Contracts affect every moment of our lives. From a verbal agreement with one of the neighbor’s children to mow the lawn to a major deal to provide a service or product to a Fortune 500 company, contracts are negotiated, executed, and completed every day. There are pitfalls to avoid and major items to be included and discussed in every contract to ensure the success of the activity.
Contracts are usually written between two parties; however, they can involve multiple parties as well. Essentially one party will deliver a product or service by a specified time at a specified price with addendums /terms specifying additional requirements that must be met. We will delve into these issues and more in the following narrative.
What Is a Contract?
A contract is an agreement between two or more parties that answers several questions and clarifies any assumptions that may be included with the contract. Fundamentally it documents a conversation about an agreement. Verbal contracts are also considered legal agreements; however, there is always some doubt about what was agreed to and depends on the memory of the parties about what was agreed to.
The fundamentals of a contract and the questions that need to be answered include:
- Naming the parties involved
- What is the timeframe – start and finish dates
- What milestones and deliverables should be included?
- Where will the work be performed?
- What is the cost?
- When will payments for the work take place?
- How will the service or product be delivered?
- Who will meet the terms of the contract?
- What assumptions need to be included in the contract agreement?
Contracts are fundamentally about good communication regarding a complex agreement. Whether it is the teenager next door who will cut your lawn or a loan to a family member or a major business deal, contracts help spell out all of the assumptions and ensure there is no confusion about the terms. Confusion about terms can often lead to disputes, so why not write them down and agree ahead of time to all of the terms associated with whatever endeavor you are entering into?
Clearly define all of the terms of the contract, negotiate those terms as needed so that both parties are in agreement before beginning the work.
What is a Contract Template?
There are many different types of contracts which we will cover in more detail later in this post. Using a contract template can help you by saving time, including the essential elements needed for a particular type of contract, and identifying the research, you may need to complete before finalizing the contract. Templates also assist in providing a professional-looking document with the legal terminology you need to include.
Generating company-specific templates also ensures that your employees do not waste time working on contracts and ensures a standard across the company for contracts that are written on your company’s behalf. Start with a generic template for the type of contract you need, update it with your company’s information and other specific terms needed for your business, and make it available to your team of contract negotiators.
Contract Samples and Templates
When to Use a Contract?
Any time an arrangement is made between two parties for a service or product to be delivered by a specified date for an agreed-to price, a contract is involved.
It might be a verbal contract, i.e., neighbors kid to mow the lawn once per week on Tuesdays using your lawnmower and gas for a price of $20 to be paid in cash once the work is completed.
The same service could be provided by a landscaping company; however, it will likely be more expensive and involve a simple written contract. Homeowners have all sorts of work completed by various companies. They should all involve a written contract and include the bare minimum essential elements in the contract:
- Service or product
- Completion date
Large and small companies almost always use contracts to document the terms, conditions, and prices covering various services and products that will be provided or delivered to them. It is considered a professional approach to doing business, and it spells out all of the assumptions involved in the agreement to avoid any misunderstandings that could become an issue later on.
How Can a Sample Contract Help You?
Contracts should always be used to avoid misunderstandings and confusion. Using a sample contract helps to ensure that the major points are included, and all of the essential elements are covered.
A sample contract will also foster discussion between the parties or, as some would call it, negotiation. A discussion about when the work will be completed, the price, the quality, what will be delivered, and so on is healthy and professional. It helps to avoid assumptions by either party and even frustration between the parties.
Using a sample contract between family members ensures that all of the pertinent items are discussed and documented for other family members to peruse if needed.
There are many different types of contracts used in business. Many sample contracts are available, which can save a great deal of time. Business owners can select the appropriate sample, fill in the details for their company as they create their template to be used by themselves and employees within the company. Developing a personal template from a sample template ensures consistency, professionalism, and accurate information for you and your employees.
Essential Elements of a Contract Template
As mentioned earlier, there are many different types of contracts, from the very simple to complex; however, they all have essential elements that should appear in each contract to avoid misunderstanding and to foster excellent business relationships going forward. While not all elements will be included in every contract, it is helpful to review each one and make a conscious decision to include the element or remove it from the contract. A good example would be marketing information. A lawn service contract would not need a marketing information section, while a business development project for a product would need this information and also nondisclosure agreements included as well.
The following is a list of the potential essential elements for your consideration in no particular order of importance:
- Effective dates
- Parties involved
- Signatories to the contract
- Contact information
- Payment details, including billing information
- Scope of work
- Milestones and deliverables
- Cost estimates
- Payment schedules
- Late payment penalties
- Bonus payments
- Confidential information
- Ability to subcontract
- Nondisclosure agreement
Contracts can vary a great deal depending on the circumstances, the products and services, and the company’s involved.
Types of Contract
There are many different types of contracts, and companies may have several contract templates available to their employees for use depending on the type of contract and the objectives they are trying to achieve. We provide a list of different types of contracts with a short description of each.
- Cost reimbursement
- Time and materials
- Unit price
- Professional services
Fixed price – defines a lump sum to be paid on completion or delivery of the specified goods or services by a specified date. There may be benefits for completing the service early or penalties associated with delays. Attention to the time needed and resources is a must to ensure that all costs are covered in the contract.
Cost reimbursement – involves paying the contractor as work is completed. Payment is for incurred costs as described in the contract. An estimate of the costs is usually included, along with an end date. If the contract ceiling is reached, the contractor can stop work, or the buyer can terminate the contract.
Cost-plus – is where the buyer agrees to pay the full cost of the project – labor, materials, and any additional expenses needed to complete the project. There are four different types of cost-plus contracts. These include cost-plus award fee contract, fixed fee contract, incentive fee contract, and percent of cost contract
Investment – between an investor and a company where the investor acquires a portion of your company for a specified amount of money, position on the board, or other terms and conditions that are of interest to the investor.
Freelance – templates are used by many freelancers to protect them, which specifies the deliverables, the amount to be paid, and the dates to be completed. There may also be upfront fees and completion fees involved
Time and materials – similar to a cost-plus contract, the buyer pays the contractor for the time he spends and the materials purchased for the contract. It is used in situations where it is difficult to estimate the cost. Often there is an agreement to the hourly rate for workers and a margin for materials. Buyers and contractors must pay close attention to all hours and materials purchased for the project.
- Construction – describes the services and materials to be provided, along with start and end dates, price, scope, and conditions
- Unit price – is based on the number of units required to complete a contract. A unit can be a material item or a unit of time, or both. Buyers agree to pay the contractor based on the number of units needed to complete the project.
- Bilateral – means that both parties have contractual duties to perform to complete the project or activity, and these duties equal each other in value. It is important to specify the duties when they will be delivered and the cost of the obligations.
- Employment – provides the terms and conditions binding an employee with an employer covering start dates, salary, benefits, reporting, and job accountabilities
- Professional services – is another form of a contract covering the services of various professionals such as engineers, lawyers, etc. the contract can take the form of any other type of contract in terms of a subtype. Usually, there are no materials or goods involved in the contract.
- Unilateral – occurs when one party requires a specified act or service which they promise to pay the other party when they fulfill the requirement.
- Implied – is based on the actions of two parties which may not even be written down. The contract begins once the party takes the required action. Warranties are good examples. A buyer purchases a product that comes with a warranty. The warranty is an implied contract which only begins when the purchase is completed.
- Express – contracts are the opposite of implied contracts. In other words, all of the terms and conditions are either written down or discussed. Entering into an express contract requires six attributes: you must have the capability, there must be an offer, there must be accepted by both parties, it must be legal, there is a consideration, e.g., money or trade, and both parties must be bound by the terms and conditions and the contract.
- Simple – contracts can be written or agreed to orally where there is an exchange of one item for another or consideration in terms of money or trade.
- Unconscionable – contracts are one-sided where only one of the parties benefits from the contract. In most cases, they cannot be enforced by law. A contract that is agreed to under duress in situations where the negotiations are one-sided or unfair or where one party has undue influence is considered unconscionable.
- Adhesion – contracts are generally offered with the same terms and conditions to all parties, take it or leave it approach, with little or no negotiation of the contract.
- Aleatory – contracts are often used as part of an insurance policy. In other words, no action is taken unless there is a specified activity taking place. E.g., life insurance in the case of death of the insured.
How to Write a Contract (Step-by-Step)
Writing a contract for the first time may seem a daunting task; however, if you follow a step-by-step approach, writers can avoid confusion, mistakes and provide a complete and professional contract.
- Gather Data
- Decide on the type of contract you need
- Select a contract template
- Add the basic information
- Add terms and conditions
- Add the scope of work
- Include payment terms
- Review draft internally
- Send draft to other parties
- Complete final negotiations
- Sign and date the contract
- Gather Data – is often the most important part of writing a contract. Make a list of the data you will need and who will provide the information to allow you to complete a draft
- Decide on the type of contract you need – using the data and your company’s preferences, review the contract templates available and decide on the type of contract. There are many different types, and you may even use a hybrid of several.
- Select a contract template – that makes sense for the type of contract you will need
- Add the basic information – such as names of the parties, introduction, contact details, and the proposed start and end dates of the contract.
- Add terms and conditions – including term definitions
- Add the scope of work – describe the complete scope of work, milestones, deliverables, the responsibilities of each party, when payment is due
- Include payment terms – define progress payments if needed, final payment, and what triggers these payments to become due. Include an approval process if pertinent.
- Review draft internally– ensure the decision-makers within your company have an opportunity to review the draft before sending it to the other party. You will want to ensure everyone is on board with the draft contract before making it available to the other party
- Send draft to other parties – for review and internal approval
- Complete final negotiations – in most cases, the negotiators have discussed all of the clauses and requirements of the contract during the writing phases, so there should be no surprises for either party. However, upon review, further negotiations may be required due to changing circumstances depending on how long it took to prepare the contract.
- Sign and date the contract – once both parties agree, prepare two original copies of the contract and arrange for both parties to sign both copies to enable each party to have an original copy in their possession.
Mistakes To Avoid When Preparing a Contract
Some of the common mistakes many people make when they are preparing a contract can be avoided if you take the time to do your research and understand not only why you are writing a contract but also the objectives you want to achieve. Some of the best contracts are when both parties are satisfied with the contract, they are not one-sided, and both parties feel they can make a profit and achieve their objectives.
Avoid these mistakes:
- Write a contract before you are ready with all of the details and information needed for the contract.
- Not using the word contract up front in the document. Judges look for the word contract; otherwise, they may feel it is a simple agreement.
- Not being specific or keeping it too general can lead to misunderstandings and confusion.
- Not avoiding jargon and confusing wording that could lead to misinterpretation
- Moving too quickly and not conducting appropriate reviews of all legal and contractual obligations
- Not having the contract reviewed for legal issues that could void the contract or the intent of the contract.
Tips for Writing a Perfect Contract
Contracts should be well written and express all the terms, conditions, and deliverables clearly and concisely. Good contracts reduce confusion and misunderstandings that can jeopardize the project, relationships and involve legal challenges. Good contracts are all about communicating clearly and endeavoring to negotiate a win-win for both parties.
- Put it in writing
- Include payment terms
- Add Details
- Accurate description of parties
- Add dispute terms
- Include contract termination terms
- Location for resolution of a dispute
- Negotiate with the decision-maker
- Don’t overcomplicate
- Include confidential statements
Put it in writing – verbal contracts leave much to interpretation and misunderstandings. You ensure all of the details are documented, including dispute resolution, especially in the courts.
- Include payment terms – so you know when and how you will be paid, whether the payment is tied to satisfactory completion or progress payments, and by wire transfer, certified check, or cash.
- Add Details – about the obligations of both parties, to complete the contract, to provide information as needed, and any requirements specific to either party.
- Accurate description of parties – including the proper company name as it is legally defined and accepted in court. Your contract may be worthless if the wrong name or a nonidentifiable name is used as per the courts. Use the full name of each person if it is a contract between two people, including full addresses and contact information.
- Add dispute terms – identify the dispute process, including mediation and/or arbitration, to avoid expensive legal litigation
- Include contract termination terms – including how and when the contract should terminate, including termination processes if the contract is breached to legally communicate the issue to the breaching party and provide opportunities to cure the breach.
- Location for resolution of a dispute – should be a mutually acceptable location in case you need to go to court. Traveling to other states or even countries to resolve disputes and litigate can become expensive.
- Negotiate with the decision-maker – understand who makes the decisions and ensure that final negotiations have their stamp of approval to avoid a worthless contract.
- Don’t overcomplicate – keep it simple so that it is easy to understand for all parties. Cover all of the bases and discuss any issues that appear confusing or overly complicated to avoid misunderstandings.
- Include confidential statements – if you need your company data to remain private between the two parties, include these requirements in your contract. Add a damage clause if the information is breached.
The following frequently asked questions are asked by many readers involved in developing and writing contracts.
Contracts are important because they document the agreement between two parties regarding the scope of the activity when it starts and ends and the remuneration for the work. Add a description of the deliverables, NDA details, and dispute resolution to ensure that all of the assumptions and details are covered to avoid misunderstandings during the progress of the contracted work activity.
Virtually everyone needs a contract when a work activity is to be completed by one or both parties. The contract can help family members understand the details and avoid assumptions about work, payment, and timing which could lead to misunderstandings. Individuals, small, medium, and large corporations all benefit from contract templates that save time, ensure consistency and professionalism and cover your company’s processes and legal needs in every contract.
The short answer is that it depends on the type of business and the goods or services offered by the business. Many companies will use several different templates in their business that reflect the goods or services offered, whether it is a fixed price contract or a cost-plus contract. Your customers may request different contracts depending on their comfort level with you and the perceived risk they wish to take. Businesses should be prepared with several different templates that reflect the type of contract they are comfortable with.
A contract template should, at a minimum, include a clause that reflects the payment structure your business is agreeable to. There may be several clauses to choose from in the template. Cost-plus contract templates may reflect an hourly rate charged by the company. For example, whenever the hourly rate is updated, it can be reflected in the template for everyone to utilize
In many cases, the contract is signed at the same time by both parties; however, in situations where that is not possible due to physically different locations, once both parties have agreed to the contract terms verbally, the buyer can sign the contract followed by the provider. Both parties receive a signed copy of the document for their records.
Usually, two copies of the contract are signed by both parties to enable both parties to have a copy of the original signed document. If the contract is prepared by a legal firm, a third copy is signed and retained by the legal firm for safekeeping.
Contracts are legally binding provided that they do not require either party to be obligated to do something illegal. The contract must be signed by both parties, which indicates an offer and acceptance by the parties. Contracts can be either verbal or written; however, verbal contracts are much more difficult to enforce legally due to the inherent vagueness of the agreement.
A contract agreement is an agreement between two or more parties, creating one or more legal obligations between the parties. A contract agreement instructs to do or not to do something. The term parties can include individuals, organizations, corporations, and other types of legal entities. A well-written contract will cover timeframes, scope, deliverables, payment, obligations, NDA, and dispute resolution processes.
A verbal contract does qualify as a valid contract and is legally binding. Verbal contracts are more difficult to enforce due to the misinterpretation that often arises due to the different understanding of what was agreed to. Keep verbal contracts very simple and straightforward to avoid confusion between the parties.
Key-points, Conclusion, or Final Thoughts
A contract should always be considered when one party is providing a service or product to another party. Verbal contracts can be used, especially for straightforward activities, although they are difficult to enforce due to the inherent lack of accuracy perceived by both parties. Simple written contracts are best that include the names of the parties, the service or product, timeframes, and payment clauses.
Larger complex activities should always have a contract that describes the names of the parties, the service or product, timeframes, payment clauses, as well as scope, dispute resolution, location for resolving the dispute, NDA, progress checks, and payments.
Multiple original copies should be retained and signed by both parties. The legal team will also retain a signed copy of the contract. Each of these originally signed contracts is considered an original when it has been signed by the parties involved.
Contracts should reflect a win-win situation between the parties.
A legal contract cannot enforce anyone to complete an illegal activity and is considered unenforceable in a court of law.
Contracts serve to clarify the complete understanding between two parties concerning the work, service, or products to be provided. They are excellent communication tools that are used by many companies and individuals. Contract templates can save time, ensure consistency and bring a professional look to the contract between two parties.