What we've learnt about contracting (Part 2)
June 11, 2018 / Startup / Greg Atkinson
They say in life, you can’t escape death or taxes. We’ve discovered another thing you can’t escape: legal contracts. Despite good intentions, and to protect against the odd bad intention, contracts are the only thing that will give you a legal leg to stand on (and the moral high ground to do so). In Part 1, we discussed some general rules we always follow when contracting. Here, we’ll share some tips on contracting with suppliers specifically.
1. Start small
Never, ever get tied up in a big project with a new supplier. Many people and companies spend a lot of time selling themselves to new clients, and not enough time actually doing the work. That’s why no matter how impressed we are by initial presentations, we never commit to a large or long project with anyone new.
Draft a contract that covers a small piece of work first. This could be a single, independent project, or the first stage of a much larger project. The contract should include the option to end the relationship if either party is unhappy. Basically, the contract allows you to treat the project as a litmus test for how you enjoy working with the supplier.
Your contract can also include an option to contract (this means the option of working together in the future), but this should not be binding.
2. Contract with the workers
Where possible, you should have the people who’ll actually be doing the work present at the contracting stage. For example, many companies will send their ‘suits’ (the client service representatives who’ll promise you the moon) to the initial briefing. However, the developers who’ll be doing the actual work are far better equipped to give you realistic timelines and deliverables, and to point out any potential issues. You should be sure you hear from them before you assess how well suited the company is to your needs.
On that note, you can also explicitly state the individuals or teams you want handling your business. It’s also common practice to send the A Team out to impress clients, then fob the work off to a junior team once the contract is signed. You can be choosy about who works on your stuff, but be aware of limited time and capacity if you’re going to be particular.
3. Put a cap on all costs
A sure way to bankruptcy is a running project that is never near completion, yet continuously sucking up resources. It’s like building a house that never gets done: you’ll be living with the dust and leaking for years, while your bank account haemorrhages your life savings away.
Your contract should clearly state your maximum allocated budget for each project. You can break this umbrella cost down into smaller items, and build in miscellaneous costs. The important thing is to have an accurate idea of what you’re in for upfront.
If you’re not entirely sure what things should cost, get a second, or third opinion. And for very large sums (whatever this means to you), you should probably have a legal professional check the contract.
4. Be clear about what you expect
Deliverables, and where possible, the resources required to achieve them, should be clearly stated. For example, your contract should state that ‘5 logos are to be delivered by X date’. You could also include an additional clause stating that 2 designers and 1 creative director are needed to accomplish this. This lets your suppliers know exactly what you expect of them.
Your contract should also build in regular status reports. This could take the form of sit-down meetings, calls, or emails. The important thing is to contractually bind your supplier to making continuous progress, and keeping you aware of this progress. A good supplier will consistently deliver quality work, on time, so will have no problem updating you. But beware the ones who disappear for weeks on end, only to turn up with another generic excuse for why the work is not done.
Having clear deliverables ensures that you’re getting what you’ve paid for. It also makes it easier to determine breach of contract, or when you can terminate the contract - two very important safeguards for everyone involved.
5. Be clear about what’s expected of you
We tend to think of contracts as something that tells us what the other guy needs to give us. However, contracts are bilateral instruments, which means both parties have rights and obligations.
Part of your obligation will probably relate to payment. Your contract should clearly state when payment is due (it could be for work delivered, or at the end of the month), and you should try not to be late on this. Suppliers will always prioritise the clients who pay first and fastest. Also remember that, as a general rule, assets and intellectual property only pass ownership once full payment has been made. That means if you haven’t made full payment, you’re not legally entitled to use any of the supplier’s work.
In addition to your payment obligation, the contract should also state when your suppliers can expect further instructions from you. You shouldn’t expect suppliers to ‘just get on with it’; at every stage, you should be issuing clear and reasonable instructions, and giving fair and substantive feedback.
6. Try to get everything on one document
You might have a main contract, a non-disclosure agreement, and perhaps even an option to contract. Try to have everything in one document, so everything can be seen and signed by everyone in one go. When different contracts come into effect at different times, your brain is tempted to see them as sections of the same thing, and will immediately lapse into the lethargy of ‘not this again’. Later documents might not be read as carefully, as you’ll subconsciously feel that you’ve already paid your dues.
Knowing that everything of importance is in one document also makes things easier to find, as you’re not searching for, or sifting through, multiple files.
7) Negotiate jurisdiction beforehand
Different countries have different laws about which courts or forums have jurisdiction over a contract (this means the power to hear a case). You should do some research on how this affects you. In the event that lawyers and courts, or even arbitration forums, need to be involved, you ideally want people and places physically closer to you, or legal systems which work in your favour. For example, if you’re sitting in Johannesburg, but have suppliers in India, you can bake in a clause that specifies the laws and courts of South Africa have jurisdiction over the contract.
You could also include a clause on binding arbitration. This means that if any of a predetermined list of situations occur, you both agree to go to arbitration. This has its pros and cons. On the one hand, it gives you immediate and automatic recourse to an independent forum. On the flip side, the other guy has the same power. Some arbitration forums allow you to bring in professional legal help, others don’t. Either way, be prepared to spend lots of time and energy on this. And if you’re a startup like us, all your members will already be wearing multiple hats, so adding ‘legal wrangler’ to the list of duties is sure to stretch things thin. Additionally, if the other guy is bigger than you (think about taking on a giant like American Express), you’re statistically unlikely to win, as they’ll have way more resources to throw at this than you do.
Remember that any legal recourse should always be a measure of last resort, because it will be costly, and it will be time and soul-consuming.
Contracting is like a dance, you pull a little and push a little. However, you’ll know you’ve done it well if, at the end of the process, both parties walk away just a little bit uncomfortable. That probably means you’ve given enough, but not too much, and taken enough, but not everything. Good luck!