May 24, 2022
General
Masooma Memon

Retainers Demystified

Are you a freelancer or professional services business and need advice on how to set-up a retainer agreement? Find out more about how retainers work and why they are great to generate predictable and stable revenue.

A retainer agreement is the most common pricing model among agencies with 35% of agencies using it to price their services.

No wonder, with retainers, it's easier for agencies to predict their revenue, stabilize their cashflows, and build lasting relationships with their clients.

Want to learn how you can make these retainers work for your agency? Dive into this guide that looks at what retainers are, how they work, and how to create a retainer agreement. 

What is a retainer agreement?

In agency-speak, a retainer agreement is an ongoing month-to-month agreement between a service provider and their client.

Think of a retainer contract as a work-for-hire agreement where you complete either a set amount of work for the client on a monthly basis or commit a set number of hours to their work. 

In exchange for your rolling services, the client pays you a fixed amount of money for an agreed number of hours each month.

In fact, it is common for agencies and their clients to enter into a retainer agreement after a bigger project (e.g. a website re-development project) has been closed out. Unused retainer time usually expires and the client cannot get a refund or take the unused time forward into the next month. Agreements are signed for longer periods of time and while they can last for up to five years, they are commonly reviewed, adjusted and renewed every financial year.

Retainer time should be used to work on smaller (recurring) tasks, such as:

  • infrastructure maintenance and monitoring
  • software upgrades
  • account management, advice and consultancy
  • content updates
  • analytics
  • small changes or bug fixes

What is the difference between a retainer and a contract?

The main difference between a retainer and an ordinary contract lies in the pricing model and work required.

A retainer agreement, for example, means that agencies receive ongoing payment from their clients. A one-off contract, on the other hand, revolves around a particular service that an agency provides its client for a specified time.

Similarly, retainers involve a retainer fee on a continuous basis — one that’s paid in advance each month for the service/time the agency commits to its client. On the flip side, contracts involve one-time payment for a one-off project.

Here’s a breakdown:

What is the difference between a retainer and a contract?

How long do retainers last?

Retainer agreements can last from anywhere between one year to five years. The timeframe depends on what you agree upon with your clients.

The general rule is that the agreements are signed for longer periods of time and while they can last for up to five years, they’re commonly reviewed, adjusted, and renewed every financial year.

What is the purpose of a retainer?

Briefly, a retainer’s aim is to provide a client access to your service on an ongoing basis. In doing so, a retainer contract offers clients an opportunity to avail services valuable to their business regularly.

In certain cases, retainer service providers also offer discounted pricing to their clients for the regular work that they agree to. The exact, however, depends on the type of retainer you offer — we’ll discuss this in more detail in a bit. 

How does a monthly retainer work?

There’s no set blueprint that determines how a monthly retainer works. It varies from agency to agency and what you finally agree upon with your client.

The basic structure of retainer agreements is the same though:

  • Agency agrees to provide a service(s) or a number of hours their client needs each month.
  • In turn, the client agrees to the retainer payment that they’d pay in exchange for the agency reserving its time/service for them.
  • Agency lays out the scope of work involved and creates an agreement to get both parties on the same page.
  • Work starts and both parties involved keep their word.

Remember: Unused retainer time each month usually expires, and the client cannot get a refund or take the unused time forward into the next month.

The benefits of retainer agreements

Keep in mind that a retainer contract is a favorable settlement for both agencies and clients. It’s essentially a win-win agreement.

Let’s start by looking at how you, as an agency, can benefit from providing ongoing services:

  • Maintain cash flows (more income stability). This is the biggest benefit of retainer contracts. The client usually pre-pays for the work, which makes your finances predictable and creates stable and foreseeable revenue. 
  • Build long-term relationships with your clients. If managed well, retainers are a good way to build a long-lasting relationship with your client and they can easily lead to bigger follow-up projects and referrals. 
  • Ongoing value to clients. Because you work with a client over a long period of time, you get a stronger grip on their pain points and the new struggles that emerge. As a result, you can propose new solutions to provide more value to clients.
  • Reduce payment risks. Retainer projects are paid for in advance. This mitigates risks of nonpayment and cuts down headaches related to chasing payments.
  • Capital for business development. Thanks to the predictable cash flow, you can commit money to marketing, employee training, and more.
  • Less stress. This comes from the income stability as well as reduces worries around finding new clients when a contract nears its end.
retainer agreement

So how does all of this benefit a client? Here’s how:

  • Creates a budget-friendly solution for clients. Instead of having to hire people to do those services for them, clients can get part-time work setting out of retainer agreements. 
  • No need to look for new contractors now and then. Finding and familiarizing your business with independent contractors takes time. Companies that work with agencies or consultants on a retainer basis don’t have to worry about all that since they work with one agency. 

Types of retainer agreements

Interested in offering ongoing services to your clients? Before you do so, decide which type of retainer contract you want to offer.

You’ve two options to choose from:

  1. Pay-for-work retainers

This is a basic retainer contract which is very common among consultants and agencies. And, as its name suggests, involves getting paid for the hours of work you complete.

  1. Pay-for-access retainers

This type of retainer agreement doesn’t involve a trade of hours and money. Instead, pay-for-access is paid for making your expertise available to a client on a regular basis. This retainer agreement is better suited to advanced consultants whose clients trust them for their knowledge and put them on retainer to access their service.

What does a retainer agreement consist of?

A retainer agreement is a formal document that dictates the scope of work involved.

It covers everything from what service/time commitment is required from your end and how much retainer fees the client will pay and by when.

Your retainer agreement must also outline modes of communication, ethical work principles, expectations from both sides, and steps to take to end a contract (example: when to give written notice).

Remember, this document plays a huge role in determining your working relationship with your retainer client. Often, it’s also what saves you from unrealistic client expectations. 

Hence, it’s important you take the time to create and review your retainer agreement with your client to make sure both sides are clear on the details.

Here’s a template of what to include in a basic retainer contract:

  • What type of work you’ll be performing under the retainer. Make sure to clarify points that could be misinterpreted. For instance, your client might have a different understanding of what a bug fix or a “small” change is than you.
  • Who will be performing the work. There might be a dedicated person or team (Example: the team that worked on the preceding project or a maintenance team).
  • What’s the process of booking work. For instance, you may require your client to share work required by a certain date of the month.
  • Billing cycle/payment method and terms. While this depends on your pricing model, it’s a good approach to bill monthly and in advance at the beginning of the month.
  • What reporting you’ll provide to your client and by when. It’s generally a good idea to send a report of the hours spent from the past month to your client along with the invoice for the next month.
  • What to do when the time needed to do the work is smaller or greater than the agreed retainer hours. It’s important to go over this with the client so there are no misunderstandings. 

Pro tip: Sharing regular reports with retainer clients helps you establish trust and transparency with them. They also lay the ground for areas that need work and improvement.

Luckily, if you’re using a project management software such as Runn, you can automatically create various business-wide financial reports. The best part? You’ve a lot of flexibility to customize these reports as needed. For example, choose reporting dates and group them by different time periods, filter data, and personalize fields and metrics. 

How are retainer fees structured?

Before we begin, let’s be clear on what is a retainer fee.

A retainer fee is an agreed upfront cost for a service/time commitment that an agency provides to its client. It’s basically advance payment for the work you do for your client in the future.

The exact retainer fee depends on:

  • What service you’re offering. Is it a pre-decided service (example: six blog posts per month that have a flat fee)? Or will the client decide the work and needs you to block X hours for them each month (example: 16 hours on website maintenance — paid for on an hourly basis).
  • Whether you offer discounts. Some agencies provide discounts for bulk work. Others charge the original per hour or per project price.

As you calculate the retainer fee, be sure to break down the costs that go into providing your service. This will help you charge the right amount for the expenses incurred so that the retainer client is profitable for you.

For instance, if you’re charging by the hour, look at how much time typically goes into completing a service. Then, look at the hourly rate you pay to the people who’ll work on your project and their cost to business. Keep in mind, this can vary in case a client wants to work with a senior team member.

In addition to the salaries of the associated staff and time commitment, factor in overhead costs, desired profit margins, costs for admin work (creating reports) and revisions, and a buffer amount (extra hours for answering client questions and other collaboration).

Once done, clarify the work scope in the contract. This will help you ensure you are offering services according to what you’re paid for.

Don’t forget to mention when you’d be reevaluating the fees. 

You can take an annual or a quarterly approach. Either way, the idea is to encourage frequent interaction with clients to discuss any changing work needs and how you’re contributing to their overall success. In fact, you can share any new services (relevant to the client) in these review meetings.

How to negotiate a retainer agreement

If you find yourself doing almost regular work for your client, it’s time you propose a retainer contract to them. 

But that’s not the only time when you can offer a service retainer. You can also propose to bring a client on retainer when they first reach out to you. How so? By informing them that you offer your services on retainer too and explaining how it works with other clients.

Ideally, however, it’s best to propose a professional services retainer agreement when offboarding clients. Because by then you’d have already proven your value. So your client will be more likely to trust you and invest their money in working with you on a rolling basis.

That said, a client agreeing to a retainer setting, however, depends on how valuable your services were to them and how easy it was for them to work with you. 

Where providing quality work takes skill and good talent, you can always improve your client experience by using a project management software.

Such a tool helps you manage projects well, meet deadlines, provide transparency by automating reporting, and streamline your processes. All of this makes you more efficient in the work you deliver, therefore, improving your clients’ experience and trust in you. 

Retainer agreement tips and tricks

And, finally, before we wrap this up, let’s walk you through proven tips to help you maintain excellent retailer relationships with your clients.

  • Keep an eye on the retainer over time.

If you are constantly spending more hours to complete the work than the client pays for, or if the client overpays, you should go back and renegotiate.

The latter scenario might look like a deal in your favor and will work for a while. But ultimately your client will question the value of the retainer and might not renew the contract. If the client underpays, you will lose money and will have to deal with resource scheduling conflicts.

  • Make sure you have the time and right people to do the actual work.

In fact, resource planning is an important thing to look at when agreeing to a retainer. If there’s a shuffle in resources, communicate it with your retainer client well in time. This way, you can make sure the client is always getting the maximum value from your services.

  • Keep your business healthy by having a good balance of retainer and new project work.

This offers more opportunities to learn while providing stability and peace of mind to invest in new marketing campaigns and business development.

It also keeps employees happy as they get to work on a variety of projects, giving them more opportunities for growth with you.

  • Finally, as always when working with clients, be transparent and proactive.

Track your retainer hours and keep your client up to date with where things are at. When using retainers, open and constant communication is the key to building long-lasting client relationships. 

Again, if you’re using a project management software, you can easily track your time. Runn, for instance, helps you create no-fuss timesheets that track your projects on a daily and weekly basis.  

In fact, using Runn’s Time Tracking Chrome extension, your team can track their time and see what’s scheduled for them each day.

 

Ready to strike more retainer agreements?

With this blueprint for creating successful retainer contracts that we’ve shared with you, we’re hoping you’re ready to take on more retainers.

Before you begin though, make sure you have your house in order. Give all your projects the same home. Track employee availability and their hourly rates, your finances, and work completed all in the same place. 

In short, start with streamlining your project management in Runn — sign up for free and see for yourself.

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