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Monday, April 6, 2009

Letter of Agreement (LOA) - Getting paid from the beginning

"Is there a signed Scope of Work (SOW)?" is one of the most frequently asked and important questions that comes up in an agency.

The competing needs listed below are among the most vexing, catch-22 components of a project's initiation phase:
  • agencies need to have a signed SOW before starting work and committing resources
  • the substantial amount of work and information required to develop a proper SOW
  • clients need to know what they are buying before they sign off
  • projects need to start quickly lest they go away or will not be finished on time
  • client-side vetting and delays in getting a full-blown SOW approved

Enter the Letter of Agreement (LOA). This short document can be enough to satisfy both agency execs and clients alike that there is value on its way. The goal of the LOA is to quickly and painlessly establish that the agency, under the direction of the client, will carry out a preliminary set of activities and deliverables and will be compensated for all substantiated fees and costs incurred.

Additional parameters such as upper fee limits, general timing and deliverables can also be included if necessary. However, it's preferable to avoid these details or you will find yourself on the road to developing a bad SOW. Once you get sucked into this, it is easy to slip into project kick-off with no agreement signed.

To help move LOA approval along, it's worth pointing out to the client and that the agreement protects them with phrases like, "directed by the client" and "substantiated fees and costs". Including a statement in the LOA that a subsequent agreement, such as an SOW, will govern the final compensation terms, activities and deliverables, also helps mollify clients and agency execs.

I've been advised that these letters really don't have much legal bite, but that's not the point. The LOA is simply a tool to break through the typical project initiation impasse and prevent projects from starting with nothing in writing and ending without the agency being paid for all their efforts.

Issuing an LOA is the lesser of many evils. However, standing firm by not allowing a project to begin unless there is a signed SOW, when there is a hard deadline that can't move, isn't so great either. Just make sure you get around to issuing a proper SOW.

4 comments:

  1. Great advice, Jeff. Depending upon the size of the company, the tenor of the conversation seems to change. For instance, I've found that if you're dealing with a small agency and large client, the client is less adverse to a portion of the fees upfront (either 50/50 or thirds across the the length of the project) since the client know they are not dealing with deep pockets. It seems expectations change when it's large agency/small client or large agency/big client. Then, the client seems to think the agency can float more easily putting the agency at risk if client doesn't pay on time or in full. But your point is well taken that the LOA can certainly grease the wheels in terms of moving things along and make the agency seem less obstinate.

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  2. Thanks for the comment Rob. Agreed - there are a lot of ways to become engaged and agency/client size has a lot to do with it.

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