How to set up and use retainer projects

So, you’ve finished yet another project that created value and great ROI for your client. And this project you thought would be a one-off gig turned into a 2-year collaboration.

With such successful projects under your belt, you’re wondering how to make a more committed collaboration with your favorite client.

A recent study from 2021 shows that digital marketing agencies have mainly long-term client relationships, 48% of which span over 36 months. Only 4% say it’s less than 12 months.

This means freelancers and small agencies have more recurring clients than one-time ones. How do you create processes around that? How do you create income stability and foster a better relationship with your client?

The answer—opt for a project retainer agreement.

This article outlines the benefits of retainer fees, a few nuances between retainer terms, what to include in a retainer agreement, and how to set up your retainer project in Paymo.

But first things first:

What’s a retainer fee?

A retainer fee is an advance payment from a client for the services you will provide every month. The retainer agreement can be written up around a predefined amount of work (e.g., a set amount of deliverables for a flat fee) or time commitment (e.g., a number of hours on content production later discussed with the client).

Retainer fees are paid monthly, quarterly, or yearly to ensure that your services will be available to your client. In a sense, it’s a promise or commitment to work. A retainer is useful to kickstart a work collaboration and cover the project’s initial expenses.

A retainer agreement is used in the IT and development, marketing, and design industries, but perhaps the most popular is in the consultancy and legal industries. But any business niche that allows you to do work by the hour or by the project can easily adopt a retainer work model.

So, whether you are a lawyer, consultant, freelancer, or small business owner, you’ll find that working on a retainer can be advantageous in five ways:

1. It generates regular income

A monthly retainer fee makes the gig economy much more appealing. If you’re a freelancer, charging a retainer fee is the closest thing to working on a regular contract.

In case you miss your 9-to-5 or find freelance work too uncertain—remember the feast or famine cycle?—a retainer agreement will give you some income stability and peace of mind.

It’s guaranteed income, regardless of whether the retainer fee is refundable. Of course, as a professional, you will meet your deadlines and deliverables.

For example, if your client on retainer agrees to $1,000 a month for 20 hours of work, then it’s clear that you will earn at least that much. If the scope of the project changes and you end up working more, those extra hours will be billed additionally. This way, you’ll have a greater sense of security.

So, your work schedule will be packed with a few more of these retainer agreements. You’ll be able to focus on work and not worry about next month’s earnings.

This leads us to the next benefit:

2. It gives a better cash flow estimate

It can be challenging to make a budget or plan ahead when you aren’t sure how much money is coming in. So a retainer agreement reduces the stress and uncertainty when it comes to projecting income, budgeting, and managing your cash flow.

With retainer fees, you can expect a steady income, and you’ll be able to estimate how much cash flow you’ll bring in every month. It takes some of that stress associated with relying on project-based work or on signing new clients.

Plus, you’ll be able to assess project profitability better when working on a retainer.

Some projects may end, or you might drop clients from time to time, but there is a baseline you can refer to when handling expenses and balancing out wages.

3. It helps manage your workload

This is the best argument for charging your clients a retainer fee – knowing exactly how many hours you can commit to your work.

It is also helpful to people with workaholic tendencies. Work gets in the way of life, so it’s easy to get swamped in heaps of work and a ton of projects.

Take inventory of your free time and personal matters, especially if you’re freelancing or working remotely. Time is even more so elusive.

But a retainer agreement and simple math will tell you how much work you can tackle so you don’t overcommit to new clients or exciting projects you’ll lose sleep over.

What I’ve found is that if you already have several clients on retainer, you can:

• assess your workload better
• know which projects are most profitable
• decide whether to raise your rates
• choose whether to take in more work or new clients
• improve your project planning skills

But most importantly, a retainer agreement, if employed correctly, helps you strike a better work-life balance.

4. It nurtures a deeper client relationship

Some freelancers dread having to discuss money matters with their clients each month. But a retainer agreement goes the extra mile and establishes trust between the two parties.

If you have several high-paying clients, you’ll get more time to foster a better working relationship with them. You’ll no longer have to spend so much time pitching clients new proposals or finding leads and prospects. Also, there’s not much to learn about a client during a one-off project.

It creates consistency and a healthy work routine. You’ll be able to anticipate client needs better and thus improve your services.

5. It streamlines the invoicing process

A few select invoicing software integrate the retainer fee model, which means you’ll be able to create invoices with a few clicks.

For example, a designer may charge a $500 retainer fee. If the designer charges $50 an hour, the non-evergreen retainer (more on the type of retainers later) covers up to ten work hours. Any additional hours are then billed separately.

Any retainer project management software allows you to streamline the invoicing process. In Paymo, there’s even more automation. Set any project as a “Retainer fee”—set the hours, rates, and periods—and it will automatically generate and send invoices to your client.

Retainer terms you should know

The idea of a retainer is not hard to grasp, but there is room for interpretation as to what happens if the contractual hours aren’t met. Can your clients get their money back if no work is done? Does a retainer need to be paid back? Yes and no.

Retainer agreements stipulate whether any remaining retainer fees should be returned to the client or not. Let’s explore some terms.

• retainer

Also known as the general retainer or the retainer agreement. This is your standard retainer, an umbrella term for a prepaid, work-for-hire contract. The retainer agreement is between you, the provider, and your client, who retains ongoing services from you.

The general understanding—and practice—of the retainer agreement is that you cannot claim the retainer fee until you’ve finished the work and billed your client.

Let’s explain how that works:

The client deposits retainer fees into a trust account to secure the provider’s work availability. The fees are considered ‘unearned’ until the project is completed (or the case is closed). Then, we refer to those fees as ‘earned’ when they are sent to the provider’s account. Any unearned funds remaining in the retainer account are refunded to the client.

Sometimes, the provider is not paid monthly but in milestones, e.g., 50% or 80% project completion.

• ‘true’ retainer

Did you know that, in the truest sense, a retainer fee is non-refundable? There are freelancers, lawyers, and consultants whose time is in such high demand that they will likely not refund or roll over the remaining hours if their clients have no immediate need for their services.

Usually, what happens is that after a successful project, a smaller unspent portion of the retainer is not refunded as it is a frugal fee, e.g., two hours left of a 120-hour retainer agreement. So, those two hours will not roll over the next billing period.

Why is a true retainer not reimbursed? Here’s the reasoning. It safeguards providers against a financial bind, i.e., the feast-or-famine problem mentioned earlier in the article.

As a client, imagine contracting the specialized services of a high-profile lawyer, consultant, or freelancer. They would have to commit their time to you, time that otherwise would have been invested in other projects, cases, or clients. Now, the onus is on you to provide them with work.

So being charged for 10 hours of work when the agreement was 40 hours means that the freelancer made time for you instead of working on another project. Those 30 hours might mean a lost opportunity elsewhere, especially if they have to pay you back.

Rest assured, there are policies, rules of conduct, and ethical considerations when employing true retainers.

• evergreen retainer

Called a replenishing retainer, an evergreen retainer is a trust account that must replenish once it falls below a certain amount. It’s designed to cover fees for a few months at a time, and all hours or projects are billed against the evergreen retainer.

• non-evergreen retainer

A non-evergreen retainer is a trust account that doesn’t need to be replenished. Instead, any hours or projects over the budget are billed separately.

• pre-paid retainer

As the name suggests, a pre-paid retainer fee is paid before the start of work (in advance). You commit to putting in the number of hours for a fixed price and receive your pay beforehand.

• post-paid retainer

Conversely, a post-paid retainer fee is paid after the work is done (in arrears).

• pay-for-work retainer

A pay-for-work retainer means providing ongoing work (e.g., a set number of deliverables) and getting paid.

• pay-for-access retainer

A pay-for-access retainer means you are paid to provide knowledge, experience, and expertise.

• special retainer

The special retainer is a flat fee for a specific type of work or service.

• security deposit retainer

In rare cases, the retainer agreement clearly states that it is not applied to the final bill but used as a security if the client fails to pay upon project completion.

Are there retainer fees in project management?

If you find these terms confusing, don’t be bogged down by them—most are found in the legal system, and chances are you won’t encounter them daily.

As a rule of thumb, always be clear with your client about what kind of payment you are asking for. It’s best to always define your terms. In project management, the retainer model is more straightforward.

For this reason, Paymo proposes a new term when managing freelance work: the project retainer.

We call it a ‘project retainer’ because in Paymo you set retainer agreements on a project level instead of the client.

The project retainer is very similar to a client retainer. But there’s an added benefit of giving you more flexibility in handling projects.

The project retainer works great if, let’s say, you want to charge the same client different rates for ongoing projects. For example, you’ll have a pay-for-work retainer for a 6-month product design project and offer consultancy on a pay-for-access retainer.

How do you manage a project retainer?

First, you’ll have to cover some contractual details of your retainer agreement:

1. Establish project details and the scope of your work

Agree with your client on the type of work, the number of deliverables and hours, the rate at which your client will be billed, the retainer recurrence or billing cycle (monthly, quarterly, yearly), and so on.

In the case of a team or small agency, who will be performing the work? Resource planning is essential when agreeing to a retainer.

2. Include clauses stating work processes

What happens in case of scope creep? Scope creep refers to additional requests that exceed the initial agreed-upon scope.

What’s the process of booking work? Being on a retainer doesn’t promise a quick turnaround time. The last thing you want is a last-minute fix on top of a fully-scheduled work day.

Clauses like these ensure you clearly understand your work schedule and that there is more float around tight deadlines. There are plenty of retainer agreement templates out there; just make sure to adapt them to suit your needs.

3. Discuss project expectations

What constitutes project success? What happens when project hours are under or over the retainer budget? How often will you report to your client, and how? Also, how should other costs or expenses be billed?

How to set up a project retainer in Paymo

First of all, please make sure you create a free Paymo account so you can follow along.

In Paymo, you get to create projects on four billing methods: Time & Materials, Flat Rate, Retainer, or Non-Billable. Non-billable projects work great for keeping track of your internal and administrative tasks or handling pro bono projects and cases.

Then, what’s the difference between the retainer vs. hourly (time & materials) vs. the flat rate?

• Flat Rate projects can only have non-billable tasks and work best when you and your client agree on the final price, regardless of the number of hours or tasks.
• Time & Materials can have time-based, flat rates, and non-billable tasks and work best when you and your client agree on a price per hour, meaning that a 120-hour project is billed at the rate of your choice: user, task, project, or company rate.
• Retainer projects can only have non-billable tasks since the agreement states the cost per hour from the beginning.

On the one hand, the retainer project is similar to the Flat Rate project because you and your client know the final price from the beginning.

On the other hand, the retainer project is similar to Time & Materials, as you’re being paid by the hour, meaning that any overtime is billed separately.

Now let’s set up a project retainer step by step.

Step 1. Create your retainer project

In a previous blog post on project profitability, we tackled a Time & Materials project for our fictional client, Sage Financials.

As mentioned before, what’s great about the project-level retainer is that you can have multiple billing methods for the same client – a one-off website redesign project AND a monthly website maintenance project. In contrast, a client-level retainer would have overridden other billing methods.

In this vein, we’ll create a $3,000 Retainer project for the same client to provide maintenance services.

Head to Projects › “Add Project” and change the billing method to “Retainer Project.”

Choose ‘Retainer Project’ as your billing method.

Then set the payment frequency (monthly, quarterly, or yearly), start and end date of the retainer (how many months the contract is in effect), the hourly retainer rate, and the budget in either time (‘hours’) or money (‘fees’). Also, you may opt to create an invoice at the end of the period automatically.

The budget is automatically calculated, so a 40-hour budget at a $75 hourly rate results in $3,000. Similarly, a $3,000 retainer at a $75 hourly rate results in 40 work hours. Toggling between the two will do the math for you.

Step 2. Monitor your work progress

Head to Overview to see at a glance how you are doing with time (Current period Budget vs. Worked), work (Completed Tasks), and money (Unbilled AR):

Retainer project overview in Paymo

You may add a new retainer period, make adjustments to the current period, create an invoice, or mark it as invoiced.

Step 3. Create an invoice based on the Retainer project

Clicking “Create an invoice” automatically generates an invoice draft based on the outstanding retainer fees.

Invoice based on outstanding retainer fees

Step 4. Assess long-term project profitability

Paymo gives you leeway to suit the retainer agreement between you and your client. It’s up to you how you tackle overtime or whether you roll the unearned hours over the next period.

Having said that, if you head to Finance, there’s a summary of your financial projections for the entire retainer agreement (14 months in our example, amounting to $42,000), unbilled AR, internal costs, and profit margin:

Provided you invoice any unbilled AR, the fees will carry over to the progress bar:

Takeaway

A project retainer model is ideal for getting paid regularly for your services. You know your availability, how many clients you can handle, and your week is always filled with the right amount of work.

Not all projects can be done on a retainer, so you will probably always have a mix of billing methods. It’s good to balance between your retainer and non-retainer clients.

Always ensure you treat both with great care as you provide your valuable services. To put it bluntly, don’t play favorites.

Hopefully, this article helped you get a better handle on retainer agreements, and you get to explore and use this billing method in Paymo.