and injury may be “knock for knock”. This is part of why qualified legal counsel is needed on these things.


Limits of Liability


There can be considerable implications around this, and often one sees three scenarios—unlimited liability, liability only to the dollar amount/value of the work performed, or liability up to insured amounts. Some contracts work “tiered” liability limits based on the monetary value of the services and/or materials provided.


It’s particularly of interest to the independent contractor to not be liable for “consequential” damages due losses of profit, operations or production as that would likely could have huge fiscal considerations.


This is an area where qualified legal counsel is essential before signing on the dotted line.

Confidentiality/Proprietary Information


This is a particularly sensitive area to clients, because often consultants are exposed to confidential data/information, trade secrets, etc. which, if mishandled or communicated to unauthorized third parties-even inadvertently- could severely damage the company’s competitive edge. Usually all documents, work papers, etc. generated/used during the engagement will likely be under the confidential/proprietary umbrella and will be the property of the client. This information will be treated confidentially by the consultant, both during and post assignment. Exceptions include information that’s publicly disclosed. Again, this is a critical area that needs legal counsel guidance.


Compliance with Regulations, Policy


This is a provision directing compliance with all applicable state, federal, local regulations as well as company policy. Usually there’s a statement prohibiting possession/distribution of unauthorized drugs, weapons/firearms, and unauthorized alcohol consumption. Depending on circumstances, the consultant may be subject to random drug testing and/or security searches. Also, there may be special wording regarding proper use of the company’s computer network, if the consultant has to tap into/use the system for his/her work.






Insurance


Most clients require insurance coverage for consultants, especially if the engagement requires onsite presence. Typical coverages include General Liability (for injury and property damage), automobile liability, excess/umbrella coverage and perhaps professional liability coverage for errors and omissions (more on that later). For the sole proprietor consultant with no employees, there will be no worker’s compensation insurance requirement, but normally the company will require a signed statement assuring that the entity has no employees that fall under any state’s worker’s compensation laws, if applicable (check state law).


Two of the most expensive coverages are usually excess/umbrella and professional liability, depending on the nature and location of the work. If one is primarily engaged in “office work”, then there may be no requirement for excess/umbrella coverage (for injury/property damage over and above General Liability), depending on corporate requirements.


Professional liability for “errors and omissions” can be an expensive coverage, depending on the service rendered. Of course, all laws/regulations must be followed by the professional. For example, if one regularly develops regulatory required Spill Prevention, Control and Countermeasure Plans (SPCC) and stamps the drawings as a registered P.E. for submittal, then it could be surmised that these are “professional services” and likely this type insurance coverage is required. However, if the consultant is expected to only provide, say, historical operational information and technical suggestions based on his/her unique background/experience, and others will develop the actual plans and certify as P.E. thereof, then this coverage would likely not be required.


From the author’s experience, it’s advisable to shop around for coverages. There are companies that specialize in insurance for professionals, and they know how to ask the right questions and correctly interpret the answers. However, there are also those that sell professional coverages, but either have a “one size fits” all program (which may force high premiums) or don’t know the right questions to ask to properly fit the coverages. The author’s experience is that appropriate coverage for a specified engagement (if no professional liability or excess/umbrella required) can vary from less than $1,000/year to ten times that amount. That’s why it pays to shop around.


NOTE: Some policies/coverages stipulate the requirement of a “written agreement” on the certificate of insurance. Of course, that can be an executed contract, but it also can be a written Purchase Order or some other form of written work authorization with terms and conditions attached.


Notices

This is simply the name, mailing address and contact information for both parties to exchange information regarding activities or provisions in the agreement—i.e. insurance renewals, proposed rate changes, amendments, termination notices, etc.


Governing Law

Specifies the state laws that will govern the agreement. Usually client’s home office state.



Other Provisions


Depending on the length of the contract, the client company’s corporate culture and nature of the assignment, there may be other provisions, as follows:




Conclusion


The aforementioned is a broad brush summary of the common provisions usually included in a professional/consulting type services agreements. Each client will have their own form terms and conditions which may differ from this. Regardless, depending on the nature and extent of the engagement, it’s usually prudent to engage qualified legal consultation before signing one of these documents.





RLL

9/17/15



Biography:

Robert (Bob) Langley, P.E. holds a B.S. Degree in Chemical Engineering from the University of Oklahoma. For over 30 years he worked for Fortune 500 midstream (natural gas processing) companies as Process Engineer, Plant Engineer, Plant Supervisor, Plant Manager, Supply and Distribution Manager, Supply Chain Manager and Environmental, Safety & Health Manager. Currently, Mr. Langley is engaged as an independent contractor to provide Supply Chain/Procurement support services for a major midstream energy company, primarily in the area of master service agreements, including those for professional services described in this article.

Article # 0068        TEST QUESTIONS:


  1. Consider first consulting with the following before signing a contract:

    1. LegalZoom

    2. Your Financial Advisor

    3. Texas Board of Professional Engineers

    4. Qualified Legal Counsel


  1. The first paragraph of an agreement usually contains:

  1. The legal entities for both contracting parties

  2. The effective date of the agreement

  3. The physical location/address of both parties

  4. All of the above


  1. The description of the work to be performed should be detailed enough to fit the situation. True or False

a. True
b. False

  1. The following are usually included on rate sheets…

    1. Hourly and/or daily consulting billing rates

    2. Billing rates for travel time

    3. Travel/Living Expenses, including mileage rates

    4. All of the above


5. When doing a rate change, it’s usually best to just e mail the client the new rates with the effective date. True or False

a. True

b. False

  1. Rules regarding classification as “Independent Contractor” vs. “Employee” are published by the following agency…..

    1. Internal Revenue Service

    2. Secretary of Labor

    3. U.S. Bureau of Labor Standards

    4. Public Utility Commission


  1. “Indemnification” covers provisions on who pays for what in case something goes wrong and results in injury, property damage or some otherwise unintended adverse result/claim: True or False

a. True

b. False

  1. Insurance coverages for the sole proprietor professional could include all of the following except which one?

    1. General Liability

    2. Auto Liability

    3. Worker’s Compensation

    4. Professional Liability

    5. Excess/Umbrella Liability


  1. Insurance premiums are pretty much at industry standard, so there’s really no need to “shop around” for the best deal... True or False

a. True

b. False

  1. An “evergreen” agreement is one that ...

    1. Is environmental friendly

    2. Is only for professional Land Surveyors

    3. Automatically renews unless terminated

    4. All of the above

 

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