Why CYA Contracts Suck

No one likes contracts. They’re full of confusing legalese, confusing clauses, and stuffy addendums. You know you’re supposed to have one, because (as a client or as a contractor), you need to cover your ass. Both sides are concerned about protecting against a future in which things don’t go according to plan. 


So, in the very tender early stages of the client-contractor relationship, before you really know each other all that well, you’re essentially putting the business equivalent of a prenuptial agreement in place outlining all of the punishments that will be enacted if this project fails. Not exactly a warm, fuzzy start to a true partnership, is it?


If you’re lucky, once the project is underway the contract will be filed away in Dropbox or abandoned in an email and never ever referred to. If you’re not lucky, the project goes sideways, and someone has to dig up the contract and hope that 1) this particular problem will be addressed somewhere in all of that jargon and 2) it’ll work out in their favor.


Not only that, but contracts are static and a real pain to change. Particularly in creative fields, it’s very common to start a project and discover that there’s additional work to be done - work that the client WANTS to have done - but it is annoying to have to make amendments to a Scope of Work document, so most of the time, people just… don’t. The additional requests are made via email, Slack, meeting, or phone call. And then, when scope creeps or the project hits a rough patch, the documentation is out of date and your contract isn’t worth much at all.


But there’s a better way - a more proactive approach to making sure projects go smoothly, and nudging toward partnership and away from the transactional or even adversarial client/contractor relationship. 


Here’s how it works. 


You start with a very simple contract. I know, I know, I just railed on contracts, and now I’m saying you need one… but this one is SIMPLE. All it does is outline the rules and code of conduct. Think of this contract as clear communication about expectations, more than trying to predict and protect against future problems. You can even use “plain English”, but it’s also worth having the legally binding language. So yes, I’m encouraging taking some protective measures, because we need to recognize that sometimes the relationship will fail.


Within this contract, you establish a more flexible approach to documenting scope of work. This makes it a lot easier for the working relationship to remain nimble and feel less transactional. Instead of pointing to a static Scope of Work document (often attached as an “exhibit” to the contract), you instead point to a shared project portal. Changes to the scope can be made via the portal, with the consent of both parties. This portal functions not only as a more flexible part of your contract, but also as a super simple task and project management system. It’s easy for both client and contractor to see where the work stands at any given time. This is most easily accomplished with a tool like Ditto to act as the neutral third party which ensures that all changes are tracked and mutually agreed to, but it’s also possible to put together your own system using a shared Google Drive folder or the like.


For this approach to succeed, it’s important that when scope of work is documented, it is approached incrementally. This “one phase at a time” incremental approach to contract-based work minimizes the risk that client and contractor are taking at any given time, and also ensures that every time a new phase begins, both parties have essentially “renewed their vows” (to continue the marriage/pre-nup metaphor).


Here’s an example of the contract we use at Ditto to accomplish the above. Obviously, this is purpose-built for our platform -- we’ve created the project portal and integrated payment tools to bring this approach to life -- but if you like the idea and want to try it yourself, you could. 


In addition to providing the legalese, we use plain English to outline the essence of the agreement and explain how the work will be completed in phases. Again, these terms are specific to Ditto, but you may find them helpful in crafting your own incremental approach. Here’s what the Ditto terms include. (Note that the “IC”(Independent Contractor) and “Client” are carried over from the official contract document to ensure clarity.)


Services

Services will be broken up into phases. Each phase will include a description, timeline, and cost. 


These phases are represented within a shared Ditto project portal. New phases may be added to the project at any time, and inactive phases may be edited. This allows Ditto to document the agreed-upon scope of work in an ongoing, dynamic way. 


Services will be provided by the independent contractor (IC) in a professional and timely manner, and the client will likewise respond in a professional and timely manner. If a response is required on either side, Ditto will allow 4 days before nudging to action.

Payments

The Client must pay for a phase before it begins. This money is held in escrow by Ditto until work on that phase is complete. When work is complete, IC will notify Ditto, and Ditto will contact the Client. The Client will have 4 days to respond; if the Client is satisfied, payment will be released to IC. If the Client does not approve the release of the payment, he must provide the IC with required changes or requests.

Modifications of Services

Changes to the scope of work can be made by adding a new phase or editing unfunded phases within the Ditto portal. Any funded phase cannot be edited - the scope is locked. While the Client may fund multiple phases in advance, only one phase at a time is In Progress.  


At the conclusion of any phase, the Client or IC may choose not to continue with subsequent phases.

Termination

Either IC or Client may choose not to move forward with the work at the conclusion of any phase. If the agreement is terminated by the Client without cause while work is underway, IC will be paid for the phase that is In Progress.




Disagreement

If there is a disagreement between Client and IC, they will attempt to resolve it in good faith for a period of at least 30 days before taking any kind of legal action.

Escrow

Ditto will hold funds in escrow and release them as previously outlined.


This agreement is between Client and IC - Ditto is involved solely to facilitate their relationship. 


Client and IC agree to hold Ditto harmless unless there is negligence or misconduct on the part of Ditto.


If a disagreement between Client and IC lasts more than 60 days, Ditto may choose to turn any money held in escrow over to a court of law and be absolved of any further connection.


As you can see, this phase-based approach is a little different from the typical contract-based approach. A client and independent contractor might start a project, only to discover that there’s a mismatch, and decide that it’s better to abort the project than to keep charging forward just because a contract is in place and a 50% deposit has already been paid. 


This means that work only continues as long as both parties are still satisfied with the work and the working relationship, and there are built-in points of evaluation to check in and communicate with one another about what’s going well or what needs improvement. This is something that could (and should) be done in any kind of work environment, but it’s much easier to achieve when there’s a framework in place to force it to happen, and when payments are directly linked to these communications. 


Contrast this with a typical contract situation, in which both sides have committed and are locked in to delivering or receiving exactly what was contracted. There’s a lot of pressure on the contract to get it right - to specify precisely what will be delivered, when, and how - but even for the most experienced contractor or client, it can be difficult to predict the things that might come up throughout the course of an engagement. Then, when things start to go a little bit sideways or don’t align 100% with expectations, tensions begin to mount. 


Conversations like “I can do that, but it’s going to require a larger budget” or “I’m not satisfied with your work” are much easier to have when there are clear “check in” points at which to have them. Expectation setting is important, and when it’s been clearly articulated that work will be conducted and evaluated via a phased approach as opposed to completely scoped right out of the starting gate, both client and contractor can rest assured that the chances of going off course are minimized.


In general, think of the phased approach as taking proactive measures to make sure that the project goes well every step of the way, while the CYA contract approach puts more emphasis on seeing to it that if the project doesn’t go well, protections are in place.


An ounce of prevention is worth a pound of cure, and companies (and their lawyers) are starting to recognize that old school contracts don’t do a very good job of aligning interests and promoting good working relationships. In fact, Harvard Business Review recently wrote an article about a new kind of contract called a “formal relational contract” which big companies are using to address this very problem. The article is summarized as follows:

 

“In an era when businesses increasingly have to depend on their suppliers to lower costs, improve quality, and drive innovation, traditional contracts don’t work. They often undermine the partner-like relationships and trust needed to cope with external uncertainty.


The remedy is to adopt a totally different kind of arrangement: a formal relational contract that creates a flexible framework designed to foster collaboration in complex strategic relationships over the long term. These contracts, which are legally enforceable, specify mutual goals and establish governance structures to keep the parties’ expectations and interests aligned.


They are especially useful for complex purchasing arrangements, outsourcing, strategic alliances, joint ventures, franchises, public-private partnerships, large construction projects, and collective bargaining agreements.


Crafting a formal relational contract involves five steps: laying the foundation, co-creating a shared vision and objectives, adopting guiding principles, aligning expectations and interests, and creating systems for staying aligned.”


For most people and situations, true “formal relational contracts” will be overkill, but it’s possible to apply the sentiment and goals to your own contracts and working relationships, as we’ve tried to show.


Lawyers won’t be going extinct anytime soon, but it’s our hope that contracts as we know them will be. :)