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What Is a Retainer Agreement?

By Motley Fool Staff – Jun 29, 2017 at 5:03PM

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Some contractors love retainers. Here's how they work.

Not everyone works as a full-time employee. If you're the type who typically performs contract work for clients, it might pay to see if any of the companies you work for regularly are willing to sign you up on a retainer agreement. Similarly, you might be asked to sign such an agreement if a company finds that it consistently requires your services.

A retainer agreement is a contract wherein a client pays another professional in advance for work to be specified at a later point in time. In exchange, that professional agrees to make himself available to that client for a certain number of hours within a predetermined timeframe. Though retainer agreements are common among lawyers, these days, a growing number of freelance professionals are pushing for them as a means of securing a certain amount of business. And while retainer agreements can be quite beneficial to both parties involved, there are a few negatives to consider as well.

Signing a contract


How retainer agreements work

Though there's no single formula for setting up a retainer agreement, it typically goes something like this: One party -- say, a contractor -- agrees to provide a client with a certain number of hours of work each month. In exchange for locking in that time, the client will pay the contractor in advance for those hours. Then, once the work is complete, the retainer fee will be applied to what the contractor is owed, and any subsequent hours will be billed at that contractor's usual rate.

So say you're a copywriter who sometimes works for a marketing firm, and your typical rate is $80 per hour. That firm might choose to reserve your time, so to speak, by putting you on a retainer for 10 hours a month. You might then receive $800 at the start of each month to guarantee that availability on your part. If you wind up doing exactly 10 hours' worth of work for that client during a given month, you'll both break even. But if you do 12 hours of work, the firm will owe you an additional $160. Similarly, if the firm only needs you for eight hours that month, you'll essentially collect $160 for doing absolutely nothing.

Benefits of retainer agreements

From a contractor's perspective, the primary benefit of signing a retainer agreement is the guaranteed income it provides. Many freelancers struggle with variable income, so the more clients who offer you retainers, the more you'll rest easy knowing that you'll have a certain amount of money coming your way.

Having a number of retainers might also save you the time you'd normally spend sourcing new business. If you have enough hours guaranteed each month, you'll be able to focus on your work, and you'll have the flexibility to spend less time putting yourself out there.

Retainer agreements can also be good for the clients that issue them. If a company likes your work, putting you on a retainer means that it's guaranteed a certain amount of your time each month. That company won't run the risk that you'll get too busy and start turning down work requests.

Drawbacks of retainer agreements

Though most freelancers would agree that the benefits of retainers outweigh their drawbacks, don't overlook the fact that when you sign such an agreement, you're locking yourself into a specific schedule. This means that you might lose out on more profitable opportunities because you're committed to a certain number of hours and don't have time in your schedule to take on new clients.

From a client perspective, the main disadvantage of a retainer is that you risk paying for services you don't ultimately use. Say you typically need 20 hours of graphic design work each month, and so you get a local artist on retainer. But what happens if you have a slow month and really only need 10 hours' worth of work done? Suddenly, you've thrown away money, and all because you didn't want to take the risk that your go-to designer wouldn't be available as needed.

Whether you're on the client side or the contractor side of a retainer, be sure to review that document carefully before agreeing to its terms. A retainer is a legally binding contract, and violating it could have serious consequences. If you're not sure you should agree to a retainer, don't do it without consulting a lawyer -- because once you sign that document, it's hard to go back.

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