Section Four: Managing Risk
Standard of Care
As a consultant you should know the risks to which you are exposed. Not only your business assets, but also your personal assets may be at stake.
As an independent consultant you must recognize the legal responsibility you have in rendering specialized services to others. When you sell your professional services to others, your customers have the right to expect that you will exercise the skill and knowledge that is normally possessed by members of your profession. This is referred to as the Professional standard of care. The law will protect your customers’ rights.
Knowing what kind of insurance you should carry and how much is an important aspect of good risk management. An increasing number of consultants are being challenged by their customers. Plaintiffs are becoming more creative and aggressive in their claims. Defense costs can be substantial even if allegations are groundless or frivolous, or fraudulent.
Professional consultants often carry several types of insurance coverage, including commercial general liability which applies to property damage and bodily injury, as well as professional insurance which deals with economic losses. You may also require automobile insurance to cover the use of your automobile for business purposes. Some insurance agencies now offer a special home-based office package. Talk with several insurance companies or brokers to assess your insurance needs and to obtain competitive prices.
An Independent Consultant – the Acid Test
Generally, in order to operate as an independent consultant, the following conditions should be met:
- As an independent consultant you may not be paid through an organization payroll. Companies should charge your services to an outside service account rather than a labour or salary account.
- You should have the right to control the work that you perform.
- Your consulting business should contract with several firms. If you work for only one organization, you may be deemed to be an employee of that organization. You should be able to demonstrate that you customarily engage in work with several established businesses.
- Typically benefits such as health and dental are not paid on your behalf by the organizations you work for.
If you have questions about your status as an independent contractor, consult with your lawyer for advice specific to your business.
When entering into a business relationship with a client (organization), you should prepare a service contract or a letter of agreement that defines the specific services which you will perform, fees to be paid, and the timelines involved. The contract should be signed by you and your client to ensure that you are both clear on the terms of your assignment.
Appendix B (PDF) provides a sample Letter of Agreement.
Click on Worksheet 7.4 (Word Document) to develop risk management techniques.