Whether freelancers or business owners, everyone is drilled with the idea of having an ironclad contract to protect their business. It defines a set of promises or rules that cannot be breached by either of the parties. It is also referred to as a legal document that binds both parties by certain terms and conditions.
But it does not mean a contract has to be complicated or a scary one. It needs not to have legal jargon to boost its importance. Simply outline the essential details and keep it simple so that one does not need a licensed lawyer to understand.
But how to write a contract, so that it brings both you and your client on the same page? Here’s all you need to know about a contract!
What is a contract?
It is a legally binding document between two parties involved in a business transaction, typically a sale of goods or services. It outlines all the legal obligations and responsibilities and holds either of the parties accountable in case any terms of the contract are violated.
Has it ever crossed your mind, as to why it is important to have a contract? Let’s discuss!
Significance of a contract
A contract is a vital part of a business that ensures the overall protection of your enterprise in case of any legal complication.
- A contract ensures both you and your client are on the same page.
- The contract outlines every nitty-gritty detail of the project to create a legal roadmap.
- Legally bind your client, which helps to protect your business in case the client does not abide by the terms.
You have heard about contracts and agreements. But do you know what’s the difference between them? Let’s find out!
Difference between an agreement and a contract
Without learning the clear distinction between the both, there’s no point in learning how to write a contract, as it might create confusion. Practically, there is no technical difference between a contract and an agreement.
Both of them outline a set of guidelines and clauses to state how the project will unfold. A contract is considered to be more rigid and enforceable by law, while an agreement is followed by two or more parties. But more or less both are treated as the same and hold the same meaning in most cases.
Depending upon the purposes the contracts are categorised under three main types.
Types of contracts
Fixed-Price Contract:
This type of contract is used in cases where buyers have a clear idea of what they want. The supplier creates a fixed-price contract and outlines all the expenses. It is less risky for buyers as they already know the total cost before the project starts.
Cost-Plus Contract:
This type of contract is used in cases where the scope of work is not predetermined. The buyer agrees to pay the labor and material cost, even though they do not have a clear idea of the work. This is a bit risky for the buyer as the cost may fluctuate.
Time and Material Contract:
Like the cost-plus contract, this type of contract also provides a solid solution when the clients themself are not clear about the scope of work involved. In such cases, if the supplier agrees to work on a fixed rate for whatever time spent and material required, then time and a material contract are used.
Before we talk about how to write a contract, it is important to know what is added in it. So here it is:
What to include in a contract?
- Start and expiry date of the contract.
- Name of all the parties involved in the business transaction.
- Main terms and conditions involved
- The itemized list of products and services to be provided.
- Detailed project terms including the project schedule, total amount, payment method, billing dates, etc.
- Finally comes the CTA for cases like- missing deadlines, incomplete work, damages, and disputes, and breach of contract.
So, finally, as you know all the facts related to ‘contract’, let’s move on to the next section.
How to create a contract?
- Add the contact details of both the client and business owner. Remember to put the legal business name, physical address, billing address, and other contact details. Contact information is a vital part of a contract and any error can put off some clients.
- The contract outlines every nitty-gritty detail of the project and hence, it is necessary to include the scope of work. Make sure you cover all the areas that have to be completed for the assigned project so that the client gets a clear idea of what they can expect and what they are paying for. For example, if you took up a website redesign project- make sure you add details like,
- Whether you are responsible for sourcing images or not?
- How many revisions does your work need?
- What happens if the client wants an additional revision round?
- What assets do you need from the clients?
- You are working to get paid finally. Hence, your contract must have a clear mention of the payment terms. What to cover under this section? Here it is:
- Payment type – hourly basis or project basis
- Maximum and minimum hours should be included for accurate calculation.
- Billing schedules
- Payment schedules
- Project deliverable to outline what the project rate will cover.
- Finally, the payment method
- Mention your project schedule so that your clients get a clear idea about the deadlines. Do mention the timeline of completing a certain part of the project after receiving a specific asset. For example, (You business name) on receiving ‘A’ asset from (your client) will submit the first part within three weeks.
- Clearly state the time frame of project cancelation. On crossing the timeline the payment will not be refunded. Moreover, you can also impose a ‘kill fee’ of 25-35% in case they decide to terminate the project early.
- It is essential to mention who owns the final copyrights to avoid any legal implications later.
- Clearly state whether you prefer to take up the responsibilities of your own taxes. If you identify yourself as an independent contract do mention it in your contract.
- You can mention where the disputes will be handled and which state law will govern the matter unless your client is located in another state.
- If you wish to settle any dispute through arbitration, then do mention the arbitration clause.
- Finally, it is essential to sign the contract to prove each one’s consent as it is a legally binding document.
Wondering when to send a contract to your client? Get your answer in the following section!
When to issue a contract?
Here are some cases that decide whether to issue a contract or not!
If a transaction involves-
- Purchase, rental, or lease of goods
- Hiring a new employee or entering into a partnership
- Sale of intellectual property like computer program or book
- Cases, where the buyer agrees to pay for the services that are going, come up several times a week over the entire project life.
What if the client has their own contract? How would one deal in such a case?
What to do if your client has a contract of their own?
Clients may have an agreement of their own and that is not a big deal. Just don’t blindly sign it off without giving a thorough check as to what all it includes. It may require a licensed lawyer in some cases if you fail to break the meaning of the client’s agreement. Hiring a lawyer may apparently cost you extra dollars but it would probably save a lot more if you sign a contract without understanding.
Bottom line!
Writing a contract may even seem easy but it’s important to understand every aspect of a contract to avoid legal implications. It eventually decides your business growth, professional credibility and makes you trustworthy among your clients.
