Fee-for-service Agreements

Fee-for-service agreements occur between two parties, or two companies, where one agrees to perform a task and the other agrees to pay for completion of said task.

Why Are They Used?

Fee-for-service agreements are used to reduce the costs a company incurs when services need provided. Profit-participation agreements are also used, but they tend to be costlier since they guarantee the servicing party a percent of profits or percent of sale.

When Are They Used?

Typically, fee-for-service agreements are specific tasks that need to meet strict guidelines written in the contract. These contracts are common because agreeing to a flat rate usually limits the paying company's overall costs.

Example: Website Design

One example of a fee-for-service agreement is website design. A company may hire a consultant to design its website. The company pays the consultant upon completion, fulfilling the contract.

Example: Real Estate

Realtors' income is derived from profit-participation agreements. If Realtors sold houses fee-for-service, they would earn a flat fee, regardless of the selling price. When Realtors sell houses using profit-participation, they earn a percentage of the house's selling price, which typically is higher.

Source:

Fee-for-Services in Research