If you don’t have a bookkeeping contract with your freelance hire or agency, this post is for you. We’ll go over what a contract does for you, and how to draft one that protects you.
Importance of a Bookkeeping Contract
Having a formal contract is very beneficial to both you and the person you’re hiring. In the world of business, contracts offer significant advantages to working relationships.
Clarity of Roles and Responsibilities
A formal contract clearly outlines the roles and responsibilities of each party. This eliminates ambiguity about what the hiring party and the hired party will do.
By setting clear expectations upfront, the contract reduces the risk of misunderstandings and disagreements later. Everyone involved knows what to expect, which encourages a smoother working relationship.
Legal Protection
A signed contract becomes a legally binding agreement. This means that if any party fails to fulfill their obligations, the other party can take legal action. Depending what terms the contact outlines, they can get a court to enforce them.
For example, a bookkeeper can seek justice when a client doesn’t pay the proper fees, and a client for a bookkeeper who is not delivering services as agreed.
A proper contract can establish a dispute resolution process, too, which avoids costly court proceedings. This can be mediation or arbitration for when disagreements arise. This outlines a structured approach that both parties can follow to help them resolve issues.
Defining the Scope of Services
A contract defines clear boundaries around the specific services the hired party will provide. This prevents misunderstandings about what’s included and allows for additional fees that apply for unforeseen tasks outside the original scope.
A defined scope of services protects both the bookkeeper and the client. The client has a clear understanding of the services they are paying for. The bookkeeper avoids being obligated for tasks not initially agreed upon.
Having a formal contract also demonstrates professionalism and a commitment to clear communication. This helps to foster trust between the parties.
Key Elements of a Bookkeeping Contract
A proper contract must include at least the following basic elements.
- Services Provided – Outline exactly what bookkeeping services you expect.
- Duration of Contract – Specify how long the contract will be in effect and under what conditions it can be either renewed or terminated.
- Payment Terms – Include the details on compensation, including rates, invoicing schedule, and late payment penalties.
- Confidentiality and Data Security – Add clauses that specify your data handling requirements and how both parties will protect sensitive information.
- Termination Conditions – Define how either party can end the contract and the notice required.
- Legal Jurisdiction – Indicate which laws govern the contract and how either party may go about resolving any disputes.
Step-by-Step Guide to Drafting a Bookkeeping Contract
Below is a straightforward guide on writing each section of a bookkeeping contract. A well-written bookkeeping contract ensures a smooth working relationship. The goal is a clear document that supports mutual understanding and benefit.
Introduction
Begin by stating the nature of the document and outlining the overarching terms of service between the client and bookkeeper. Clearly identify both parties, using their full legal names and business names, if they are different.
Make sure you also specify the date that the agreement becomes effective.
Services Provided
Focus on clearly outlining the specific bookkeeping services that the contract applies to. This should be a dedicated section of the contract. List each service in plain language and avoid using technical jargon so that the meaning is clear.
Include specific examples of tasks to illustrate the services, For example, you can note that managing accounts payable includes processing vendor invoices and generating payment schedules.
Make sure that the services you include align directly with the client’s needs. Also make sure that both parties have already agreed on each service before drafting the letter.
Responsibilities
Both the client and the bookkeeper have responsibilities under any contract, Emphasize that the contract recognizes these mutual obligations.
Divide this section on responsibilities into into two parts. The first part will contain the client’s responsibilities. The second part will talk about the bookkeeper’s responsibilities.
Clearly but concisely outline what each party is expected to provide. For clients, for example, this can include timely access to accurate records and approval of reports. For bookkeepers, you can emphasize the importance of accuracy and timely reporting, for instance.
Term and Termination
Define all expectations around how long the work agreement will last, with specific start and end dates, if possible.
Include a termination clause that defines the process when initiated by either party. This should include requirements around giving notice to ensure a smooth transition. Include a note that the parties should try to talk about their disagreement before taking such action.
It should also outline potential reasons for termination of contract. Consult a legal professional to make sure these reasons align with current laws and regulations.
Payment Terms
Be very specific in this section about your compensation structure. Clearly state that the fees are and how often the client will pay them. Be specific about what each fee covers, too.
Detail the invoicing schedule and when payments will be due. We recommend that you include a clause that outlines any late payment penalties with clear terms and amounts.
Addressing Potential Issues
Add a section where you talk about other considerations, including the following.
- Confidentiality – Emphasize the importance of confidentiality regarding the client’s financial information.
- Compliance – Mention the bookkeeper’s responsibility to follow GAAP or other relevant industry standards.
- Software – Be clear about what accounting software the client requires and who is responsible for the associated costs, like subscription fees.
- Data Storage – State how the bookkeeper will store the client’s financial data for security. Include any data backup procedures that further protect this data.
Conclusion
This section is dedicated to formalizing the agreement. Start with a closing statement that summarizes the agreement.
Add a signature line for both parties with their full legal and business names, as applicable, underneath. Include any titles, and the name of any authorized representatives involved.
Proof the contract carefully. We highly recommend that you engage the help of legal counsel. This will help you make sure that the contract is solid.
If any parts need work, revise them before signing the document.
By following these steps, you can create a bookkeeping contract that protects both parties and encourages a strong and transparent working relationship.
Templates and Samples
Check out these free templates. You can use them to help you start drafting solid contracts.
https://www.signwell.com/contracts/bookkeeping-contract-template/
https://www.pandadoc.com/bookkeeping-contract-template/
https://jetpackworkflow.com/blog/bookkeeping-service-agreement-template/
https://legaltemplates.net/form/employment-contract/independent-contractor/bookkeeping/
The internet is full of many other free templates. You can start off with any one of them – just make sure they have all the basic parts. The most important thing to focus on is that you have all the details that are important to your specific agreement.
Best Practices for Negotiating Terms
Pre-Negotiation
Negotiating terms of service in a contract can be tricky, so make sure you prepare so you get a fair deal. Familiarize yourself with standard terms and areas you might want to adjust.
Before negotiations begin, make sure you have your priorities straight. What are the most important aspects of the contract for you? Are you more concerned with specific service details, fee particulars, or termination clauses? Knowing all this will guide your focus during negotiations.
Make sure you understand the party you’re negotiating with. Details like their business model and common terms in similar contracts can inform your expectations and potential concessions.
During Negotiations
Start with a draft contract that outlines your desired terms. Be clear with the other party that your focus is to collaborate towards a mutually beneficial agreement.
Aim to understand the other party’s reasoning behind specific terms, and explain why certain elements are important to you. If the other party is unwilling to do the same, be ready to let go and explore other options.
Be specific about the changes you want. Be prepared to offer concessions in return for what you want, too. Use a professional and courteous tone and language throughout the process.
Negotiation Tips
Don’t feel pressured to speed things up if the other party needs time before responding. Use the time to take detailed notes of what is discussed and agreed upon.
Remember that negotiation is a conversation, so be prepared, professional, and clear about your priorities. This way, you can increase your chances of getting a contract that works well for you.
Complying with Legal Standards
Clarity and Specificity
Avoid using legal jargon or overly technical terms that either party might misinterpret. Stick to clear, concise, and plain language wherever possible. Otherwise, make sure to clearly define any specific terms or acronyms used.
Be specific about the rights and obligations of each party as defined in the contract. This includes details like deliverables, timelines, payment terms, and termination clauses.
Consider Applicable Laws
Research and identify any relevant laws or regulations that might apply to your contract type. For example, rules that affect employment contracts and non-disclosure agreements. Make sure that your contract also adheres to any other relevant industry standards or best practices.
Seeking Legal Counsel
For complex contracts, or if you have doubts, consult with a lawyer who specializes in contract law. It’s always best to err on the side of caution.
Contract Complexity
If the contract is for a high-value deal, having a lawyer involved protects your interests. Contracts with intricate details, technical specifications, or intellectual property considerations also benefit from a lawyer’s expertise.
If the contract relates to an industry with specific legal regulations, and you’re unfamiliar with them, a lawyer can guide you. When the legal landscape surrounding your contract is also unclear or evolving, a lawyer can provide valuable insights.
Unequal Bargaining Power
If you’re contracting with a significantly larger or more experienced party, a lawyer can help ensure fairness. Even pre-drafted contracts and templates might require legal review to help you understand potential risks.
A lawyer can also help draft clear and enforceable terms if there is a history of contractual disagreements. This is also useful for long-term agreements to consider potential future situations.
Frequently Asked Questions
What should I do if one party refuses to sign the engagement letter?
If any party hesitates to sign your engagement letter, schedule a meeting to discuss their reservations. They may be worried about fees, the scope of work, or unfamiliar terms. Acknowledge their concerns and address them directly. Be prepared to explain each section of the engagement letter again.
If you find that their concerns are reasonable, revise the engagement letter. If they are unreasonable or unwilling to budge on key terms, it might be best to walk away from the engagement.
How often should the engagement letter be reviewed and updated?
An engagement letter is not a static document. Ideally, it should be reviewed and updated at least annually, just to stay on the same page. You can update it more often if there are changes in the terms of service, rates, etc. If new parties become involved in the engagement, revise the letter to reflect them.
If any relevant laws or regulations governing the industry change, you may need to update the letter to ensure it complies.
Are there specific legal terms that must be included in every bookkeeping engagement letter?
There isn’t a universally mandated set of legal terms for bookkeeping engagement letters. However, we recommend including some standard clauses for everyone’s protection:
- Parties Involved
- Scope of Services
- Fees and Payment Terms
- Term and Termination
- Client Responsibilities
- Confidentiality
- Ownership of Records
- Standard of Care
- Limitations of Liability
- Dispute Resolution
- Governing Law
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You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
A formal contract is essential for any professional service arrangement. It promotes clarity, protects both parties’ interests, and establishes a foundation for a successful working relationship. Remember to make every effort to communicate clearly before drafting a contract so you can avoid a tedious process.
