What is retainer-based billing?

Paul Doerwald
July 8, 2020

Retainers are essentially medium- to long-term Time & Materials engagements for ad hoc as well as small project work. Retainer-based billing is used to even out cash flow for vendors and clients, allowing both parties to ramp up and decrease work as needed, while making sure that salaries get paid.

When an agency (vendor) and their client agree to a retainer, they agree to the following terms:

  • For a monthly or quarterly fee, based on an annual agreement, the client agrees to purchase a fixed number of hours from the vendor.
  • The vendor becomes the “agency of record” for the client.
  • The vendor agrees to set aside one or more “resources” (designers, software developers, copywriters) for at least those hours.
  • Retainer time is often discounted, because it’s purchased up front, in bulk.
  • Sometimes those “resources” are named — i.e. the client can buy access to a particular individual, rather than a team — but usually the vendor can assign resources at their choosing.
  • The client can expect to get work done in a timely manner, without waiting for the vendor’s other projects to finish, because they have pre-paid for that time.
  • The vendor MUST NOT overbook their staff's time. The staff CAN work on other projects if the client is not waiting for anything, but the staff MUST switch to the client’s work (assuming hours remain in the retainer) when a request is made.
  • The vendor SHOULD track time, because the client is entitled to an hourly accounting.

If retained hours are unused, they may expire, they may be shifted to a future period, or they may be refunded.

Ideally, every agency wants unused retained hours to expire immediately, but very few clients will agree to that. Most retainer agreements specify some amount of shifting and/or refundability.

Why would a vendor want retainer engagements?

Retainers even out cash flow. Life in an agency is often described as “feast or famine”. A big project at the beginning of the year might lead to desolate times at the end of the year. By setting up retainers, the cash from a possible $85,000 project can turn into guaranteed $7,083 per month — enough to pay a salary and some overhead — for about a week-and-a-half of work.

The agency can then sell the resource’s remaining 2.5 weeks of time for pure profit!

Why would a client want a retainer engagement?

At the outset, retainer agreements seem biased to the vendor’s advantage. There are however a handful of good reasons why a client would want a retainer agreement:

  • Clients get a small discount on the hours they buy. If they know they’re going to need the time anyway, they might as well pay less for it.
  • Retainer clients are often larger (enterprise) customers, where the people “procuring” (hiring) the agency are not the same as the people accessing the agency’s services. By having a retainer agreement in place, staff from all around the enterprise can access services without needing to get more than minimal approval.
  • Clients know that agencies’ incomes ebb and flow. By buying a retainer, they can keep a business they like viable.

Challenges with retainer engagements

Even cash flow; uneven work. Retainers are successful at evening out cash flow, but they stink at evening out work. Typically clients don’t need 50 hours of work every month; instead the work fluctuates from month to month. Some months might have zero hours, and then suddenly there’s a month with 200 hours. Meanwhile the agency, having become used to the regular income with no work, might have taken on another project. Suddenly the agency finds themselves overextended.

To avoid overextending, care has to be taken during project planning. Retainer hours must be set aside before any new work is planned. If your retainer client doesn’t make any requests, your staff can work on new work.

Dependency on one client. A big retainer can easily make an agency dependent on a single client. I’ve heard countless stories of agencies that grew mightily because they became Agency of Record for a major brand. When the contract came up for renewal, the agency found themselves without a new agreement, and without any other large clients. You know how this story ends…

Risk

Because retainer agreements are weighted heavily to the agency’s advantage, the client often holds most of the risk, the usual risk being that the agency has overextended itself.

Conclusion

Retainers are powerful billing agreements that can propel your agency to massive success, but if your time isn’t managed properly, they can lead to stress and ruin. Clockk is a powerful AI-powered time tracking tool that helps you track the time you spend on retainer projects, so you don’t accidentally overextend yourself. Try our free plan to find out how automated time tracking will make you more successful.