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As a freelancer or business owner, understanding different contract types is key to running your business smoothly. Contracts are the building blocks of your business relationships. They spell out what you and the other party expect from each other.
In this guide, we'll walk you through various contract types, their uses, and what to keep in mind when dealing with them. We'll use simple language and real-world examples to help you grasp these concepts easily.
Did you know that businesses lose about 9.2% of their yearly income due to poor contract management? Knowing your contract types can help you avoid such losses and keep your business on track.
Let's start with the contracts you'll encounter most often:
These are the most common in business. Both parties make promises to each other. For example, you promise to design a website, and your client promises to pay you for it. Most of your business deals will likely use bilateral contracts.
Here, one party makes a promise in exchange for the other's action. Think of it like this: if you offer a reward for finding your lost phone, that's a unilateral contract. The contract is complete when someone finds your phone.
These contracts clearly state all terms, either in writing or verbally. Written contracts are usually better because they're easier to remember and enforce if issues come up later.
These contracts aren't written or spoken. They're formed by how people act. For example, if you always proofread your friend's blog posts and they always buy you lunch afterward, you might have an implied contract. These can be tricky, so it's usually better to get things in writing.
Contracts can be at different stages:
These are contracts where both sides have done what they promised. It's like crossing the finish line - the job is done.
In these contracts, one or both sides still have work to do. Most ongoing business relationships use executory contracts.
Some contracts might not be legally binding:
A void contract isn't legally binding from the start. It might be because what's being asked is illegal or impossible. A voidable contract can be canceled by one side if there was fraud or pressure involved. Knowing the difference helps protect your business.
These are take-it-or-leave-it contracts. One side (usually a big company) sets all the terms, and the other side can't negotiate. They're common in things like software user agreements. Courts sometimes look closely at these to make sure they're fair.
Some contracts deal with uncertain events:
These involve chance or uncertainty. Insurance policies are a good example. The payout depends on future events that might or might not happen.
These give you the right, but not the obligation, to do something in the future. They're often used in real estate. For example, you might pay for the option to buy a property within the next six months.
How you charge for your work can be structured in different ways:
You agree on a set price upfront. This can be good because everyone knows what to expect, but be careful - if your costs go up unexpectedly, you might lose money. For instance, a study found that 60% of construction projects go over budget, showing how important careful planning is in fixed-price agreements.
Your client pays for all your allowed expenses plus some extra for your profit. These are often used for projects where the costs aren't clear at the start.
You charge based on the time you spend and the materials you use. These are common in service industries and construction.
This is one fixed price for all the work. It's simple for the client, but make sure you estimate your costs carefully.
You set prices for individual units of work or materials. This is useful when you're not sure how much work there will be, but you know what kind of work it is.
Different industries often use specialized contracts:
These define how two or more businesses will work together. They're important for managing shared risks and rewards.
These spell out the terms between employers and employees. They cover things like pay, job duties, and how to end employment. A survey found that 64% of organizations use formal employment contracts for at least some employees1.
These govern how goods or services are sold. They define things like price, quantity, and delivery terms.
These outline how services will be provided. They're common in fields like IT, consulting, and maintenance.
Some situations need very specific contracts:
These need to cover complex issues like delays, changes, and quality standards.
These involve detailed legal and financial considerations. They need thorough checking and often include clauses for unexpected events.
Startups need flexible contracts that can adapt to fast growth and changing business models.
These must follow strict rules and often deal with sensitive patient data.
These include environmental considerations in business agreements. They're becoming more important as businesses focus on sustainability.
Understanding these contract types can help you manage your business better. Each type has its own purpose and things to consider. By knowing about them, you can make smart decisions that protect your interests and help build strong business relationships.
Remember, this guide gives you an overview, but each contract type has its own details and legal implications. For more in-depth information, check out the linked articles. And if you want an easy way to create and manage contracts that fits your business needs, think about using tools like Notch.so.
1 According to the Society for Human Resource Management.
