If you're providing a service to someone, you may ask for them to pay a retainer fee. Retainer fees are a common form of payment, and clients should be prepared to pay them when seeking the services of any professional who devotes their time to work for them. This article will help you understand what retainer fees are along with the different types, why they're used, and how to determine your own. And you can use Skynova's template to request a retainer.
What Is a Retainer Fee?
A retainer fee, also known as a retainer agreement, is an upfront payment made to law firms, attorneys, and paralegals providing legal services and legal advice, consultants, advisers, freelancers, and similar roles before they can be hired. This fee is like a down payment but for a service rather than a material purchase. It acts as an agreement to work with the client, but it's not necessarily a payment for the entire service.
The retainer fee is usually put into an account and drawn from by the professional to pay for the services and other costs associated with the job. Once the money in the retainer account is empty, the client can choose to add more or cancel the services of the professional. A retainer fee differs from a deposit because a deposit is returned upon completion of the service.
Retainer fees don't mean there's a guarantee of success. For example, a client may pay for an attorney and lose their case, but they still have to pay for the attorney's time.
Why Are Retainer Fees Used?
Retainer fees are used to ensure commitment to the work and help pay for the services throughout the duration of the arrangement. The retainer fee is mostly to represent the professional's reserved time. They can help build trust between a service provider and their client.
A retainer fee can also help the client, as it guarantees the time they need for the service to be rendered. It also ensures the professional will be paid for the work they must schedule.
For example, hiring the professional for five hours a week would require that the client pay the retainer fee to cover those five hours and any other potential costs that can occur during the service. If more time is needed, then the professional will bill the client for the added time or the extra tasks.
How to Determine a Retainer Fee
You may need to determine how much to charge as a retainer fee for your service. Deciding on a retainer fee is simple. While calculating your retainer fee, you'll need to know the number of hours that will be worked and the hourly rate that represents the worth of your time.
Determine the Amount of Hours to Be Worked
First, you need to determine how long the work will take, whether five hours or 20 hours. There might be hours to add later, but for the retainer fee, you'll want a base amount of hours to work with.
Determine the Hourly Rate
No matter your profession, though, it's good to find a reasonable rate that works with your experience level and your success rate in the industry.
Calculate the Retainer Fee
To calculate the retainer fee, determine the number of hours that it will take to finish the project or provide the service. It doesn't need to be exact because you can always charge for more hours once you've crossed the set amount of time.
You'll need to include your state, city, or county tax, which you can then add to your hourly rate. Multiply your hourly rate, with tax included, by the number of hours required to get your retainer fee. Any other expenses should be added to this number, such as supplies or processing and legal fees.
Other Factors in a Retainer Fee
There are different financial factors that can be wrapped into a retainer fee. Processing fees, document fees, and materials required for the service can be included in the retainer fee to cover those charges.
Some professionals offer different ways to pay the retainer fee. The amount, method of payment, and the payment due date are agreed on before the payment of the retainer fee.
The retainer fee must be held in a trust account, then drawn out as the professional invoices for the money. If the retainer fee isn't placed in a trust and is placed in a business or personal account, there can be legal repercussions. Some mistakes are made when money is borrowed from the trust account or there is a mismanagement of money, but they can lead to a client being able to sue the professional for malpractice.
Types of Retainer Fees
There are two types of retainer fees that can be used when collecting payment. The retainer can be considered a work retainer or an access retainer.
A work retainer is when you charge for specific tasks that you agree to provide during the service. With this type of retainer, you'd get paid through the milestones completed on the project.
On the other hand, an access retainer is an agreement on the number of hours that will be provided rather than what will be done during those hours. Access retainers remain among the more popular of the two choices because you can determine a flat fee for the services provided.
Earned Retainer Fees vs. Unearned Retainer Fees
Both types of retainer fees can be considered earned and unearned.
An earned retainer fee is the amount of money that the professional has earned by working to a set point or through so many hours. The professional earns this money as their income.
Alternatively, an unearned retainer fee is the payment placed by the client before any work is done. If any of the unearned retainers are left in the account after the work is done, it's usually refunded to the client unless a non-refundable agreement was signed.
What to Consider With Retainer Fees
When creating a retainer agreement with a client, be sure to have everything written down rather than an oral agreement. This keeps you and the client legally protected and helps define the exact parameters of work to be done. It's better this way to avoid any potential confusion about the service being provided.
Another important thing to include in the agreement for legal purposes is the names of everybody included. That means the client or clients and all the people who will work on the project.
Be clear with your client on the best possible means of communication so that you can work together seamlessly. Include with the agreement that your client may terminate the work at any period during the service.
Keep Your Business Finances on Track With Skynova
Do you need help keeping track of all your retainer fees for your business? With Skynova's retainer template, you can send a request for retainer to your client, record their payment, and easily view all payments received from a client.
Skynova's accounting software allows you to keep track of all your transactions with receipt uploading, switch between cash and accrual basis accounting, and keep track of your paid and unpaid taxes, among many other features.
Start a free 21-day trial with Skynova today.
Notice to the Reader
The content within this article is a general guide and may not apply to your specific situation. To ensure that you're managing your retainer fees correctly, please contact a financial adviser.