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Demystifying the Agency Contract: What You Need to Know and What to Include

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Updated on:
February 15, 2024
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If you’re running an agency, or plan to open one in the near future, then you must immerse yourself in the world of contract creation. Contracts will form the basis of your agency’s income and formal legal backing, making it vital to get them right.

So, how solid are your contracts? A small oversight could cost you a lot of money, both in lost revenue and legal fees. And if you’re not versed in legal matters, you could easily be making contracts that seem fine at first glance, but a competent lawyer could dismantle in minutes.

That’s why you need to understand agency contracts inside and out if you want to make them yourself.

Luckily, we’re here to help. Read on to find out what you need to include in contracts and how client management and contract creation software like Bonsai can speed up the process.

What Is an Agency Contract?

Agency contracts (or agency agreements) are legally binding documents that create a formal, legal relationship between an agency (i.e. your company) and its clients. Alternatively, an agency contract can create a relationship between an agent or an agency company and a principal, a person or entity in whose name the company can act.

In the broadest sense, an agency contract gives the agent authorization and power to perform tasks and actions in the principal’s name, as well as represent them to other parties. Naturally, the contract also establishes that the agency will be reimbursed for their time through payments or fees.

It should be noted that, legally speaking, an agency agreement is not the same as subcontractor agreement. A contractor simply provides services to the end client. In that case, the ownership of the subcontractor’s product is transferred over to the client. However, in an agency agreement, the agency doesn’t provide a product per se, just renders its services available to the client but can also act in the client’s name as long as it does so in the client’s best interests.

From a practical standpoint, however, the line between agency and subcontractor agreements is blurred due to the vast range of services and products agencies create. The exact type of contract you’ll need to draft might change between one client and the next, but it will usually be dependent on whether you provide services (i.e., non-tangible items) or products.

Types of Agency Contracts

There are several classifications of agency contracts, depending on what services or products the agency provides in the client’s name. They can be separated into three distinct categorizations:

  • Exclusivity
  • Payment structure
  • Project type

Agency Contracts by Exclusivity

  • Exclusive agreement: An exclusive agreement gives the agency complete power to represent and provide services to their client in a specific territory and for the projects that the agency can provide.
  • Non-exclusive agreement: With a non-exclusive agreement, the client is free to contact additional agencies to provide services in the same territory as an existing agency. This is a more flexible option for the client, but most agencies shy away from it since it limits their options.
  • Sole agency agreement: This is a similar concept to an exclusive agreement, but limits both the client and the retainer to working only with each other for the field the agency is responsible for.

Agency Contracts by Payment Structure

  • Commission: Most common in real estate agencies, a commission-based payment structure means that the agency takes a small percentage of the sales or revenue generated by the client. It creates a natural incentive for the agency to do well, but is risky if the retainer doesn’t generate revenue.
  • Retainer agreements or fees: The retainer pays the agency a fixed sum depending on the agency’s fees for the project or work to be complete. This can be done upfront, spread across multiple payments, or create a subscription or regular payment plan that the client must abide by so long as the agency provides its services.
  • Hourly rate: This is similar to employing a subcontractor and means that the agency will charge the client based on the person-hours of work needed to complete the agreed-upon project. It’s the most transparent option, provided that the agency tracks its expenses and schedules but can create unpredictable results if the scope of the project changes.

Agency Contracts by Project Type

This is by far the broadest category and can’t easily be divided into manageable chunks. In general, there are a few different ways to categorize projects, with the most common niches that require agency agreements being:

  • Marketing
  • Real estate
  • Talent agency
  • Independent contractors

As mentioned, the difference between independent contractor and agency agreements is a little blurry, hence the final category can’t be really separated into subcategories.

What Do You Need to Include in an Agency Contract?

To ensure that your agency contract is relevant to the situation in hand, you’ll need to make sure to include some key information to prevent ambiguity in the future. Luckily, once you create an agency contract sample, you only need to make minor modifications for any future clients. Here’s what you’ll need.

General Information on the Agency and the Client

These usually include the legal names of both parties in the agreement, their legal addresses, and any other pertinent information such as tax identification numbers, if needed by the jurisdiction in which you’re operating. It’s also best to include relevant contact information for both parties.

By putting this vital information in the first few lines of the contract, you can quickly identify the contract among others in your filing system, and it removes any ambiguity as to whom the contract applies.

Keep the information simple and easy to process, and make sure to list your agency’s full legal name as well as any trade name or DBA that you commonly use for communication.

Once you properly introduce the parties that assent to the agreement, you can use alternative terminology afterward, so long as it properly identifies one of the parties. For example, you can refer to your agency as “company” or “agency” and mention that the client can be referred to as “client” or “agreeing party.” Still, you need to specify that terminology in the introduction after the party’s full legal name.

With Bonsai’s CRM, you can ensure that the contract information stays with the client’s other required files. This allows you to quickly find the contract if any issues arise and you need legal assistance.

Duration of the Agreement

There are generally two different ways you can specify how long the contract will last.

First, you can set up the agency contract to last until the end of a specific project. This can create a natural deadline by which work needs to be done, and allows you to precisely coordinate when your agency will get paid for its efforts.

Alternatively, you can make the agreement last for an indefinite amount of time, or at least until one party prompts the dismissal of the agreement. This is more common for subcontractor and agency work that is perpetual and assumes some amount of work would need to be done recurrently.

While you can be precise as to the beginning of the agreement, putting a specific calendar date to end the agreement is usually tricky. If you decide to create a contract with an end clause, it might be better to state that the contract concludes once the agency delivers the final product or service as a part of the project completion KPIs.

You should also carefully consider what circumstances can lead to either party canceling the contract or ending it early. A premature ending clause won’t absolve the client from the need to pay for the work done until that point, but you need to word that carefully to ensure it’s enforceable.

Scope of Work

Improperly specifying the agency’s obligations towards the client (and vice versa) is one of the main ways an agency contract falls apart and gets canceled. Even if you weren’t specific in detailing how long the contract will last, you need to be incredibly precise in your wording here.

The scope of work includes any and all specifics on the project. Ask yourself the following questions:

  • How much work is the agency expected to do or how many person-hours does it need to devote to the client regularly?
  • Do you expect to need to revise the work you’ve done according to the specifications set out by the project details?
  • How will you track the project’s KPIs?

If you don’t precisely determine how much or how long your agency has to work on the project, the client might consider it a given to pile on more demands and work midway through the realization. It can lead to scope creep and lock your agency’s resources into work that won’t be properly paid for.

Payment Terms and Budgeting

As mentioned, there are three main ways you can set up how your agency will be paid for your work. However, you also need to account for contingencies and late payments.

Discuss what happens if the client is late with paying you for your work. Are you going to apply late fees? Does the work transfer back to you? Are recurring non-payments grounds for dismissing the contract entirely?

The industry standard for most companies is to apply a late fee of a few percent and allow the client to have a few weeks to pay for the invoice you send them. However, this can be as strict or loose as you want it to be. You can have more generous payment requirements as a show of good faith, but it might mean that clients are more likely to try to skimp on payment for as long as possible.

If your agency doesn’t get paid on time, you risk running into issues where you can’t organize your cash flow appropriately. According to Metics, 82% of startups fail due to cashflow issues. More specifically, the organization cites some of the most common problems as relying on one client who fails to pay on time, delayed invoicing, and reluctance to collect fees.

You should also precisely outline the terms for what constitutes a part of the project that needs to be paid for. If you don’t take care to mention this, a client might try to find a loophole inside your contract’s payment terms and request a refund. A contract that doesn’t properly detail what constitutes a successful project according to the listed specifications might result in a lengthy legal battle to overturn the refund request.

Termination

You also need to make sure that both parties have an exit strategy outlined in the agreement.

A premature end of the contract can happen for a variety of reasons. Perhaps the client is requesting more work than your agency can manage. Maybe the client ran out of funds for the project. Whatever the case, the contract needs to outline how one side can initiate its termination.

Regardless of how you set up the termination to take place, both sides need to agree on an appropriate notice period. You will also need to agree on which methods of communication (email, letter, or other official correspondence) are satisfactory to deliver the notice.

The termination clauses might be one of the most difficult parts to navigate. Since the project is ending halfway, both parties need to agree to the final payment terms as well as what happens to the completed work.

Intellectual Property

Your agency needs to clearly define what parts of the project belong to the client. Usually, if your work is freelance-based, then the copyright to the products offered is transferred over to the client automatically upon project (or part of the project) being complete.

Alternatively, the copyright of the product can be leased to the client for the duration of the agency contract. This is a useful method when you offer subscription-based services.

When discussing copyright terms, it might be worthwhile to check how the platforms you’re using operate. For the most basic example, Fiverr automatically transfers the copyright of any projects from the freelancer to their client when the work is complete. You can follow that logic and apply it to your services, but consider your local jurisdiction and how it influences copyright protection.

Confidentiality and NDA (Non-Disclosure Agreement)

Privacy is paramount in corporate settings. That’s why your agreement should contain confidentiality and NDA clauses to prevent either party from disclosing their private business deals and valuable project information.

They are usually similar clauses that should already have been built into your workers’ employment agreements, and the language isn’t particularly different.

Indemnity

Lastly, you need to make sure that the work your agency does won’t make you liable for any damage due to misuse or any other reason. Provided that the client is either using your services or owns the copyright for the product your agency created, you shouldn’t be responsible for any issues that arise due to unfortunate circumstances.

Best Practices When Creating Contract

There are a few key points to consider when drafting your first contract, which should hopefully make it easier to navigate the possible legal pitfalls. Luckily, that’s where Bonsai can help.

Avoid Overusing Legal Jargon

While an agreement is technically a legal document, it might pay off to simplify the language whenever possible. Although you will likely have lawyers reviewing the contract to finalize it, it still needs to be readable by people who are not as versed in legal matters.

If you overuse legal jargon and strange business vernacular, you may end up just confusing the client or turning them off entirely.

You can use Bonsai’s rich base of agency contract templates to get started. They have precise language that ensures both parties get all the information they need without overloading them with “legalese.”

Get Legal Help

For your first business contracts, it’s best to consult an attorney specializing in corporate agreements. They will be able to guide you through the process and help you avoid the most common mistakes.

Once you get your first few contracts done, you can use them as the base for future cooperation. Make sure that you periodically recheck with a lawyer to ensure law changes don’t affect your contracts.

Use Software to Help You Out

Perhaps the best way to get excellently written contracts is to use a rich knowledge base that contains samples and explains the terms in simple language. You can use Bonsai’s agency contract samples as the base for most of your contracts throughout your company’s existence.

Furthermore, a smart management platform like Bonsai allows you to store agreements digitally and connect it to your client’s database for easy overview. Then, you can make changes to the contract if needed and send the new version to the client in a few clicks.

Don’t Make Promises

One of the biggest pitfalls novice agencies include in their contract is guaranteeing positive results. According to Forbes, this is one of the few things you can’t reliably offer, no matter how good your agency is at its job.

Inserting a clause that guarantees your company’s going to deliver some result can set unrealistic expectations that your workers may not be able to achieve.

How to Get the Best Agency Contract Samples

If you need a one-size-fits-all all solution to making an agency contract, look no further than Bonsai. It combines the best features of client management, invoicing, project management, and scheduling software, as well as providing you with a generous knowledge base of contract samples that fit pretty much any industry and agency type.

You can simply start with the general sample, get acquainted with all the necessities of a good contract with straightforward examples, and make modifications based on the information you have collected—and stored on Bonsai—on the client.

Additionally, Bonsai also integrates with most modern scheduling and project management software, allowing you to take your existing software to the next level thanks to easy data-keeping. Contact the Bonsai team today and learn how you can jumpstart your agency.

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