Payment-by-result contracts can be problematic

In Business Organizations by Coolidge Wall

The root of a solid business relationship is typically a well-drafted, clear contract between parties. This document drives behavior, outlines expectations and specifies conditions of the relationship that must be observed.

Considering how much can be at stake and protected with these contracts, it is critical that they be crafted with the specific parties and interests in mind. In other words, what works for some business relationships may not work for others. For instance, payment-by-results contracts may seem appealing for you, but they are not right for everyone.

Recently, this article in the Harvard Business Review examined PbR models and contracts more closely, essentially stating that they are based on the concept of paying for results. Below are a few takeaways from the article that you will want to consider if you are considering a contract that based on this concept.

  1. The relationship can be doomed from the beginning if either party has unreasonable expectations. PbR agreements rely on one party being able to deliver results in order to receive payment. If the results are unattainable or if payment is inappropriate for the work it takes to secure the results, disputes can arise.
  2. Clarity can make or break a contract. This can be especially true when it comes to measuring results. Unless you agree on exactly how you will measure results and define success, you could be in for a battle when one party announces success while the other feels much less confident.
  3. Support will be essential. Not only should you have support when creating a PbR-based contract, you should also have support when it comes to managing expectations, developing new solutions to reach the desired outcome and translating results.

Results-based payment structures can be quite favorable for certain business owners across Ohio. However, like any business arrangement, there are drawbacks to consider before signing a contract. If you are starting a new business relationship with another party, you would be wise to consult an attorney prior to signing anything that legally binds you to certain actions or each other.