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7 Best Practices for Creating a Monthly Retainer Contract

July 6, 2021

8 Min Read
Monthly-Retainer-Contract

One of the biggest challenges most agency owners need to overcome is finding sources of steady, streamlined income. One month, you could be netting thousands in recurring revenue. The next, your projects may dry up. Obviously, this could prove to be a hindrance in the growth of your agency.

Consistent cash flow enables you to take a proactive approach towards your business instead of only reacting to situations.  So it is important that agency owners look for ways to generate steady income on a monthly basis. One of the best ways to do this is through a monthly retainer; in fact, it can completely change your approach towards business dealings.

To prevent major dips in revenue, it is important that you focus on selling your clients on monthly retainers. It can also help you boost profits considerably. There’s a lot you need to learn before you start selling your clients on monthly retainers, so let’s get started!

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Understanding the Monthly Retainer Model

Retainer contracts are actually quite prevalent in many industries, especially the legal industry. A client will pay a retainer fee in advance to ensure that your services are available to them for a specific period of time.

For instance, if you sell a client web development services, you can sign them onto a retainer contract for monthly website maintenance. This will turn into a recurring payment, and ensure that you have consistent streams of revenue flowing in from different clients.

For larger agencies, monthly retainer contracts provide the freedom to invest in value-added services and improve operations. For smaller agencies that are looking to grow, monthly retainer contracts provide a sense of stability. For startups that are looking to survive, monthly retainers allow for valuable funds that can be invested back into the agency.

Monthly Retainer Fee

A monthly retainer fee is paid in advance by your clients to ensure that your services will be available to them for the period covered. Clients on a monthly retainer usually pay a recurring fee, and they usually work on long-term projects with different agencies, who are available at their beck and call.

How to Calculate Monthly Retainer Fee

Retainer FeeSource: Due.com

If you devise a fantastic retainer for your clients, but don’t charge them an appropriate amount, you are essentially losing money by the hour. There are several different ways for you to bill clients effectively. These include charging a commission for each project, or billing by the hour.

Clients also prefer retainers for their predictability. The client has a definitive figure each month that they have to pay, and they can budget it in accordingly. Everything is paid upfront, and this makes matters quite easy for both them and the agency owners.

Here’s how you calculate the monthly retainer fee.

Calculate Your Annual Salary

How much are you going to pay yourself and your workers? The figure is obviously going to be an estimation, but it should be properly calculated. You can select an amount that you have earned doing similar work for another client, or you can look for industry estimations.

Let’s take an example. If you want to earn around $90,000, you need to first calculate your annual overhead. Add this to the salary. The fixed overheads are essentially the expenses that you incur for conducting business, like electricity costs, rent for the office, insurance, fixed salaries, and phone bills.

If your overheads are around $30,000, you can add it to your salary of $120,000. Now you add a profit margin to this figure. It could be however much you want, but it’s important to keep in line with the industry figures.

Ideally, most people prefer profit margins between 20% and 50%. The average is usually 30%.

30% of $120,000 is $36,000. Add the two figures together, and your total comes out to $156,000.

Estimate the Amount of Time You Will Spend on One Client

The amount of time you spend on a particular client  depends on the nature of services you’re providing them. For instance, if you are going to spend around 3 hours in a day on that particular client, the calculations will be as follows:

Let’s assume a standard year, where you work eight hours in a day for five days in a week. Let’s also assume that you take two weeks off in a year. This way, you have 2,000 hours in a year to work. Out of this figure, you will spend 750 hours working for one particular client.

You can look at it in this way 3 hours per day x 5 days a week x 50 weeks in a year = 750 billable hours in a year.

Now, you can just divide the annual figure calculated in the previous section of $156,000 with 750 hours, and you get your answer. In this case, the hourly rate will be $208 per hour.

Obviously, you will have to compare the hourly rate with other agencies in your industry and adjust it accordingly.

The 7 Best Practices for Creating a Monthly Retainer Contracts

Simply calculating the fee for your monthly retainer isn’t going to cut it. There are several important things that you have to care for as well. Here are some best practices to follow when devising a monthly retainer contract.

1. Create an Airtight Contract

NDVlaw - ContractSource: NDVlaw.com

Scope creep is a serious problem for many owners, and it usually happens when your contracts aren’t airtight and ironclad. Many experts have weighed in on how to create effective agency contracts and one rule keeps popping up: you need to have a clear scope of work.

Clients are always going to approach you for “minor” revisions or changes from time to time. To make sure you’re not taken advantage of here, properly define the extent of changes that you can make without additional charges in the retainer contract. Then stipulate the fee for any further changes outside the defined scope.

Describe the terms you use in the contract in detail, like “fixing bugs” or “testing new features”. All terms and references need to be properly defined. This way, when a client asks for something that falls out of the scope of work highlighted in the contract, you can easily outline the process and discuss the additional fee with them.

2. Making Provisions

FCPAmericas - ContractSource: FCPAmericas

Structure the agreement in a way so that there are appropriate provisions for future events that might arise. For instance, what if your client gives you work that exceeds the amount of time stipulated in the contract?

Your contract should have a proviso outlining the calculation of additional payments in this regard. Since your client will already be signed to a retainer, you can throw in a discount for additional services.

More importantly, what if the number of hours are underutilized? You might want to add a provision about whether the hours are going to roll over to the next month, or if the client will “lose them.”

3. Set Tiers

Set TiersSource: SupportYourApp

Building a retainer proposal with different tiers will make it easy for you to scale your existing contracts. By defining tiers and different levels of pay for different amounts of work, your client can easily choose a higher tier when they want to scale.

Keep in mind that there is a difference between a retainer proposal and a retainer contract. The proposal can be amended without any issue, but amending the contract is not going to be easy.

It’s best to contact a lawyer when drafting a tiered retainer contract to ensure it doesn’t expose your agency to any legal difficulties.

4. Define Payment Terms

Payment TermsSource: Tap2Pay

When creating the retainer, outline the terms and conditions for payment. Payments are made in advance for retainer contracts, but it’s important that you highlight the modes of payment, and how you are going to receive the amount.

Will you charge the client’s credit card, or will they set up a standing order? Will the client offer a lump sum fee upfront for a year, or will you stick to a monthly payment schedule?

Clearly define the base fee, as well as the additional amounts that can be received for any additional services rendered to the client. There is no defined structure for stipulating the payment terms; they can vary based on the kind of services that you offer to your clients.

It’s important that you discuss everything in detail with your client when adding this section in your monthly retainer contract.

5. Reports

Guidelines-for-Writing-Short-ReportSource: The Business Communication

You need to maintain transparency between your client.  The best way to do that is by offering comprehensive reports on the work that you have done for them, the hours that you have billed, and the progress you’ve made.

This shows that you actually value the contract and are willing to prove every month why you deserve the payment. It also communicates that you do not take your client’s business for granted and are willing to provide them with extensive details about the work done.

Even if the client doesn’t meticulously scrutinize the report, simply receiving a notification at a set time each month will give them peace of mind. A professional approach like this highly increases the chance that your clients will renew their contracts with you.

6. Re-Evaluate

Re-EvaluateSource: Customer Value Partners

You also need to review and adapt on a regular basis. For instance, if your client has been working with you on a higher tier for a few months, you can propose amendments to the contract that increases the amount of work and the fee accordingly.

Track the work and make adjustments when you deem fit. Retainer contracts are not set in stone. You can always submit a retainer proposal to your client if you feel that some changes are necessary to the work.

Sit down with your client at set intervals to discuss work-related details with your client. You can hold a meeting at the end of each quarter and get valuable input from your client, and also offer your own advice.

7. Establish an Offboarding Strategy

offboardingSource: DeskAlerts

Your clients must never get the feeling that ending the retainer is difficult. Have a dedicated offboarding strategy in place, and touch upon this when signing the monthly retainer with a client.

Clients should not feel like it’s an issue to get out of the contract. So it’s important that you create a proper offboarding strategy that is easy to implement and doesn’t use a lot of resources.

If your agency only focuses on onboarding new clients and doesn’t have a dedicated offboarding strategy, it could be a problem.

Very few agencies actually have a dedicated offboarding process. Instead of just finalizing the deliverables and sending an invoice, you should consider looking at ways to improve the process and educate your clients about the importance of monthly retainers too.

Be Open to Change

Lastly, I’d just like to say one thing: be open to change and adapt accordingly. Instead of upselling a retainer to a client, you should try to sell this from the start. It will bring stability to your business and allow you to invest your money in growing your agency quickly.

By following the practices given above, you will be able to draft excellent retainer contracts that mitigate risks and also minimize exposure. More importantly, you won’t have to worry about scope creep either!

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Najam Ahmed

I work as a digital content producer at Cloudways. Besides that, I love to read, and i love to play the guitar. Fan of all things Arsenal and the Patriots. Occasional gamer. I like to fly drones too. Jack of all trades.

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