Outsourcing - Contract Review

Why Review?

A limited company contract can have several clauses which have financial and operational implications on a personal service company (PSC), as well as the individuals operating within the company. As such, it is important to review the agent or clients terms and conditions before accepting any offer.

Some of the factors to consider include:-

Type of contract
Contract duration
Rates of remuneration
Location
Payment terms
Expenses
Insurances
Equipment
Training and qualifications
Termination
Defective performance
Restrictive covenants
Concurrent contracts
Template contracts
Governing law

Type of Contract

One of the most important issues to check is the type of contract with which you are presented. In order to ensure your IR35 compliance, you must operate under a contract for services and not a contract of service as this is an employment contract.

In some instances it will be easy to spot a contract of service as it makes reference to ‘employees’ and the ‘employment’. In other instances, the distinction may be slightly more blurred. However, if an IR35 review of the contract was undertaken it would usually be picked up at that stage.

Contract Duration

Although it may seem straightforward, it is important to check that the start and end dates are as agreed. For example, a situation could arise whereby a lump sum price has been agreed for two weeks service but the terms and conditions state the contract duration to be two months.

Rates of Remuneration

This is likely to be at the forefront of any individual’s mind. Once a contract is signed, it can be difficult to argue that a different rate was agreed during the negotiations especially if these have been verbal.

Location

It is vital that the location at which the services are to be provided is known. It is also important to know whether the client will allow the services to be provided at additional locations (if feasible) such as the consultant's home base.

Payment Terms

In order to effectively manage company and personal finances, the payment terms should be reviewed. Does the contract indicate weekly or monthly invoicing? This is important as invoices will need to be submitted in line with the payment terms of the agent or client in order for payment to be made. Do invoices need to be supported by approved timesheets? Are approved timesheets obtained manually or through an electronic time writing system?

What are the payment terms - 7 days after receipt of the invoice or 30 days after receipt of the invoice/every Tuesday. It may be that your company cannot wait 30 days for payment due to a high level of outgoings - this would then have to be negotiated with the agent or client.

Are expenses paid in accordance with the payment terms for the services or are they governed by separate terms?

Some agencies/clients operate a self-billing scheme whereby they will make payment upon receipt of an authorised timesheet - i.e. no invoice is required. In order to be eligible for such a scheme, the agency/client will require proof of your company’s VAT Registration.

It is also important to have written notification of the payment terms so that if the agency/client falls foul of these, outstanding payments can be chased and managed appropriately.

Expenses

It will be of huge importance to know whether the agency/client expect your company to bear the cost of any business expenses (such as travel and accommodation), whether they will reimburse these upon receipt of an invoice or whether these will be paid upfront by the agent/client.

As mentioned above, it is also of great importance to determine whether reimbursable expenses will be paid in accordance with the same payment terms as for the provision of services.

From an IR35 perspective it is more beneficial for your company to bear the burden of these costs as it shows that you have a degree of financial risk. From a personal perspective it is financially better for the expenses to be paid by the client/agent.

Insurances

As an employee, your employer is under a legal obligation to provide such insurances for all employees. As a freelancer it is unlikely that you will be covered by the agents or client's insurance for injury and damage to property (employers and public liability insurance).

It is vital that this insurance is in place as any actions brought against your company could costs thousands, if not millions, and you need to be protected against this. In many instances a client/agent will ask for evidence of such insurance. For details of insurance providers please click on the links below.

Depending on the services to be provided through your limited company, you may also have a need for Professional Indemnity Insurance as this will protect against any claims brought for negligent advice.

Depending on the locations in which the services are to be provided there may be a personal need to secure travel insurance for all consultants, covering issues such as repatriation.

Equipment

The contract should state whether all equipment necessary for providing the services are to be provided by the Personal Service Company (PSC) or whether the client/agent will ensure that the equipment necessary to complete the services is provided - this would include things such as pc’s, personal protective equipment, telephones, stationery and so on.

Obviously the provision of equipment has financial implications for any company and if the PSC is to provide the equipment, the rate charged for the services may need to be increased to cover these costs. Alternatively, it may be that the client/agent will re-imburse the company for the cost of any equipment provided.

Training and Qualifications

Many contracts will stipulate that the individual providing the services must have specific training records - for example all offshore workers must have a valid offshore survival certification. Again, this has financial implications on the company and it is important to determine who will bear the cost of such training.

In some instances the contract will stipulate that the individual providing the services for the company must have a specific qualification. This has to be taken into consideration when determining the resources available to the client/agent.

Termination

It is vital to consider the implications of contract termination i.e. how much notice does the client/agent have to give to your company before the contract can be terminated - one hour, one day, one week etc.

From an IR35 perspective, the shorter the termination period the better as it helps to establish that no mutuality of obligation exists.

On the other hand, you will need to consider how much notice are you required to give if you wish to terminate the contract. This is important because you may wish to move to another project before the current one is due to end. You also need to consider the reasons that allow termination - it may be that the contract restricts you into completing services that have commenced.

There should also be information regarding payment upon termination, as it is important to ensure that the agent/client will make payment for services provided up to the date of termination.

It may also be worth checking the grounds on which the contract can be terminated, for example for misconduct, due to the end client terminating the contract and so on.

Defective Performance

The contract may stipulate that your company is responsible for rectifying any performance which is deemed to be of an unacceptable level or any equipment which is defective. It is usual for the clause to state that this will be done at your company’s expense and in its own time and therefore has financial considerations for your company.

Restrictive Covenant

On many occasions the agency/client will insert a restrictive covenant. This clause restricts you from taking employment or providing services to clients or third parties to whom you may be introduced in the course of the contract without first seeking the permission from the client/agent with whom the contract is held.

The clause will usually stipulate a timescale for the restriction, for example six months after cessation of the contract.

It may be that your company is unable to accept such a restriction in the knowledge that you are likely to provide services to a party connected with the current contract within the stated timescale.

Concurrent Contracts

Is there anything which prevents your company from providing services to other parties whilst undertaking the present contract?

Template Contracts

It may be that you wish to use your own template contract when negotiating service provision with a potential client/agent. This is beneficial as the contract could first be vetted by various experts for IR35 compliance. It could also contain payment terms that are favourable to your company.

It is worth noting, however, that many of the larger agencies/clients have their own standard limited company template contracts and will not be willing to sign into the contract that you propose.

Governing Law

The contract should either be governed by the laws of the country in which the client/agency belongs or alternatively the country in which the services are to be provided. It is preferential for the governing law to be that of the country in which your company is registered and in which the directors reside as it will be easier to obtain legal representation if needed.

It is also worth noting the procedure in the event of a dispute (if stipulated). Does the contract allow for mediation or arbitration before proceeding with court action.

Summary

The terms and conditions under which your company is to provide its services are vital as they create legally binding obligations upon your company and the individuals to be supplied under the contract. It is hugely important to obtain written terms and conditions, as verbal agreements, despite being legally binding in many jurisdictions, are more difficult to prove in the event of dispute.

As can be seen from the above, the terms and conditions under which your company operates will affect not only the financial stability of the company but also the resource availability and it is vital to ensure that the terms are favourable to your company.

Outsourcing - Contract Review

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