Consulting Agreements: What They Are & How They Work

Rarely, if ever, do you see clients give their consultants a blank check, no timeline, vague goals, and the flexibility to spill company secrets to whoever they feel like.

Instead, clients almost always set the terms that shape how contractors operate — and those terms are typically set in what's known as a consulting agreement.

Here, we'll take a look at what a consulting agreement is, look at some of the key components you'll typically find in one, and see an example of what one might look like. Let's jump in.

Table of Contents

What is a consulting agreement?

Consulting Agreement Template

Simple Consulting Agreement

Common Clauses in Consulting Agreements

Sample Consulting Agreement

Consulting Agreement

A consulting agreement is a legally binding document that affirms a client's request for assistance from a consultant. It's a contract detailing the terms of service between a consultant — operating as an independent contractor — and a client.

Virtually every project a company brings a consultant on should be shaped and guided by a consulting agreement. A well-written agreement establishes clear expectations upfront, protecting both the consultant and client from potential disputes or misunderstandings. 

A consulting relationship is a time-bound partnership, and like any other kind of business partnership, it needs to be as airtight as possible. Clients and consultants can't work on different wavelengths.

If you — as a client — don't set clear terms for a consulting engagement, your consultant could wind up working with muddled objectives, operating on the wrong timeline, or carrying out any other activities that might undermine your goals or principles.

Here's a look at the bases a consulting agreement must cover to prevent that kind of confusion.

Consulting Agreement Template

1. Names of Parties Involved in the Contract
2. Names of Businesses and Contact Information
3. Scope of Work
4. Confidentiality Agreement
5. Term
6. Termination Terms
7. Compensation
8. Clarification About Independent Contractor Status
9. Clarification About Who Will Own Any Property or IP Created by the Consultant (Rights and Data)
10. The State That Will Govern Any Services Rendered
11. Clarification That the Terms of the Contract Supercede Oral Agreements
12. Conflict of Interest Terms
13. Dispute Resolution Terms

1. Names of Parties Involved in the Contract

This one is pretty self-explanatory. You need to clarify who, exactly, is signing the consulting agreement.

2. Names of Businesses and Contact Information

Consulting agreements also typically include the names of the businesses involved in the contract and some contact information — specifically business addresses.

3. Scope of Work

The term "scope of work" refers to a detailed description of the exact services the consultant will be expected to provide. It's a protective measure that holds consultants accountable for their performance and whether they've held up their side of the deal when the term covered by the agreement ends.

Though the nature of this section might evolve as the professional relationship between a consultant and their client progresses, both parties need to set clear initial expectations to guide specific actions, avoid miscommunication and confusion, and ultimately make the engagement more efficient and effective.

4. Confidentiality Agreement

A consulting agreement should also include an agreement that clarifies that the consultant involved must keep any of their client's company or product information confidential. That can include designs, financial information, insight into how the company is performing, trade secrets, or any other information that could serve one of the client's competitor's interests.

5. Term

Consulting agreements also typically include expectations about the length of the engagement between both parties. In a similar vein to establishing the scope of work, setting firm time constraints holds consultants accountable for their responsibilities and helps guide more efficient, effective work. In most cases, this section will be set in either months or years.

6. Termination Terms

The purpose of the section is generally twofold. For one, it can establish a timeframe for when a party must provide written notice for terminating the contract and the consequences of that kind of action.

Secondly, it sets the terms for what constitutes a terminable breach of contract — that include breaches of confidentiality, violation of non-solicitation provisions, or illegal activity that might adversely impact the consultant's performance or company's reputation,

7. Compensation

This section clarifies how much the client is expected to pay the consultant, the consultant's fee structure, and the schedule that dictates how and when that compensation will be doled out.

This section might also include information about whether a consultant will be expected to submit invoices. It can also address certain overhead costs for which the consultant expects to be reimbursed.

8. Clarification About Independent Contractor Status

For legal purposes, a consulting agreement should clarify that the consultant will operate as an independent contractor. This section is key for framing how the parties will pay taxes and distancing the client from any liability for the actions carried out by the consultant during the parties' engagement.

9. Clarification About Who Will Own Any Property or IP Created by the Consultant (Rights and Data)

This section addresses how any IP that stems from the consultant's work can be used and who is allowed to use it. Sometimes, a consultant will deliver an entire product for a client. In that case, this section clarifies which of the parties gets to retain that product's copyright.

10. The State That Will Govern Any Services Rendered

Another key legal element of any consulting agreement is establishing where the contract applies. Every state has its own laws that can frame how this kind of contract should be written and enforced, so an agreement needs to clarify which state government will set those terms.

11. Clarification That the Terms of the Contract Supercede Oral Agreements

Consulting agreements can also include a section clarifying that any agreements can only be enforced if they're agreed to in writing or already clarified in the contract itself.

12. Conflict of Interest Terms

Some consulting agreements include non-compete or non-solicitation clauses that keep a consultant from engaging with other companies in the client's market or soliciting the client's company's employees, respectively, during the term of the agreement.

13. Dispute Resolution Terms

A consulting agreement might also include clear terms that dictate how disputes between the parties will be resolved.

Simple Consulting Agreement

A simple consulting agreement — one that covers the bare minimum number of bases to still be legally sound — will typically only include the following:

• The names of all parties involved
• The names of the businesses involved
• The scope of work
• The time frame covered by the agreement
• Compensation terms
• Clarification about the consultant's role as an independent contractor
• A confidentiality agreement

Let's take a look at common clauses in a consulting agreement.

Common Clauses in Consulting Agreements

Some consulting agreements are pretty bare-boned, only covering the essential bases. Other consulting agreements are more complex and may contain clauses.

Clauses add an extra layer of protection for your business by addressing potential issues that may arise during an agreement period, such as confidentiality breaches and non-performance. Here are some common clauses:

Non-Compete Clause

As the name suggests, a non-compete clause prevents a consultant from competing with the client — such as starting a competing business or working with a direct competitor. The clause remains active for a specified period of time after the project concludes.

Confidentiality Clause

Consultants often work with sensitive information, such as trade secrets, financial information, and client lists. Unsurprisingly, consultants are typically required to sign non-disclosure agreements (NDAs) that prevent them from disclosing confidential information.

It's worth noting that confidentiality clauses can be unilateral, meaning only the consultant is obligated to keep information confidential, or it can be mutual, meaning both parties are obligated to maintain confidentiality.

Termination Clause

Simply put, a termination clause outlines what will happen if one party wants to terminate the agreement. This clause should specify how much notice each party gets, plus any penalties that may arise from the termination. 

A termination clause also sets the terms of a breach of contract. This occurs when one party fails to fulfill their obligations outlined in the agreement. When this happens, the other party has the right to terminate the agreement.

Now let's take a look at a sample consulting agreement.

Sample Consulting Agreement

No matter where you stand in the client-consultant dynamic, you need to have a grasp of what a consulting agreement includes and entails. Without one, you're leaving your professional relationship vulnerable to unnecessary hitches, inefficiency, and potential legal ramifications.