Examples of this could be someone acting in an advisory capacity, legal services, a freelance writer or someone acting as a consultant. While the retainer is essentially used to hire an individual, it doesn’t represent the entirety of the fees. Other fees will be accumulated throughout the process. It also doesn’t necessarily guarantee that the outcome will be positive. An example of this would be when a defendant in a court case retains the skills of an attorney. They pay the retainer fee and the attorney offers their skills and advice in relation to the case, but this doesn’t automatically guarantee that a defendant will be able to win.
Why Do People Use Them?
There are certain industries that find the use of retainer fees more beneficial. For example, a small company may hire a freelance writer on retainer to produce content for them. They may not need the individual to work for them full-time, but a retainer paid in advance would ensure that their services are available whenever they are required. In legal situations, a retainer fee may be paid to ensure that the attorney knows that their client is taking the situation seriously. It also means that any research and initial communications are still paid for without the need for multiple invoices.
Positives of Retainer Fees
Service Provider Knows Their Client Is Serious
By providing funds upfront, the individual who is providing the service will know that their client intends to see the project or task through to the end.
Client Knows That the Service Provider Is Serious
By paying money before the project starts, the client can feel comfortable knowing that the person they are retaining is unlikely to stop halfway through.
Clients Can Easily Access Service Providers’ Skills
A retainer guarantees that the service provider will be available when their services are needed. This could be only for a short time or on a longer-term basis.
Service Provider Gains a More Reliable Income
A retainer is usually used as part of the payment for a project. This means that the service provider is able to be confident in the knowledge that they will have a reliable income for the duration of the task.
Negatives of Retainer Fees
Conversations Regarding Further Fees Can Be Difficult
When a retainer has been paid, it can make it awkward or difficult to discuss charges incurred for extra work. This can sometimes mean that the service provider resists sending additional invoices as they are worried that the request will be met negatively.
Difference in Expectations Between the Parties
Unless the work and processes are clearly set out before the retainer is paid, it can leave some confusion between parties when it comes to understanding exactly what will be provided. This can sometimes lead to clients expecting more than the service provider is able to give.
Issues with Clarity
Clients appreciate clarity. They like to be able to see exactly what they are getting for the money they are paying. This can sometimes be an issue when retainers are in use.
How Does a Retainer Fee Work?
Once a service has been agreed, a retainer fee may be required to be paid. This is usually kept in a separate account, so that it doesn’t get mixed up with the service providers’ day-to-day funds. After the initial retainer has been signed, there is usually an agreement that is signed by both parties. This outlines every aspect of the agreement, including the initial retainer fee, billing rates, additional costs which may occur and how regularly invoices will be submitted. This agreement is useful for both parties as it sets the budget for the project and indicates the amount of work which will be required. When discussing the types of retainers that may be used, many will consider earned and unearned retainers. While these may sound as though they are completely different, they are essentially two sides of the same coin.
Unearned Retainer
Refers to an amount of money that is deposited into an account that is entirely separate to the service providers’ general funds. This is usually deposited before any work has begun. This acts as a guarantee that work will be done and completed within an agreed timeframe. The funds cannot be claimed or used until the work has been completed. Once the project has been completed, an invoice for hours spent will be submitted. Any funds that are not used are returned to the client.
Earned Retainer
Generally, an earned retainer is the fee that is paid once work has been completed. This is often taken out of the unearned retainer account. This is generally transferred on a monthly basis once an invoice has been submitted. Sometimes, it will be done on the achievement of milestones instead, such as when each stage of a project is completed. As well as earned and unearned retainers, there are work and access retainers to consider. The use of each one will depend on the needs of the company and the type of service being retained.
Work Retainers
This indicates payment for specific tasks. When those tasks are completed, further payment is required. This type of retainer is often used for projects where there is an expectation for specific tasks to be completed within a time limit.
Access Retainers
This indicates paying for access to an ongoing service. A fee is paid which will cover a certain number of hours of work that can be completed over an extended length of time, depending on the needs of the company. Once those hours have been completed, further payment is required. For example, if an attorney has a standard hourly rate of $100, then they may charge a $5,000 initial retainer. This means that you are paying ahead of time for the hours they will spend working on your case. If in the first month they spend 10 hours on your case, then $1,000 from the initial retainer will be moved from the retainer account into their general account. Once the retainer has been spent, then further deposits will be required. There may also be additional charges for court appearances, letters and legal filings.
Example Two
If a company hires a writer on a retainer to produce blog posts for them, then it may be that they are required to submit a certain number of pieces per month. The retainer will be agreed according to the number of pieces of content required and the rates of the individual writer. For example, a marketing firm hires a content writer on a retainer in order to produce four 1,000-word blog posts each month on a variety of topics. The writer would usually charge $250 per post, but due to the ongoing nature of the work, they are charging $200. The company will transfer $800 per month into the retainer account in return for the four agreed pieces. If they require more, then further payments will be required, but if they require less then the writer will refund the outstanding balance back to the company at the end of the month.
How to Create a Retainer Fee Agreement
A retainer fee agreement doesn’t have to be a long-winded, formal contract. Often, it is a document agreed by both parties that outlines the expectations and fees that are likely to be incurred. These contracts act as security for both parties, as they know what is expected of them and are useful in settling disputes. There are a few things to consider when writing a retainer fee agreement:
Is a Retainer Necessary?
Not every business will need to have people on retainers. If you are only likely to need their services for a very short time or occasionally, then it is often better to just pay per project. If you are likely to need the services or advice regularly, then a retainer is a better option.
Outline All Extras
This is one of the most commonly made mistakes when it comes to retainers. If you don’t make sure that extras are outlined in the initial agreement, then it can be difficult for service providers to claim that money back. Businesses don’t like to feel as though they are being charged unfairly and will often refuse to pay for extras that haven’t been previously agreed.
Add Contact Hours and Availability
It is especially important for service providers to list their contact hours and availability as part of their retainer agreement. This is especially important when it comes to dealing with clients in different time zones. When these details aren’t agreed ahead of time, it can lead to communications being attempted at inconvenient times, which can lead to resentment between parties.
Outline the Purpose of the Retainer
A retainer is typically given for a specific purpose. It is important to outline these expectations in the retainer fee agreement so that both parties fully understand what is expected of them.
Include Dates
A retainer should cover a specific time period. In the case of legal retainers, this could be for the length of a case. Other popular options include monthly retainers, quarterly retainers and annual retainers. Make sure that the time period is outlined in the agreement, so that both parties are aware of when they need to have completed their tasks.
Example of Retainer Fee Agreement
A retainer fee agreement can be a very simple document that forms a commitment between two parties, or a complex contract that outlines a variety of obligations. A simple agreement may look similar to the one outlined below: The service provider is to provide [type of services] to the client between the dates stated above. The client authorises the service provider to provide their services during this time period. The service provider agrees to provide [list of services] and is available for consultation [list days and times for communications] for the time period stated above. The client agrees to [list of services including: provide relevant information, communicate changes, compensate additional fees within a reasonable time period] for the agreed period of time. Both client and service provider understand that additional fees may be required. These are listed below. The service provider agrees to consult with the client before completing any work which may incur additional fees. The client agrees to pay any additional fees within a timely manner. [list of additional fees] At the end of the agreed time period, the service provider and client will discuss whether an additional retainer fee and agreement are required, all of the required work will be submitted and all outstanding fees will be paid. Signed by [both parties should sign their agreement] They provide the security of knowing that specialist skills will always be available to them, while also allowing the freedom to only utilize those individuals when required. For a service provider, retainers are valuable, as they help to provide security and a regular income while also allowing them the freedom to pursue alternative clients and income streams.
