Do you ever feel like you’re constantly chasing that next payment? Wondering where it’s going to come from, or when you might get paid? This uncertainty in your freelance business can be resolved with one solution — retainers. But what is a retainer fee?
A retainer fee is a payment method that helps you create predictable income for your business, so you know when you’re getting paid and how much. Once you’ve been able to grasp the idea and apply it to your business, it can be a total game-changer.
Let’s take a closer look at finding out exactly what is a retainer fee, the pros and cons of using such a system, and the different types you can use.
What is a retainer?
A retainer is an open-ended contract with a service provider or a consultancy. Under a retainer agreement, a client pays you an agreed-upon fee in exchange for your services. Usually, the client pays in advance for work that is supposed to be done in a stipulated period.
In other words, a retainer is required to access the services of specialized individuals or companies. If the client utilizes their services, a fee is charged upfront on a recurring basis. There are different types of retainers, which can include retainers for contract services, a set amount of time/hours, access to the contractor, or value-based retainers.
Retainers are common in the fields of IT, law and finance, engineering, where one needs to work with contractors. But it is certainly not just limited to these. You’ll find retainers in ecommerce, writing, designers, web design, and more.
What is a retainer fee?
A retainer fee is defined as that amount of money that needs to be paid to a professional—you—for services that they will provide at a scheduled date. The purpose of the fee is to cover the initial costs that professionals incur to set up the working relationship.
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For instance, in IT services, every case requires some laying of groundwork before the actual project kicks off. That can be either taking the client’s brief, preparing an IT framework, or designing a delivery roadmap.
Since there are resources deployed at each stage, the contractors or consultants incur some costs. Retainer fees cover these costs and mark a recurring flow of monthly or yearly income from a particular client.
A retainer fee agreement can protect all parties against any risk involved. It helps set the expectations clearly, so everyone is on the same page.
There are different ways to plan your retainer fees based on the nature of services. For example, many freelancers choose to phase out their retainer fees when dealing with a particular client.
For projects that need a lot of upfront work, though, it’s better to charge retainer fees than for hourly work. If you charge retainer fees, it is important to note that any service delivered beyond the work specified as covered in the retainer fee should be billed out at a per-hour rate. Payment for those services should be made after they have been rendered.
Now that you know the answer to the question “What is a retainer fee”, let’s look at the types of retainer agreements you can have.
Different types of retainer agreements
We all agree that having a retainer is a perk. But it can take some time and effort to learn the type of retainer that’s best for you, how to structure it, and therefore sell it.
Additionally, creating a contract that works for both parties and abiding by what has been agreed can be another problem.
But let’s focus on different types of retainers. There are four types of retainers that a freelancer or consulting business can have. Let’s find out when to use a consultant retainer agreement and discover what type of retainer would suit your business needs.
1. Pay-for-work retainers
Under pay-for-work retainers, freelancers receive ongoing payments on a monthly basis from their clients. As a primary type of retainer agreement, this is a go-to for freelancers who have started new relationships with clients or are in the process of building one.
Under a pay-for-work retainer agreement, although you’re paid monthly, you get paid for the hours of work you rendered.
The payment structure here would vary depending upon what you are offering and your experience.
This varies because you may spend a reasonable amount of time on each task depending on the need (and even work ethic). Some may take longer than others. Others may be more efficient. Therefore, it may be common for clients to request an estimate of the time to complete a set task before settling for your retainer agreement.
When clients determine the estimated delivery time of the deliverables beforehand, they can get a bird’s eye view of how much they’d have to spend overall.
That’s not to say that the estimated figure will be accurate. You should explain to your client that estimates may vary depending on the degree of difficulty of the task at hand.
Cost-conscious clients on pay-for-work retainers can request drip feedback from you. In other words, they can get an update from you on the progress of their task even when the task has not been fully completed and only a certain amount of time has elapsed.
The pay-for-work retainer system is flexible because clients can negotiate the cost and hours dedicated to a specific task, therefore it may not be the best solution for your business.
2. Pay-for-access retainers
Under pay-for-access retainers, freelancers prefer to be paid in exchange for a client’s access to their expertise and knowledge on a regular basis.
Unlike the model explained above, pay-for-access retainers don’t take into consideration the time that it may take to complete a specific task.
Pay-for-access retainers represent relatively more stable income as they are paid on an ongoing basis. Before a freelancer can be in a position to receive pay-for-access retainers, however, they should have had years of experience under their belt in that specific field.
Those years of experience should be enough for the client to trust the quality of their services.
In most cases, pay-for-access retainers suit freelancers who also already have good relationships with their clients. Clients are not generally willing to pay just to retain a consultant’s services unless they:
- Already know the type of work you deliver
- They know they can trust you to perform when the need arises.
In other words, it’s uncommon to land a pay-for-access retainer with new clients.
A marketing agency is a great example of a consultancy firm that can charge pay-for-access retainers. Leading agencies like Ogilvy and Dentsu, for instance, have many clients who pay to retain access to their services.
Under a contingency retainer agreement, fees are paid based on the end result. In other words, under a contingency fee arrangement, the client is supposed to pay only when the services have been successfully delivered.
For instance, a lawyer in a civil case would only receive a payment if they successfully argue that case.
Typically, when the case is won and the lawyer’s client receives court-ordered indemnification, the lawyer receives an agreed-upon percentage of that amount recovered by the client. On the other hand, if the client loses the case, they will not be charged for the lawyer’s professional services.
It’s important to note that, of course, this is not always the case. Sometimes, the lawyer receives compensation even if their client loses. What is a retainer fee for these services will depend mostly on what the two parties have agreed upon at the start of the engagement.
In other words, in a contingency agreement, also known as a damages-based agreements (DBAs), the client may still be required to pay for expenses incurred by the lawyer.
A hybrid fee arrangement is just that: a fee arrangement that involves a combination of the other payment arrangements we just talked about. It may be a custom arrangement where a particular fee structure applies up to a certain stage, and then, beyond that, other fees are applied.
For example, you can have a provision where the hourly rate of billing applies only upon completion of a specific volume of work. When completion of the work entails going beyond those agreed-upon hours, the client is then required to pay a fixed amount.
An advertising agency, for example, can define its cost per hour depending upon the nature of work. Suppose it has to undertake design work that requires a lot of iterations.
The agency can then decide to put a cap on the work covered by a specific fee, say, up to 3 rounds of revisions. If the agency goes beyond the three rounds of revisions, it can charge extra for any ad-hoc work.
A hybrid agreement allows for flexibility. The agency is assured it is properly compensated for additional work done. The client is also given the assurance that, for as long as the work is part of those 3 rounds of revisions, they won’t have to pay for additional costs.
Here’s a quick chart showing you a comparison of pricing models and their potential profit/risk scale and best use cases:
Such agreements work best for agencies and professionals in the creative field. Clients, after all, typically require revisions before they deem a project completed. There can be many combinations of payment arrangements under a hybrid fee arrangement, so it is best to explore all the options and pick those that suit you and the client the best.
Pros and cons of retainer fees
What is a retainer fee? We’ve answered that question. We’ve also looked at the types of retainer agreements that exist. Now, let’s talk a bit about the pros and cons of retainer fees.
Retainer fee agreements are used in practically any field. Established freelancers or contractual workers typically resort to these to get proper compensation for their work and expertise.
Retainer agreements can also help freelancers who don’t have a business structure or an admin department to manage their finances. When an issue on payments arises, freelancers can just go back to the agreements. The agreements safeguard their interest and their clients as well. It’s a win-win for both parties.
Here are other benefits of retainer arrangements:
Steady income: One of the biggest issues faced by freelancers or independent consultants is the inconsistent workflow and, therefore, inconsistent income. But when you work on retainer, you no longer have this problem.
A retainer arrangement gives you peace of mind since you’ll have money rolling in. It’s the closest a freelancer can get to conventional employment while still being their own boss. They get the best of both worlds, in short.
Trusted clients: When you enter into a retainer agreement with a client, you can be assured that the client can be trusted. Clients don’t usually commit to paying retainer fees if they don’t have the budget for it.
In other words, you wouldn’t have to worry about not getting paid on time or about not getting paid at all! These are the clients who have a reputation to protect so they’ll stand by whatever you agreed upon.
Long-lasting relationships with clients: If a client asks you to work on retainer, you can conclude several things. One, they have the money for it and can therefore be trusted (see our previous point), and two, they see you as worth their money and time and would like to establish a long-lasting relationship with you.
It makes sense because most clients would rather keep their trusted contractors than search the Internet looking for someone new.
By signing a retainer agreement, they’re assured they receive good services from reliable professionals for a long period of time (at least for as long as they’re paying).
Does that mean retainer agreements are always great? Well, not really. Let’s take a look at the cons of retainer arrangements.
Tight deadlines: If you’re on a retainer, you’ll always have a deadline hovering over you. Depending on the specifications and flexibility of your agreement, your deadlines may be highly inconsistent.
With a deadline looming over your head, it can also be hard to accept and work on other time-sensitive work. Since your workload changes from month to month, you might not be able to sort your work and manage your time properly. The result? You might end up accepting more work than you can handle and then commit mistakes.
Dependency: Since your contract states you’ll be there whenever your client needs you, you in a way lose that freedom you were looking for that prompted you to leave your 9 to 5 job in the first place.
Retainer agreements can also encourage you to place all – or most – of your business “eggs” (time) in one basket if you don’t have too many clients. That can be damaging to self-employed professionals especially since your client has the option to leave you at any time.
Comparatively less pay: If you have a client that’s active seasonally, you may have literally nothing to do at times. That means less money for you.
The possible discounts under a freelancing setup and the fierce competition can also result in less pay for you as a consultant.
All that said, should you then be asked to be paid on retainer, or just stick to the regular payment scheme?
The answer will depend on your preferences and own assessment of your situation. The key is to do your research on what a retainer fee is, and lay down all your options. If you do all those things, you can easily make an informed decision.
Is a retainer right for you?
So, what is a retainer fee? It’s a question that’s not really that difficult to answer. A retainer fee is the amount of money paid to a professional for services they will provide.
Is the retainer system the way to go? Well, if you’re someone who has incredible time management abilities and feels that less freedom is a fair price to pay for steady revenue, then working on a retainer might be perfect for you.
If this is a path you want to explore, just take note of the different kinds of retainer arrangements, and evaluate each of their pros and cons.
Choose the one that fits your needs. Don’t forget to get your retainer agreement signed by your client so if any issues arise, you can always go back to the agreement to resolve it.
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