Why Is a Contract Important?
Learning how to write a contract is an important part of owning a business. A contract is a legally binding agreement between two or more parties entering into an exchange of value, typically the sale of goods or services. It outlines the obligations and responsibilities of all parties and holds them accountable to the original agreement. A contract is a vital part of any business transaction as it locks in the terms of the transaction and protects both parties if the terms are not met.
When to Use a Contract
Before learning how to write a contract, it's a good idea to consider whether the transaction even requires a contract. Consider these factors:
- Does the transaction involve the purchase, rental, or lease of goods, such as a car or house?
- Does the transaction include the business hiring a new employee or entering into a partnership?
- Does the exchange include the sale of intellectual property, such as a computer program or a book?
- Is the buyer agreeing to pay for services rendered, such as hiring a construction crew for a major project or a cleaning crew to come in several times a week over the long term?
Any of these situations, and many others, require the use of a contract to make sure all parties understand their roles and responsibilities. Remember, a handshake agreement between two parties, even close friends or family, typically won't hold up in a court of law if a dispute arises or any parties forfeit their end of the agreement.
Steps for How to Write a Contract
Follow this step-by-step guide for how to write a contract that's enforceable by law.
Go over any notes from discussions with the other parties about the details of the transaction. Ask questions, if needed, to ensure clarity among everyone.
Select a contract type and begin drafting the agreement. Include the names of each party in the introductory paragraph, as well as contact information for all parties involved. Be sure to also state the start date of the contract and when it expires.
Next, add a detailed list of any key terms and definitions that appear throughout the contract. This helps prevent any ambiguities and clarify vagueness. For instance, for simplicity, the contract writer may use the words "Work Product" throughout the contract in reference to the goods or services on offer. However, it's important to define from the start the exact goods and services that make up the "Work Product."
Define the complete scope of work involved in the business transaction. Start with the deliverables, then discuss the roles and responsibilities of each party. This includes any goods or services the seller must provide and any payments the buyers must make. There's no need to use legalese. Keep the language simple, succinct, and easy to understand. This helps reduce ambiguity and misinterpretation. However, remember to provide as much detail as possible.
Outline the payment terms. Include specifics about when payment is due and how to make the payment. Be sure to also include a project schedule that clearly outlines any deadlines for all parties. This is also a good place to note any performance incentives or deductions for missed deadlines.
Provide details about the protective terms of the agreement, such as what happens if any parties breach the contract. Also include liability, confidentiality , dispute, termination, and ownership statements in this section if they apply.
Give each party time to review the contract and negotiate the terms. Make sure everyone feels comfortable with the details and understands any obligations and expectations. Continue to revise the contract as many times as needed to get it right.
Once all parties agree to the terms of the contract, an authorized representative of each party must sign and date the contract. Signatures make the contract legally binding.
Remember, oral contracts rarely stand up in court, so include every aspect of the agreement and get it in writing. When learning how to write a contract, remember to use simple language and clear terms. Following the steps highlighted in this article and including as much detail as possible helps ensure the contract holds up in a court of law if any parties breach the terms of the agreement.
Types of Contracts
Before writing up a contract agreement, business owners need to know about the different contract types. There are three main types of contracts, and each one serves a unique purpose. Read this article to learn more about different types of contracts .
This type of contract works well when buyers know what they want and provide a clear scope of work. The seller then creates a fixed-cost estimate for all labor, materials, and anything else required to complete the work. Fixed-price contracts offer minimal risk to buyers since they know the total cost of the project at the start.
When the buyer does not know exactly the work involved in the project, a cost-plus contract works well. The buyer agrees to pay for the actual cost of any labor and materials involved in getting the work done. This type of contract poses some risk to the buyer since the cost of labor and materials may fluctuate throughout the life of the project.
Time and Materials Contracts
Similar to cost-plus contracts, time and materials contracts offer a solid solution when the buyer cannot provide a clear vision for the project. The seller agrees to do the work based on a fixed rate for any time spent and materials used to complete the project.
Sometimes, business owners need to combine different types of contracts to cover all parts of the transaction.
Writing a Contract Agreement
When writing a contract agreement, it is necessary to state all terms and provisions clearly and succinctly to help reduce the risk of dispute over ambiguities. It is also a good idea to think about all aspects of the business transaction, such as any potential risks, and include contingency plans about how to deal with risks within the contract.
What to Include in a Contract
Before writing up an agreement contract, it is important to consider the following information:
- The date the contract begins and when it expires
- The names of all parties involved in the transaction
- Any key terms and definitions
- The products and services included in the transaction
- Any payment amounts, project schedules, terms, and billing dates
- How to handle missed deadlines, incomplete work, breach of contract, damages, and disputes
Not including enough detail is one of the most common mistakes people make when writing a contract agreement. When in doubt, include as much detail as possible and write it in simple terms. Here is a link to sample contracts that provide insight into how to write out a contract and what to include in the contract.