What is a Retainer Fee?
Retainer fee is an advance paymentAdvance PaymentAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services. or a down payment made on a frequent basis (i.e. monthly or quarterly or semi-annually or annually) for procuring the future services or ensuring the confirmation of future services from an individual (or in some cases, from any corporate entity) who is a consultant or a freelancer or a lawyer or any other professional or expert in the relevant field.
- A retainer fee is nothing but a fixed fee paid upfront to a person for receiving a specified service. The payer of the retainer fee is called the service receiver or the client. The person to whom the payment is made is called retainers provider or service provider or expert or consultant.
- Retainership provider or service provider may be an individual (in most cases) or a corporate entity having a group of experts within it.
- Retainership provider or service provider is generally an expert in the relevant field who may be a lawyer or freelancer, or any consultant.
- Generally, a contract is made by the payer with the service provider. The contract is normally made for a year & then renewed based on the level of services received last year.
- So, this fee is like a fixed cash inflow for the service provider with the commitment for future services.
- It ensures the commitment of the specified services to the payer of the fee.
How Does it Work?
- Retainer fees provide for the base for the service relationship.
- First & foremost, an agreement is made between the service provider & client. The agreement specifies all the terms such as the amount of the fee, the rate per hour, service time limit, the extent of services, location of provision of service, a penalty in case of default, jurisdiction in case dispute, etc. covering all the possibilities of a business transactionBusiness TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements..
- The client is required to sign the representation agreement & a reference is made to the attorney to make the agreement legally binding on both the parties. The client deposits the specified amount of fee in a special account maintained by the service provider. Having a special account ensures that money is not spent by the service provider for personal purposes before providing the said service.
- As and when the service provider works on the assignment, he keeps a record of the number of hours spent on the assignment. Such a record helps in invoicing at the end of the month. Then a settlement amount is derived by comparing the retainerThe RetainerA retainer is an arrangement between the firm and service provider wherein the service provider is paid an advance for services that will likely be needed in future. Retainers are commonly used in areas like law, accounting, HR. fee & the invoice amount. The difference, if any, is either adjusted or cash-settled.
- This fee is normally paid to the attorney holders, lawyers, tax consultants, industry experts, quality check experts, etc.
Example of Retainer Agreement
Suppose a tax consultant is hired for an assignment. The typical workflow goes as under:
Usually, the invoicing rate per hour includes charging for making phone calls, preparation or keeping up of records, etc. As you can see in the above example, the client gets a refund of $ 500.
An agreement can be made between the client & a lawyer, wherein the lawyer gets a nominal account at the beginning & gets his complete fee only if he wins the case. Such an agreement is called a contingency feeContingency FeeA contingent fee is compensation payable only if the outcome acquired is favourable or a particular objective is accomplished. It is a widely used fee structure in the US, especially in the law practice. Also, it is termed a conditional fee in the England and Wales. agreement. Further, the client may enter into a retainership agreement with the lawyer so that the client can engage himself in the future whenever any legal issues are faced.
Such type of retainership agreements is made for restaurants, hospitals, tech-oriented companies.
Why Pay Retainer Fee?
Basically, paying a retainer fee projects that the client is pretty serious about the case & they need the consultant’s services. It enables a harmonious relationship between the client & the consultant, indicating that the client has trust over the consultant.
The retainer fee is vital to both the client as well as the consultant since this ensures that the firm is working for the client & the client, in turn, can manage how much to spend for the work. Keeping the fee in separate accounts ensures that funds are not used for personal purposes & funds represent pendency of services to be performed by the consultant. Also, retainer fees give confirmation for the receipt of consideration against the services performed.
To understand the importance of retainer fees, let’s take an example wherein the client appoints a lawyer to handle the lawsuits of his business.
Once the retainer fee is paid, the lawyer can protect the client from any unforeseen circumstances during or before the occurrence of the business transactions. If the lawyer wins the case, he can charge his fees & adjust the receivables against the retainer amount.
In case of any unexpected event, the lawyer can receive compensation for the work performed. Choosing a right lawyer is also essential, since lawyer may settle the case even without going to the court procedures.
- As the name suggests, you retain the best of experts with you.
- You get assured services promptly.
- The service provider gets a fixed income on time.
- Retainer fee ensures good relationships among the payer & service provider.
- The payer can consult the service provider as many times as he wants.
- There is no outer bound for the number times the services to be availed.
- Payer gets a structured solution for his unstructured problems in the relevant field.
- Payer gets expert advice since the consultant is an expert in the relevant field.
- The payer does not need to consult the different issues relating to the service to different consultants as he retains the expert.
- A fixed contract ensures commitment & legal binding on the expert.
This article has been a guide to what is a retainer fee and its definition. Here we discuss examples, why to pay, and how does retainer fee work along with importance and advantages. You may learn more about financing from the following articles –