What Every Organization Needs in Its IT Consulting Contract

Developing an IT system can be complicated. From time to time, organizations need outside help to build or improve a database, upgrade a network, install new equipment, migrate to cloud services, and so forth. We gathered plainspoken insights from a veteran IT consultant and a technology contract lawyer on what every organization needs in an IT consulting contract.

Why You Need a Contract

Although it may be obvious to some people that a contract is essential for IT consulting work, often IT work is done on a more informal basis, especially if it is being done by a volunteer or semi-volunteer. We thought it might help to reveal what a contract really accomplishes.

There are two types of IT contracts:

1. Basic contracts for the delivery of pure consulting services without coding or development of software or other intellectual property (for example, working on managing an existing IT system).
2. More complex contracts involving the development of software and other forms of intellectual property that must address ownership of intellectual property.

This article will cover basic contracts for pure consulting services. Here is what a contract actually does.

1. Removes Ambiguity

The function of a contract is to remove ambiguity by stating, hopefully in plain language, what each party expects from the other. Contracts create the rules of engagement for the relationship with your contractor.

Some essential components include

• What both the customer and contractor are required to provide in terms of materials or other deliverables.
• What the maximum amount to be paid is (open-ended agreements are risky).
• When and how are payments made.
• Who decides when work is complete.

2. Prevents and Resolves Conflict

A contract serves to both prevent conflict and set up ground rules for resolving conflicts if something does go wrong.

Zac Mutrux explains that the most important part of a contract for an IT consultant is the scope of work because that is where the conflicts begin. Without a clear scope for a project, customers say, “Why isn’t this done yet?” “How come you didn’t include that?” “I didn’t think it would cost this much!”

He says that many conflicts can be avoided when the contract contains:

• clear estimates.
• detailed specifications for what is being delivered.
• written agreements on schedule, response times, and other details about what is to be done.

In his experience, the other important parts of a contract for an IT consultant are payment terms that may include the amount due in advance and final payment, as well as who decides whether the project is complete.

Many of the items he mentions should be included in the contract’s Statement of Work (SOW).

What to Include in a Contract

Both experts agree that the SOW is the centerpiece of an IT consulting contract. It spells out the work activities and the time frame for completion.

A SOW also includes

• Deliverables: what you expect to have when the project is finished.
• Costs: usually time and materials expenses by the contractor.
• Acceptance criteria: It defines what needs to happen in order so that everyone is satisfied with the work. In a Windows upgrade contract, for example, the acceptance criteria might state that the computers will work 99 percent of the time, and all applications will work on all the devices in accordance with documentation. The process for acceptance testing should be in the body of the contract.

Advice on creating a SOW:

• Make it as detailed as you can.
• Deliverables, costs, and acceptance criteria should be in plain language.
• The SOW should be exhibit A in an IT services contract.

According to Julie Pietrantoni, the body of the contract should include

• A section that obligates the contractor to perform, to make it clear who does what; each party’s obligations; and payment terms.
• Confidentiality provisions. IT consulting contracts also need to have confidentiality provisions. Very often, consultants have access to all your data, so you must protect against misuse of your business information. You should make sure that the contract allows for an adequate remedy in case the contractor misuses or discloses your or your customers’ confidential data.
• Indemnification protection provided by the contractor. This is a type of insurance that covers loss or damages if the contractor makes mistakes.
• Limitations on your liability. This is a clause that sets a maximum dollar amount in case of the client’s negligence.
• Performance warranties. These are terms that say that the contractor’s services will be performed in accordance with the client’s acceptance criteria within a specific period of time. The warranty should also include a specific remedy, for example, full refund of monies paid, if the work is not done satisfactorily. The acceptance criteria defines the process that permits you as customer to cancel the project and get a refund if the work isn’t done on time to your satisfaction.

Zac Mutrux offers the following additional advice:

• It’s important for the contract to identify who the parties are to the agreement. He often checks GuideStar and the Secretary of State website to find the legal name of the entity he is contracting with.
• You should include a clause that the person signing is empowered to enter into contracts on behalf of the organization.
• Make sure to have agreements signed by an officer or director.
• Clear payment terms are essential.

Avoiding Pitfalls when Contracting

Julie Pietrantoni examines contracts from the viewpoint of the organization contracting for the work. In her experience, disputes mostly come from dissatisfaction with the quality of the work, and getting your money back.

She advises organizations to provide their own contracts for IT consulting work. In the worst case scenario, she says: “The contractor’s agreement will probably be favorable to the contractor. It may have passive language that doesn’t define who does the work or clearly define responsibilities, acceptance criteria will probably be missing, and the contract probably won’t contain proper protections in the form of warranties and indemnities from the contractor.”

Another thing she often sees in a contractor-favorable form are limitations on contractor liability. For instance, contractors may want to cap the amount of damages they might have to pay you at the maximum amount you agreed to pay them. However, as she notes, “Just because you pay $20,000 for services doesn’t mean that the contractor can’t cause your organization much more harm. For instance, if the contractor breaches or misuses your or your customers’ data, the potential liability could be in the millions of dollars.”

She also notes that disputes from clients most often arise from dissatisfaction with a consultant’s work. To ensure you will be able to recover some or all of the money you have paid a consultant, she says being able to “point to clear obligations of the contractor that weren’t met” is crucial. Further, she says that “the acceptance criteria you identify in the contract are very important since they provide the standards for satisfaction that the contract was done and done right within a defined period of time.”

The main pitfalls Zac Mutrux has seen include

• No written agreement — this is very common and risky. It makes it easy for disagreements to emerge.
• A scope of work that is too broad, or open-ended. This can result in a shocking invoice.
• Not clearly identifying recurring charges versus one-time costs.
• Not understanding exactly what is being sold or, more importantly, what is not included.
• Not asking the contractor for proof of worker’s compensation insurance. This mistake can expose a charity to a claim by a contractor’s employee or subcontractor.
• Not asking the contractor for proof of professional services liability insurance (errors and omissions insurance).
• Failing to ask for and check contractor’s client references.
• Organizations not reading or understanding the entire agreement.

Do You Need a Lawyer to Write Good Contracts?

According to Julie Pietrantoni, in many cases, nonprofits should have a lawyer, especially for complicated contracts, or if the organization doesn’t have much experience with consulting contracts. She says: “The sections of a contract in both the body and the statement of work can be complicated and should be carefully worded to make sure that you have adequate protections from the contractor. Having a lawyer is certainly helpful when it comes to drafting and negotiating these terms.”

However, legal advice doesn’t have to be expensive, even for tiny organizations with little or no budget, because pro bono (no cost) legal help is available.

As Julie Pietrantoni says: “Lots of attorneys want to make a positive contribution to the world, and many mid- to large-sized law firms are looking for good pro bono clients. Under American Bar Association rules, each lawyer is encouraged to do 60 hours of pro bono work per year. Good legal help is out there, and it really doesn’t need to cost anything for a valid charity.”

What Every Organization Needs in Its IT Consulting Contract by Jim Lynch