What is a Retainer Fee?

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Definition:

A retainer fee is an amount of money that a client pays upfront to guarantee services or representation from a lawyer, consultant, or another type of professional.

🤔 Understanding retainer fees

Retainer fees are upfront deposits a client pays to secure future services. Retainer fees are most commonly associated with the legal profession, but they’re also paid to business consultants, contractors, freelancers, accountants, and others. A retainer fee makes sure the service provider commits to performing a specific action on behalf of the client when needed. But it’s important to note that a retainer fee isn’t typically representative of the total expenses incurred throughout a given business relationship. Retainers don't guarantee a successful outcome, either. These fees are often put into a different account than the service provider would normally use to make sure the funds aren’t misspent.

Example

Let’s say you run a small business and don’t need an accountant in the office daily. But maybe when tax season rolls around, or when you’ve got to file company reports, you could use a hand. You might find an accountant and agree to outsource work using a retainer fee.

By keeping the accountant on retainer, he or she is committed to providing you with particular services as and when you need the help. But if you ask him or her to go above and beyond what you'd both previously agreed on, the retainer won't cover it. Your accountant will likely turn around and send you an invoice.

Takeaway

A retainer fee is like taking out a spa membership…

The fees you pay might secure a certain level of access to the spa whenever you fancy a quick dip in the pool or steam. But those monthly payments you hand over to secure your membership might not cover a massage or a pedicure every couple of months. So, you'll have to pay your spa provider extra for those services. In the same way, a retainer will generally guarantee you access to a professional, but you may still have to pay extra for services provided.

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What is a retainer fee?

A retainer fee is a payment that a client pays to a service provider before that provider delivers any services. It’s a down payment on the future services a client is expecting to receive when needed. It typically covers all of the expected costs of the relationship between a client and service provider.

For example, you might pay a monthly retainer fee to an external public relations (PR) consultancy. Your retainer could cover all work involved on select services, such as responding to media inquiries up to an agreed cap of 10 hours per month. If you need the agency to put in an extra couple of hours any given month, your retainer won’t cover it. The agency will probably bill you separately for that work.

If you don’t need 10 hours of services one month, the consultancy may or may not refund part of your retainer fee — it'll depend on the terms of your agreement. Retainer fees are common across a variety of industries. Marketing agencies, accountants, business consultants, PR professionals, and other freelancers will often ask for a retainer payment. That payment is to secure their future services whenever you need them. That being said, you’re most likely to come across retainers in the legal profession.

What is the purpose of a retainer fee?

The purpose of a retainer fee is to secure the future services of a professional. A retainer fee represents a commitment on behalf of the service provider to offer you access to their services. Simply put: By paying a retainer fee, you’re making sure that a service provider is on standby to lend you a hand.

In that respect, retainer fees are kind of like insurance policies. You may have to pay a monthly or annual fee for services you don’t always need. But when the day comes that you do need help, the retainer fee you've paid should guarantee you access to a certain professional service.

How do retainer fees work?

Retainer agreements determine retainer fees. When a client has engaged a lawyer, accountant, or another type of professional, the service provider may ask the client to pay an upfront fee. The retainer fee agreement should spell out the fee. It should also state the exact services the fee covers and what the fee doesn't cover. Finally, it should cover what happens if the fee runs out.

Many service providers will keep a separate bank account that’s appointed for client retainer fees. This is to make sure the funds aren’t accidentally misused and give clients some peace of mind that the money is in good hands. After a service provider starts work, he or she will then typically send an invoice. This lets the client know that the provider will transfer the fee to his or her main account as payment.

If part of the fee is left over, the client may be entitled to a refund. Refunds aren't usually given if there was a non-refundable clause in the retainer agreement.

For example, let’s say you’re getting sued and need a lawyer to represent you in court. After finding an attorney, he or she might estimate your case will take at least 50 hours of their time. That means if your lawyer charges $100 per hour, you should be expecting your lawyer fees to cost at least $5,000. It’s important to remember this is only an estimate.

Your lawyer might then provide you with a retainer agreement asking you to put down a $5,000 retainer fee to cover the expected cost. The lawyer will then expect you to pay that sum into their retainer account before he or she begins work on your case.

Let's say the case ends up taking more than 50 hours' worth of work from start to finish. You’ll then likely get an invoice with a request to pay the difference as specified in your retainer agreement. But sometimes the work turns out to be easier than expected. If your lawyer only needed 40 hours to close the case, he or she will likely refund you the difference.

How do you pay a retainer fee?

Methods of payment for retainer fees vary, and a retainer agreement will generally outline the desired payment method. Generally speaking, many professionals will keep a separate bank account that’s appointed for retainer funds only. This makes sure the funds don't get used for another purpose. A service provider will likely ask a client to pay a retainer fee directly into that account.

The payment amount, frequency of payment, and payment method is agreed at the outset of a business relationship between client and service provider. For example, this could be paid monthly via direct debit, or as a check before the professional takes on a project.

Can a retainer fee be refunded?

Retainer fees are often refunded to a client if a part of that fee stays unearned for the duration of a business relationship or a billing cycle. For example, let's say a lawyer asks you to pay $500 per month in retainer fees. If you don’t need his or her services for January, you should be entitled to receive that money back. This is standard practice across many industries.

But it’s important to note that not all retainer fees are refundable. Some retainer agreements may include non-refundable clauses. Those clauses specify the client won't be eligible for a refund regardless of whether the work takes place. Simply put: If you don’t use it, you lose it. Retainer agreements generally spell out these clauses before the start of a business relationship between a client and a professional.

How long is a retainer good for?

There’s no set deadline for how long a retainer fee is good for. The duration of a retainer should be agreed upon before the fee is paid. In many cases, a retainer could be good until a project has been completed or until a client ends his or her service agreement with a professional. In other cases, a client may keep a service provider on a rolling retainer that's reviewed and agreed upon every couple of months.

When should you use a retainer agreement?

Retainer agreements are crucial for both clients and service providers. An agreement guarantees everybody is on the same page when it comes to retainer fees. Retainer agreements spell out how much money is owed and how it should be paid. Retainers also specify what the fee will be used for and whether unearned funds will be refunded.

Generally speaking, retainers can be incredibly useful for clients because they guarantee access to a service provider as and when required. They’re also good for professionals like attorneys because a retainer represents a stream of guaranteed income for a particular job or service rendered.

One of the disadvantages of retainer agreements from a client’s perspective is the risk that you’ll be paying for unused services. As a result, it may be worth exploring options outside of retainer agreements if you’re unlikely to require any of the services provided in the foreseeable future.

What is the difference between earned retainer fees vs unearned retainer fees?

An unearned retainer fee is the amount of money a client has paid upfront before services have been rendered. It’s referred to as an unearned fee because the services provider has yet to do any actual work that would mean he or she has earned the money. Any portion of a retainer that remains unearned after work has been completed is then typically refunded to the client.

An earned retainer fee is the portion of a retainer that a professional is entitled to keep as income because work has been carried out. The part of a retainer that qualifies as earned depends on the terms outlined in the client and service provider’s retainer agreement. For example, fees earned might be a result of the provider meeting project milestones on a calendar basis. Alternatively, a professional could base fees on the number of hours worked.

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