5 Types of Contracts You Should Know About
In business, many agreements must be made, signed, and sealed legally before some form of progress can be made. Many times, legal services advise that terms and conditions of a partnership, proposal, and many other types of deals should be laid out clearly in writing.
This set of laid out terms of an agreement is known as a Contract. They are a part of business you can’t do without, and one of the primary purposes of creating contracts is to ensure that every party involved is aware of all the proceedings within. It also makes sure that they agree with it and accept the terms.
Contracts are a part of many industries, and so there are different types of contracts that exist. Many of them are important for every business owner and, in many cases, employees to know and understand what they entail.
What Is a Contract?
Like we mentioned above, contracts are a set of agreements laid out in writing. Let’s take a more in-depth look at what it entails.
There are basic things you should know about contracts. First, it is an agreement between two parties or sets of people that serves as legal backing or security for the parties involved in a business deal they’re about to close.
A contract typically states all the roles and duties of the parties involved. It also controls the risks and any expenses incurred by the contractor. A contract is the protection parties can leverage in the event of unforeseen circumstances.
A properly written contract ensures that each side honors and sticks to their side of duty. Although they can be quite tasking to draw up, many contract examples below come with templates to ease up the process, allowing business owners to create an irrefutable contract seamlessly.
The Main Elements of a Contract
Many elements make up a valid contract. Before examining the various types of contracts, you must first know what you should look out for to determine their authenticity. Not every contract is the same, but these elements should be present for it to be legally binding.
- An Offer: This is the promise or agreement an individual makes to pay for a service or product. It also includes other terms and conditions of the contract, for example, rights that will be given up.
- An Acceptance: This is when the other party agrees to perform the service or action required in the contract in return for the compensation stipulated in the contract.
- An Intention to Create a Legal Relationship: In other words, this is the intention to be legally bound by the contract. This means both parties intend to enter into a legal agreement where they are obligated to carry out their duties as stated in the contract.
- A Consideration: This is whatever is given in return for services or goods. This may not always be monetary. The important thing is that you and the other party are aware of and accept the compensation agreed upon in the contract.
5 Types of Contract You Need to Know
There are two main groups of contracts; fixed-price contract and cost-reimbursement contract.
A Fixed-price contract, also known as a lump sum contract, is the type of contract where both parties agree on a fixed payment for the contract, regardless of any changes that may occur in the course of the project.
A Cost-reimbursement contract or cost-plus contract is quite the opposite. Here the contractor gets paid for expenses plus some more to allow for profit-making.
Both groups contain different types of contracts that can be used in combination or singly in many areas of business.
- Freelance Contract
Many times in business, you would find the company has to conduct some business with a freelancer outside of the organization. In this case, there is a need for some form of legal backing for your company as you start to work with the independent freelancing entity.
A freelance contract, also known as Client/Service Freelancer Agreement or Contractor Agreement, is used to set the terms of business between your company and a freelancer as they work with you over a period of time.
It is also useful to get into one if your company will be working as an independent contractor working for another business.
- Licensing Contract
This is another significant contract in the business world. It helps creatives earn money from their products and innovations. Here is how it works:
A licensing contractor agreement is one where you allow someone (a business or individual) to use your creation for a fee, helping you make money from it.
The company or party involved signs a contract where details like the terms of agreement between both parties, the payment you agree on, the restrictions involved in using the product, reproduction rights, and many other details will be clearly laid out.
- Marketing Contract
This is one of the most common types of contracts, especially for businesses. This contract exists between a marketer or marketing organization and a client.
A marketing contract or Joint marketing agreement typically spells out the terms and conditions that state how you (the marketer) will assist the client in selling their goods and services.
This contract includes details like how the marketer or marketing organization will create materials, including pamphlets, flyers, advertisements, websites, etc., to help the client meet and interact with potential clients and customers. It will also detail important information like the activities that will facilitate improved sales for the business.
This type of contract should protect the rights, interests, and intellectual property of both parties. It should also serve as a means to reflect how the marketer aims to develop the client’s vision and wishes.
- Partnership Contract
This is another crucial type of contract for those in business. If you ever decide to become business partners with an individual or existing firm, you must ensure one of these is signed and sealed by the parties involved. Just in case anything goes haywire.
A partnership contract sets out the responsibilities and roles of the parties involved. It dictates the tone of the relationship between the business partners, highlights their obligations, the capital contributions from each party, how they share profit and loss in the business and many other details.
The best practice is to have all this in writing before the partnership begins. However, changes can still be made during the partnership. This means that even if a partnership is already in place, there can be a review of the contract and possible changes. Once the contract has expired, the option of contract renewal can be discussed.
- Support Services Contract
Are you planning to own or offer an online service in your business? Then this contract is also important to note. Typically, this type of contract is an agreement between two parties that would support the other with specific services for a fee.
In many cases, the service often offered is IT Support. This is useful for organizations that will be offering their customers or clients some sort of service online. An IT Support organization helps to ensure that the online or technical processes run smoothly without any challenges.
When you contract IT Support, it means that you are hiring an IT Support service to help ensure that your IT processes run hitch-free. This contract contains a list of the services the support company is offering, the products they will use, cases or scenarios that the contract will not cover, and many more.
In this contract, you may also find the payment required, a payment schedule, liaison officers that serve as a go-between, etc.
Why Is a Contract Important?
Contracts remain crucial parts of any business, and they are important for good reason. Here are a few of them that make getting one worth it:
- Contracts are legal security. They ensure that in the eventualities of a disagreement between the parties involved, they both have legal protection.
- Contracts enforce cooperation. When there is a contract in place, both parties are compelled to keep to their end of the bargain. There is no need to cajole, prod, or push any parties because a valid contract states that all parties are bound to do their part obligatorily.
- Contracts improve transparency. There’s no room for misunderstanding or misrepresentation. Contracts are proof that there is a deal between two parties, and there is an acceptance where the parties agreed to be in the contract. It sets the right expectations and ensures they all remain true to the contract.
Conclusion
Business partnerships and deals are not always a straight road trip without hitches and drawbacks. The ride can get bumpy from time to time, very bumpy. People can be very fickle, backing out on agreements when there is no legal binding that ensures they commit to it.
When deals go sideways, a contract is one of the few things that can save you. Your knowledge of various types of contracts and ensuring that you protect yourself with a valid contract will effectively keep your business out of a rut.
Never rely on oral agreements; a solid, indisputable contract is the way to go.