I work for a consultancy firm and it happened (rarely) that the project got cancelled after 1 week of the day it should be starting. No work has been done, but the allocation of the developers were being made.
That being said, how should we word Cancellation Clause in the contract? Any advice?
One option you have is considering on the commercial side, e.g. a down-payment. Without the down-payment the project won't even get scheduled.
Another option is to add a notice period that also applies even when the project hasn't even started. In your example you might have a 2-weeks notice period, so if the project was cancelled one week after the start you would still be entitled to payment for the effort planned for the first three weeks.
I'm sure there are other options and a lot depends also on how good your position is in negotiating terms and conditions for this contract. Good luck!
I do not think the language has to be too onerous. The incident you described in the other thread, and you validated it here, is a rather rare event. So while you want a safeguard in place, keep it consistent with the rarity of the event.
If you are a larger company (no, I'm not sure how I'd define it in this context), then I might pursue the capability of doing credit checks on potential clients, and leave the language out of the agreements. If you are a smaller company, like by yourself or just a small group of developers, then I might pursue a small retainer to seal the project, maybe 25% or slightly less of your estimated costs for your first month of work, just something to help offset my risk and sort of get the client more committed. This is not unprecedented so it should be well received. However, if you get push back, I am not sure you should make it a deal breaker. After all, the contract itself is the binding arrangement. The issue is, you have to go get it and that's costly of and in itself.
I think this is the risk of doing business and asking for a small retainer is an appropriate mitigation that will not make you look as if you are trying to operate in a risk free environment.
Like jmort I'm not qualified to give legal advice, I can only speak to what I've seen.
In my area (pharma) it is fairly common to have a payment schedule where some proportion of the total project cost is due upon signature of the contract. This becomes a formal milestone in the contract and project plan rather than a "down-payment", though the effect is the same. I've seen this range from 5% to 50%, depending on the amount the two parties trust each other and the total value of the contract (usually lower value contracts require a higher proportion of the value paid up-front).
I've also heard of (but not seen) "lost opportunity" clauses, so if the client cancels work the vendor can get some dollar value because resources/equipment/whatever can't be efficiently moved to another project.
Having a contract is critical to ensuring that both parties understand and agree to expectations. Unfortunately, there are many things to consider, when writing a contract, that can add a lot of doubt and uncertainty. The laws differ from jurisdiction to jurisdiction, and some language in a contract may not be enforceable if it violates local law.
However, I've used LawDepot to help draw up some contractual agreements. They have out-of-the-box templates that you can use for a variety of different cases, and the templates are tailored to your jurisdiction.
What you're really looking for though is just a way to come to a very clear understanding with your clients before you commit any resources. As long as you communicate really well with your clients and they communicate really well with you, you shouldn't have any misunderstandings.
Writing this down is one way to ensure both parties agree, and if well-executed, you shouldn't ever have to exercise this clause of your agreement.
DISCLAIMER: I am not qualified to give you legal advice, and the purpose of this site is not to give legal advice. Use this information at your own risk.
