How To Draft a Contract: 6 Steps to Follow

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If you’ve found this article, then it’s apparent that you’ve learned how powerful legal documents are. Aside from actual work and money paid, a written contract acts as a legal record that a mutually agreed-upon arrangement went into effect. However, the wrong agreement can result in unwanted legal consequences and cause massive problems for the company.

However, the benefit of contracts far outweight their costs. Before getting started, check out our article below on how to draft a contract the right way:

What Is a Written Contract?

A written contract , also called an agreement, is a legal document between two businesses that define a contractual relationship over the course of a transaction. Written agreements are legally binding and contain provisions called clauses . You must hire someone with legal drafting skills and knowledge when creating your written contracts.

How To Draft a Contract – Step by Step

Contracts are a great option when protecting your legal rights. They’re an essential component to major asset purchases and running a business. You should always put a contract in writing since verbal agreements aren’t always enforceable.

Below, we have outlined a step-by-step guide that shows you how to draft a contract:

Step 1. Information Gathering

At the top of the page, write down the names of the people and companies involved in the contract as well as the effective date. For example, “On this 1 st day of October 2021, ABC Company enters into the agreement with XYZ Inc. as contained herein.”

Step 2. List Your Services or Products

Your next task is to describe or list the products or services you’re offering in exchange for payment. Get really specific in this section since general terms are open to interpretation. You don’t want to be on the side of an agreement where a client can press you to perform more work than intended.

Step 3. Determine Term Length

You should also specify how long your agreement will last. Companies can have them end after a certain amount of time, such as 90 days, or offer a more finite contract termination clause date. If your customer is willing to work on an ongoing basis, you may also indicate as such in this section.

Step 4. Lay Out the Consequences

Breach of contract and negligence claims are common in the business world. Ensure that you let customers know what penalties are on the line for non-payment or non-delivery. Ensure that you insert the term “null and avoid” into this section as appropriate so that you no longer have to work with individuals who don’t fulfill their contractual obligations.

Step 5. Determine Dispute Resolution Terms

How will your company deal with disputes as they arise? This question is an important one to address since there are many options. On the one hand, you could permit the traditional methods of civil litigation. Still, on the other, you could enforce alternative dispute resolution measures, such as mediation or arbitration.

Step 6. Create Signature and Date Lines

You can’t have a valid and enforceable contract unless both parties sign on the dotted line. Conclude your signed contract with two signature and date lines for both parties to sign. It doesn’t matter who signs the contract first, nor does the order of signing necessarily infer any advantages.

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What’s Typically Included in a Contract?

Written contracts should offer all parties a sense of security and reassurance. You should include commonly recognized terms and formatting that business owners anticipate. It’s also worth the effort to walk the client through your contract’s terms before both parties sign at the bottom.

For the most effective result, here are the elements typically included in a contract:

  • Names and addresses of all contract parties
  • How much money the offering party will receive in exchange for their services
  • Legal purposes and mutual agreement
  • Acknowledgment of competence by both parties
  • Terms and conditions as appropriate
  • Signature and date lines

You should always take ample time to invest in the contract drafting process. No matter how big or small your company is, you need to protect the legal rights of you and your stakeholders. Otherwise, you are exposed to unwanted and unintended consequences that can leave you on the hook for liability.

Common Types of Contracts

Contracts address a wide range of legal issues and can be very powerful when used correctly. Consequently, that means there are several from which you can choose. Gain an understanding of the contract type that you may need by first familiarizing yourself with documents routinely used by people and businesses alike.

Here are a few common types of contracts of which every business owner should be aware:

Asset Purchase Agreement

Asset purchase agreements (APAs) are legally binding contracts used in the commission of making large asset purchases. Types of assets usually include sales of equipment and tools exceeding $500. The only exception to this rule is real estate transactions.

Commercial Lease

Commercial leases establish the terms and conditions between you and a business tenant. These lease types are different from residential leases since they address specific issues related to term length, variable rates, and insurance.

Confidentiality Agreement

Confidentiality agreements are the documents you enact to keep trade secret information private while hiring private employees. As part of your employment agreements , you can ask them to sign confidentiality agreements so that you have legal recourse and options in the event of unlawful disclosure.

Joint Venture Agreement

Joint venture (JV) agreements are the perfect legally binding document when working on a project or business effort with another company. For example, if another company is going to feature your products within theirs, a JV agreement will set the terms related to compensation, licensure, and more.

Partnership Agreement

Partnership agreements were developed for business partners. If you’re part of a partnership, whether general or professional, you must have a partnership agreement in place to avoid unnecessary conflict. This document will help you navigate profit-sharing matters, day-to-day management, and how to handle disputes if they arise.

Sales Contract

Sales contracts are used in the commission of selling a product. They are similar to asset purchase agreements but generally address sales rather than an asset acquisition from a general standpoint.

Service Contract

Service contracts are legally binding agreements that providers can use when offering their expertise to another company. They typically define the scope and depth of the project and payment terms, and dispute resolution processes. Service businesses are always more challenging to protect since they aren’t generally offering a tangible end product, and ambiguity can become the Achilles’ Heel of contractual outcomes.

Contract Drafting Fees

The below contract drafting fee data comes from ContractsCounsel’s marketplace. The table includes 12 popular drafting projects.

Document Type Bid Avg Project Avg
Service Contract $650 $505
Partnership Agreement $875 $625
Single-Member Operating Agreement $525 $450
Multi-Member Operating Agreement $1,100 $950
SaaS Agreement $850 $725
Terms of Service $845 $450
Privacy Policy $500 $450
Employment Contract $650 $500
Consulting Agreement $650 $450
Contractor Agreement $650 $450
Convertible Note $650 $550
Promissory Note $695 $550

All data is flat-fee (not hourly), so the pricing you see below is the total to complete a project. Please note, pricing for projects can vary based on contract type, number of custom terms, and number of revisions needed. The below pricing table includes averages.

How Long Does It Take to Draft a Contract?

The amount of time it takes to draft a contract ultimately depends upon your specific needs. A basic, one-page agreement could take a few days, whereas a lengthy, complex document could take several weeks or months. More significant transactions often involve the negotiation and renegotiation of a deal which can add to your timeline considerably.

Can I Write My Own Contract?

People and businesses can write their own contracts. However, contract law is highly technical and varies by state, province, and country. You should at least speak with business lawyers to learn more about how they could help you and where your signed contracts could be improved.

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