This article is written by Lara Murrar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.
Clients are interested in hiring consultants to provide proficient or expert advice on a specific matter. A consultant might be an employee of a consulting company, or work on his/her own as a “freelancer,” or more exactly, as an independent contractor.
When the consultant and the client for example reach a deal, they frequently sign a legal contract, which includes a prescription of the services the consultant agrees to perform; for what amount; how and when the consultant will be paid, and who will be responsible for paying what expenses and how the contract can be terminated.
But how do these consultants get paid? Which is the best method to get their payments? What are the pros and cons for each payment method? These entire questions will be answered in this article, which will cover the most effective methods for setting consulting payment methods.
Most Effective ways to Remunerate a Consultant
When a client makes the decision to appoint a consultant, and while recruiting a consultant, the client may bump into a variety of payment options, favored by the various consulting service providers. Here are the most effective payment method options, and their pros and cons:
Fixed Monthly Remunerate
This payment method is very popular among consulting companies, as these companies offer their consultants a monthly fixed salary, where the price for the services is set earlier and also the amount of payment isn’t dependent on the time spent performing the work. The good thing about this type of payment is that the consultant knows what he/she will get monthly, and the consultant doesn’t need to worry about missing out on tasks. On the other hand, there will be no extra pay whether or not the consultant is doing well.
Example of a consultant Fixed Monthly Remunerate clause:
“The Client shall pay to the Consultant, as reimbursement for the Services, a consulting fee of US$20,000 per month, which consulting fee shall be paid on the first business day of each calendar month during which the Services are rendered, with the first such payment being due and accruing as of July27, 2020. If this Agreement is terminated prior to the end of a calendar month, the consulting fee for such month shall be pro-rated to the date of the Consultant’s termination”.
A Fixed Monthly Remunerate can also be accompanied a with Bonus
In this case consultants are relatively offered a high fixed salary in addition to a bonus that is paid if the consultant can reach a certain billing rate. The good side for this method is that it is considered a low risk payment method. But, most consultants on the other hand are offered a lower fixed salary, and they still don’t have the opportunity to make a lot of extra money.
A Fixed Monthly Remunerate can also be accompanied with a Commission
A common model among consulting companies is to offer their consultant employees a basic salary that’s lesser than a fixed salary and on top of that a commission on the hours they bill. This can be considered a good payment method because the consultant can make good money and still have some kind of security. However, there’s more risk in this model, and the consultant has to consider if his/her basic salary is enough for them to live on. Furthermore, Consultants also need to consider that this might mean that to a greater extent they might have to accept “boring” assignments where they do not develop as much, at least if they are in need of money.
When hiring a consultant based on a lump sum payment method, it’s important to make sure that everyone knows exactly what is required for the project. On the plus side, if the consultant’s briefing is comprehensive, there won’t be any hidden surprises. But on the down side, if any extra items have emerged along the way, they are likely to be the subject of intense negotiation.
Example of a Lump Sum remuneration clause:
“The Consultant’s total compensation shall not exceed the Contract Price and shall be a fixed lump-sum including all staff costs, Sub consultants’ costs, printing, communications, travel, accommodation, and the like, and all other costs incurred by the Consultant in performing the Services described in Appendix A. Except as provided in Clause …, the Contract Price may only be increased above the amounts stated in Clause … if the Parties have agreed to additional payments in accordance with Clause ….”.
Hourly or Daily Remuneration
Working with consultants who charge a daily or hourly rate is easier, because everyone knows exactly how the billing will work. The client can add days, or hours, and keep track of costs, and therefore, the consultant can easily add extra services to the contract, without worrying about payment. The only real problem to this is that the client will be charged for each hour or day. If the consultant works slower than expected, this will add up over time!
Example of an hourly or daily remuneration clause:
“The Consultant shall provide invoices to the Client in intervals as agreed to by the Parties. The Client shall pay to the Consultant at a rate of [……………………… “per hour”, “per day” or “in total”] during the term of this Agreement”.
Per Unit Remuneration
This payment method is used when working in construction project management, and dealing with contractors and sub-contractors. By limiting payment to units completed, clients can make sure that the consultant they hire works as hard as possible on the project, and so, the higher the result, the higher their earnings. Of course, the client may have to consider a base rate, sort of like an auction reserve. For instance, if the consultant is hired to present a workshop, and nobody attends, they have still done plenty of preparation, and may not like not receiving any payment!
Example of a Consultant Per Unit Remuneration Clause:
“In consideration for the services to be performed by the Consultant, Client agrees to pay Contractor a rate of $______ per _____ unit according to the terms of payment set forth below”.
Results Based Remuneration
In this method, the consultant typically waives part of their fee, for payment depending on a particular result. For instance, the part will only be paid to a marketing consultant if a specific product reaches a 30% sales growth.
Share Based Remuneration
Usually initiated by the client, who are normally startups lacking sufficient income when hiring a consultant to procure for services rendered, this kind of arrangement involves the corporate offering the consultant a share in the business, in return for his/her work. Before the consultant gives away his/her consulting services on this kind of deal, they have to make sure the company in question is viable. There’s no point owning shares in a company that folds!
Example of a Consultant Per Unit Remuneration Clause:
“The Company shall pay to Consultant and/or assigns as instructed by Consultant for the Consulting Services rendered hereunder, the sum of 1,000,000 shares of restricted common stock of the Company (“Consultant Shares”) which shall be earned in the following manner: 1,000,000 shares will be earned by the Consultant and/or assigns in equal installments of 250,000 shares on December 1, 2020, March 1, 2021, June 1, 2021 and September 1, 2021. Said 1,000,000 shares of restricted common stock of the Company will be tendered to Consultant and/or assigned in one certificate on June 1, 2020; provided, however, that Consultant must return any unearned shares upon termination of this Agreement”.
ROI Based Remuneration
Some consultants get paid for their services based on the Return on Investment (ROI) their work generates. But this payment method is not very favored among consultants and clients as well. Consultants do not prefer this payment method because consultants will only get paid if their work generates results, whereas clients will always look for a cheaper consultant.
For example, let’s say a business knows that if they can improve their product, it will result in a revenue increase of $90k to $150k. What makes more sense for this business? Should they find a fulfillment consultant who will work for nothing upfront but charge 20% of increased revenue? Or should they find someone who will work with them for a fixed fee of $10k? If they have $10k to spend and can find a proven consultant they trust to deliver results, this option is far superior.
Example of a Consultant ROI Based Remuneration Clause:
“The Company shall pay Consultant for the Consulting Services rendered hereunder,20% of increased revenue only if the Company generated revenue reaches 2,000,000$ in Q1 and Q2”.
Deciding which Remuneration method to use if you are a consultant or a client is not an easy task, and saying that one remuneration method is better that the other is not completely correct. Selecting a Remuneration method depends on a whole number of variables, which vary from the consultant’s point of view and the client’s or the consulting Companies’ point of view as well.
But what I can be sure about here is that the type of work the client wants the consultant to perform is what will determine the Consultants’ Remuneration type, taking into consideration of course the consultants’ years of experience.
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