Scope and pricing tend to be the biggest negotiations in a new client relationship, but agencies can protect themselves by paying more attention to termination clauses. With the growth in project assignments (versus AOR retainer agreements) and/or billing hourly, client termination periods – sometimes called “out clauses” or wrap-up of services – are an important financial element.
Daniel Paul, Senior Vice President, Finance and Operations at Launchsquad recently surveyed members of the PR Council’s COO community to document trends and best practices on this topic. Of the 20 agencies participating in the survey, half were small agencies (with revenues of less than $10 million), 45% were mid-sized agencies (with revenues between $10 and $50 million), and the remaining 5% were large agencies (revenues over $50 million).
Thirty-five percent of the survey respondents request a 90-day notification for termination, 35% request 60 days, and 25% request 30 days. The survey found that 75% of the responding agencies will accept 30 days termination as the absolute minimum notice when signing a contract with a new client.
For existing clients, 45% of the respondents report the average termination period for the majority of their clients is 60 days, 20% are 45 days, and 25% are 30 days.
Relate termination clauses to the relationship financials
“Termination clauses need to relate to the key financial aspects of the contract, including a method of payment and the length and scope of the contract,” according to Michael Lasky, Partner and Chair of the Public Relations Law Practice at the law firm of Davis & Gilbert LLP.
Lasky went on to say, “Even a 90-day termination clause is typically not adequate protection if the contract is being performed on a purely hourly basis since the client can simply stop asking the agency to perform tasks. Ninety days is also inadequate when a client engagement is “front-loaded,” with heavier work to be performed in the first few months of the project.
Consider all components of the clause
When a client engagement ends, only 35% of agencies participating in the survey do not return any requested materials to the client until the account is paid in full. All agencies should have a clause in their agreements that only requires them to return requested materials once the account is paid in full.
The survey revealed that most agencies – no matter the size, industry or geography – have the same termination period for all clients. While most agencies rarely or never have an issue getting paid by a client for the termination period, 30% claim that this can sometimes the case.
Reviewing and strengthening the contract language around client termination clauses – especially customizing it for the specifics of the engagement – could yield significant financial benefits. It will also provide for a more seamless and amicable transition off the account.
The PR Council’s Member agencies represent the premier global, mid-size, regional and specialty agencies across every discipline and practice area.
The PRC’s COO Community works to develop and share best practices that impact the core business operations of the communications industry. The community is led by Bryan Harris, COO and Managing Partner at Taylor, and Stephanie Towers COO at Laura Davidson Public Relations. A special thank you to Daniel Paul, Senior Vice President, Finance and Operations at Launchsquad for creating this survey.