A service agreement is a written contract between a service provider and a client. It spells out the work to be performed and the responsibilities of both parties in getting the work done and paid for.
Sometimes called a professional services agreement, service contract, or client services agreement or contract, a service agreement also includes time frames for beginning and completing the work, additional due dates if needed, and other procedures and details involved in the job.
Oral understandings are risky. Your client might meet with several providers and confuse the scope of the work you described with someone else’s. You might neglect to mention important details like situations when additional charges would apply. Written service agreements minimize the chance for disputes and even lawsuits that might arise due to these types of omissions and misunderstandings.
When you buy a car, a computer, or an appliance, you usually get your purchase on the spot. Even if you order it and wait for delivery, you know exactly what to expect and what you are getting. But you can’t look at a service beforehand the way you would an appliance. Many services are performed over a long period of time, and customers often pay the fee, or at least a portion of it, well before they see what their money bought.
For example, a developer who creates customized software for a company will likely go through several steps—from determining the company’s needs to designing, installing, and testing the software—before delivering any work.
A written service agreement is a way to manage expectations while the work is underway. It also assures both parties that they will get the work and fees they bargained for in the time frame they expect.
Not all services require agreements. For example, when you take your car to a quickie oil change shop, chances are that you and the owner agree orally about the price, what will be done, and when. But when work is performed over time, both parties need the protection of written standards, goals and pricing.
Some of the businesses and professionals who rely on service agreements include:
The title of the agreement should include your company name and “service agreement,” “client agreement,” “customer agreement,” or another title that best describes your situation. Real estate brokers use the term “listing agreement,” for instance, for contracts to represent properties for sale. An accountant might use a “tax preparation agreement,” and so on.
Many aspects of a service agreement can be standardized, and you can create what’s called a template that provides the basics you’ll need for your business most of the time. You might have to adjust your template to accommodate specific arrangements you make with an individual client. But you’ll usually be able to fill in the blanks without reinventing the wheel each time you get a new client.
Some industries and professions might require additional specialized sections, but in general, a service agreement should include these sections and topics:
A description of the parties involved in the agreement. The beginning of your agreement should include the names and addresses of the parties involved. If one or both parties is a business, you should include the type of entity, such as a corporation or limited liability company. Our general contractor mentioned above might start out by saying, for example, “This is an agreement between Joe’s Beautiful Homes, a limited liability company located on 100 Main Street, and Mary Smith, an individual, located on 100 Pine Street.”
A description of the services to be performed. Be as specific as possible, keeping in mind that you won’t be able to change your fee if you end up doing additional work. A caterer would want to specify the hours they would spend at the event, the number of servers, and the number of people who would be fed, as well as the amount and quality of food to be served. Accurately listing the materials and time will help ensure that the caterer bids the job adequately to cover these costs (serving only organic produce, for example, will cost more than conventional produce, and describing the food as organic will prompt the caterer to take its added expense into account).
A description of fees and payment schedules. Include terms like whether the charges are hourly, weekly, or monthly; or whether you are charging a flat fee per project. You might also need to specify whether the pricing includes expenses, such as travel for a consultant who must visit different company locations, or if those expenses are to be billed and reimbursed separately.
You’ll also want to include a payment schedule with dates and amounts due. Some providers, like caterers, will typically have two payment dates and amounts, one for the deposit and one for the balance due. But other providers, such as contractors, might have a months-long schedule of payments due for projects that take many months to complete.
The pricing section should also include the types of payments you accept, such as checks or credit cards. Some agreements will include a clause that specifies what will happen if payments are not received according to the schedule. Late fees must approximate, as near as possible, the actual damages that the business or professional suffers when not paid on time. (Courts will not enforce late fees that are so high that they are punitive.)
The effective date of the contract, when work will begin, and the terms under which it can be terminated. The effective date of a contract is the date after which both parties are bound to its terms. Often, the effective date is the date both parties sign the contract, but it doesn’t have to be. Next, include a work schedule—work done on a project basis should, at a minimum, include beginning and end dates. You might list other due dates if your project has several different stages or steps.
Ongoing services, like an IT maintenance contract, typically last for a year or six months, and they include provisions for renewing the agreement at the end of that period.
Your agreement should also cover situations where you are unable to complete a project because of something the client does or does not do. A consultant hired to provide HR seminars to managers in several office locations, for example, might be unable to complete the assignment because one of the offices does not provide a schedule for the seminars. Your contract should anticipate the most likely performance problems (known as defaults) and provide a means for remedying the situation.
If certain defaults would be so significant that they would seriously diminish the value of the service, you might want to include a provision that allows either party to terminate the contract with a specified amount of notice. Conversely, you might want to give each party the right to terminate the contract for no reason, with adequate written notice (often 30 to 60 days).
Include a place for signatures. Service agreements should always be signed and dated by both parties involved. It’s a good idea to also have the signatures notarized to prevent any party from claiming later that it did not sign the agreement.
Service agreements for certain types of jobs and businesses might also need to include provisions or clauses that deal with specialized situations. Some of these clauses are:
A hold harmless clause. Hold harmless clauses are typically used when a party wants to shift responsibility for risks associated with the service it will provide. For example, a general contractor might include a hold harmless clause that relieves the company of responsibility if it or a subcontractor damages the client’s property while doing the work.
An indemnification clause. An indemnification clause is a promise that you will reimburse the other party if it has to pay money to cover specified damages or losses that it has suffered.
Warranty clauses. Warranties are assurances that work or a product will meet certain standards or be fixed or replaced within a specified timeframe. They are typically used in construction.
Confidentiality clauses. Consultants, web developers, and other service providers typically use a confidentiality clause to keep sensitive information from falling into the hands of the competition. A consultant who has developed a special process for streamlining workflow, for example, might use a confidentiality clause to prevent the client from sharing it with another consultant.
Provisions for intellectual property. Especially in creative fields like graphic design and photography, service agreements specify who will own the finished product. If the provider owns it and licenses its use to the client, the license should describe the situations where the client may use it (in specified products or for a limited time, for example).
Provisions requiring client cooperation. The agreement should include a provision that defines the client’s responsibility to provide information and assistance so that the provider can meet its obligations.
Boilerplate provisions. Boilerplate provisions are understandings between parties that are so commonly used that they appear unchanged in many contracts. Lawyers literally copy and paste them into their contracts. Examples include a “severability” clause (where the parties agree that if a judge finds that one part of the agreement is not enforceable, the rest of the agreement will remain in place), a statement that all understandings between the parties are contained in the agreement (this prompts the parties to place all oral understandings in the agreement), and a clause stating that the agreement cannot be changed except by the parties’ written consent.
Click on the form below to see a sample template that includes the points you will want to cover in your agreement.