Wednesday, July 10, 2013

10 Contract Terms for Higher Profitability

With an uncertain economic climate, the emphasis on solid contract terms is increasingly vital to a firm's financial success. Most clients are demanding more work for lower fees, and firms that do not reexamine the terms of their contracts usually find themselves without enough income to break even, let alone make a profit. 

When negotiating a contract, insert as many of the following terms into the contract as possible:

1. Get partial or full payment of fees before starting. It's a good negotiating tactic to ask for money up front. The client may not agree, but will understand because many firms are doing the same thing. Receiving money up front, depositing it, and not crediting it to the client until the last invoice has been submitted allows you to avoid a bad debt, and earns maximum interest on the deposit.

2. Dare to require the client to pay unusual reimbursable costs. In addition to normal reimbursables, ask for reimbursement for items such as liability insurance premiums, computer time, and messenger services. With government clients, this term can reduce overhead, making your contract price more attractive. With private sector clients, it can dramatically increase profits.

3. Include a streamlined form of billing and payment. Request that the client agree to a simple monthly payment schedule tied to the scope and schedule of work. This avoids timeconsuming breakdowns of hours and expenses as well as pages of backup. Then, at the end of the project, make any appropriate adjustments.

4. Shorten the client's schedule and then work overtime. In general, shorter schedules produce more profitable projects by reducing excess perfectionism. Also, by working overtime for private sector clients, you may be able to charge clients at your normal billing rate without incurring additional salary or overhead costs.

5. Shorten the billing/payment cycle. To improve cash flow, ask the client to pay twice a month in accordance with a predetermined payment schedule. Shortening the cycle reduces borrowing, thus saving interest expense, and also indicates sooner whether there is a potential bad debt situation.

6. Agree to split savings on underbid construction amounts. This term requires an independent estimator, but it could save the project's profitability. If you agree to a design fee that is lower than the original fee estimate without a corresponding scope reduction, you should also not share in losses if the project comes in under bid.

7. Agree to guaranteed interest on late payments. Discuss interest terms with the client and make certain to include a guarantee of interest on late payments. If the client does not agree, negotiate for an advance payment instead.

8. Insert a provision that precisely measures scope changes. For instance, arrange for the client to sign a record copy of the drawings at specified calendar dates, indicating that decisions made as of that date are known and accepted. Don't tie the signature to completion of a phrase, since that is difficult to ascertain.

9. Ask that clients make payments directly to consultants instead of through the prime professional. This eliminates the problem of one design firm holding funds for another.

10. Stipulate a date after which all monetary terms of the contract are subject to renegotiation. This allows for an increase in fees if, for instance, the project is shelved. Few of the above terms taken alone will produce a significant increase in project profitability. But by adopting as many of these terms as possible, you should see a strong improvement in profitability. Since many projects are based on a letter of agreement, don't forget to incorporate these terms plus any additional terms you may have into a form that can be attached to all agreements. ​

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