Dealing With Commission Payments in Consulting Contracts

Cliff Ennico
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Posted: Jan 29, 2013 12:01 AM

"After being laid off from a company last year, I've started my own consulting business.

"Things have been going pretty smoothly, at least until now.

"I struck an agreement with a local company to perform services for its clients. They are willing to pay me by the hour, plus a commission. When I received their consulting agreement, however, there was no reference to a specific commission -- just a statement that I would be paid a commission "in the company's sole discretion" if they were satisfied with my work.

"I'm happy with the hourly fee, but I would like to get some assurance from this company that I will indeed receive a commission if I give them stellar performance. What's the best way to approach this with them?"

Whenever a company says they will pay something "in their sole discretion," what that means is "I will pay it when I can, and then only if I feel like it." You are right that this agreement does not obligate the company to pay you anything over your base hourly rate.

While a commission can be a flat amount, more commonly it is a percentage of something. You need to think about what that something is. Then, offer the company a menu of choices you can live with.

Consulting commissions are paid either on the gross revenue a company receives from a client or customer, or the net profits from a job or contract. I'm not wild about commissions based on net profits, because there are too many ways a company can fool around with its figures to deny you a commission you earned legitimately. For example, the company could add a portion of its overhead or administrative expenses to the cost of doing a job in addition to the direct costs it incurred in getting the job done, thereby reducing net profits and your commission.

Consulting commissions should, in my opinion, always be based on gross revenue. Sales are sales; either a company sold something or it didn't. The only way your client can monkey around with the figures is to commit fraud, and you can nail the company on that when you review their books (more on that later).

To make your client more comfortable with a commission based on gross revenue, you can stipulate that the company must actually receive the revenue before your commission accrues. That way the company won't be in the position of having to pay you a commission without having received payment from its customer or client -- truly, a monkey in the middle situation most companies want to avoid at all costs.

Basing your commission on gross revenue will also eliminate the need for the company to use "its sole discretion" in determining whether or not you get paid.

It would not be appropriate for you to base your commission on the company's entire worldwide sales -- your commission should apply only to revenue you helped the company generate. Here are some suggestions:

--If you introduce a new client to the company, you should receive a commission on all revenue the company actually receives from that new client, whether or not you actually perform services for that client

--If the company hands off a client to you and you perform virtually all services for that client without the company's assistance, you should receive a commission on all that revenue as well

--If you perform services for one of the company's clients and the company's personnel assists you in performing those services, then it's appropriate to say the company will pay you a commission if, "in the company's reasonable judgment," your work added significant value to the team effort.

Next, you should think about when the commission is payable. Most consulting commissions are paid monthly, quarterly or semi-annually. Your agreement should clearly state that commissions are payable within 30, 45 or 60 days, respectively, after the monthly, quarterly or semi-annual period in which the company receives revenue from its client for your services.

Next, what happens if the contract expires or terminates? Unless the company is required to continue paying commissions on work you did before the contract ends, all payments will stop on that date. The agreement needs to state clearly that upon termination you will continue to receive commissions on (1) all work you performed for the company's clients up to and including the termination date, and (2) with respect to new clients you introduced to the company, all revenue the company receives from those clients as long as their contracts with the company remain in effect, together with all renewals and extensions thereof.

Finally, when receiving consulting commissions you should always add a clause giving you the right to review the company's books and records, upon reasonable advance notice and not more frequently than once each year, to make sure the company hasn't been underreporting sales or otherwise playing games with your commission payments.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2013 CLIFFORD R. ENNICO.

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