WHY DO I NEED A CUSTOMER CONTRACT – DANGERS OF SCOPE CREEP
Scope creep (also called requirement creep) refers to changes, additions, or growth to a project’s scope over time. Scope creep rears its ugly head when the customer, purposefully or unwittingly, requires more of the contracting business than the business expected to give when it entered into the agreement. Scope creep is dangerous to a healthy business. It sucks resources, and destroys relationships.
Am I stuck in a bad contract?
Usually, the first questions asked by the business owner caught in scope creep is, “Am I obligated under this bad contract?” Sadly, the answer is very often, yes! When a business commits to providing goods or services to a customer it enters into a contract. This is true even if the contract is not in writing. Sometimes the business owner can renegotiation the agreement, or the attorney can get the business out of the agreement. But, these options can be time consuming, expensive, and they very often ruin the relationship with the customer.
Examples of scope creep.
I have seen many examples of scope creep through the years. I have seen a landscape architect who agreed to develop the customer’s property “until the customer was happy” and the architect found the customer was very hard to make happy. That architect lost money on the project. I have witnessed a commercial cleaner who agreed to clean its customer’s “entire building.” Fortunately, I was able to catch that error before it was exploited by the customer. One of the most egregious examples I have witnessed was a marketing professional who inadvertently agreed to provide unlimited marketing services to a certain type of customer for a flat fee. Eventually those contracts drove the marketing company out of business, and the owner filed for chapter 7 bankruptcy.
Avoiding scope creep.
So, how do you avoid scope creep? To start, I would use the following three business practices to avoid scope creep; (1) only contract with your customers using a well drafted customer contract; (2) ensure the contract properly defines your goods and services to be provided, as well as the price; and (3) properly use and implement the contract.
The well drafted agreement.
Like a reliable piece of equipment or a loyal competent employee, a well written customer contract is vital to a successful business and will pay for itself over and over again. To avoid scope creep the agreement should accurately define your goods and services as well as payment for those services. If you have a fixed set of goods and services you provide to all customers, you may be able to add the definition in the actual texts of the agreement. However, if your goods and/or services change based on the customer or the project your customer agreement should be flexible enough to allow you to change the scope. This is most often accomplished by drafting an order sheet, addendum, or schedule which relates back to the agreement through language in the two documents.
When the terms change, you only have to change the order sheet, addendum, or schedule. The agreement should also have language associated with payment amount, variable payment terms (if needed), method of payment, late payment penalties, and collection language. For flat fee projects where change in the scope is likely, the agreement should include a change order mechanism, so the business captures that extra work. Avoid oral agreements entirely.
Of course there are other provisions, unrelated to scope creep, which a good customer contract should include items such as: disclaimers, choice of law, choice of forum, limitations of warranties, limitation on liability, attorney expense, etc.
Properly define your goods and services.
Once a properly drafted customer agreement is created, the business owner or manager must understand how to strike a balance between broadly defining the scope and narrowly defining the scope.
Defining the scope too broadly is the main culprit behind scope creep. Broadly defining scope means that what you tell the customer you will accomplish for them is so broad or undefined that you have to expend an inordinate number of resources to accomplish it. In the written contract the user should write out exactly what they will do for the client, and sometimes what they will not do. Sometimes this takes some thought and time to fully define, but it is worth it. If you use sales representatives, make sure they fully understand their limits before they start making promises to customers.
How does one too narrowly define the scope? Although it is not as large a problem as broadly defining the scope, in some industries the user can overly define the scope by leaving no wiggle room for professional judgment or project flexibility. Think micro-managing, where the scope is so narrowly tailored that it locks the professional into only certain actions which may not complete the project and provide satisfaction to the customers, or it requires the business to tick off a list of unnecessary tasks before the project can be legally considered complete.
Properly use and implement the contract.
Once the contract is drafted, well-tailored for your business, and the scope a properly defined, you must use it.
Your personnel should be fully trained on where to access it, how to fill it out, and what situations require the contract to be used. You should not revise it without consulting your attorney, and certainly not sign any other third-party’s contract instead. You should make sure it is fully executed and dated by every party, including you, and you should always maintain a signed copy for your files.
Scope creep is just the worst. Don’t let a poorly drafted or used contract ruin your business relationships or drain your company’s assets. Take the relatively easy route to prepare ahead of time, by obtaining a well drafted, tailored, and properly used customer contract. Contact my firm to get your contracts in place.