What is the Importance of Contracts to a Business?

At one time, transacting business was easy. Two people agreed to make a trade, and both parties honored their word. But in the 21st century, professionals are all too aware of the long history of deal-breaking and lawsuits that have taken place all around them. In business, contracts are important because they outline expectations for both parties, protect both parties if those expectations aren’t met and lock in the price that will be paid for services.

Tip

Having a written contract means that everyone knows what he is supposed to do and when, and makes it easier to resolve any disputes that might arise.

Outlining the Scope of Agreement

A contract is a written agreement between two parties that details the terms of a transaction. In a business, it generally states the work that will be performed, along with important information like due dates and costs.

It can be easy to make your contract far longer and more complicated than it needs to be, but it’s best for everyone to try to keep it simple. Still, your business should at least include the following:

• Full scope of work to be performed, including all deliverables.
• General timeline or, if possible, exact due dates for each milestone. Nothing that you discussed should be left out of the contract if you want it to be enforceable.
• Payment amounts and terms. How many days will the person have after delivery to remit that payment, and how will it be paid?
• The circumstances under which the contract can be terminated and how that will be handled. If dispute mediation becomes necessary, the contract should also outline how that will take place.
• If necessary, one or both parties may choose to include a noncompete or nondisclosure clause.
• Any terms related to failed obligations. If, for instance, payment isn’t remitted by a certain date, the contract should outline what the late payment fee will apply.

If you can afford an attorney, it would be wise to have one look over your contract to make sure you’ve covered everything. Once you have the initial draft, you should be able to simply update it with all of your clients.

Protecting Both Parties

Although having expectations in writing increases the odds of success, it also makes enforceability easier. Simply knowing it’s in writing can put pressure on all involved parties to meet their obligations on time. The service provider will probably even routinely check the contract to make sure the work is progressing as agreed.

If an issue arises, having the agreement in writing will make enforcement much easier. If the client decides to work with a different agency halfway through the project, the provider could take legal action to be paid for work performed. On the other hand, if the service provider performs poorly, the vendor will have legal protection against paying for the work.

Locking in Financial Agreements

If written properly, your contract will make sure the service provider receives payment in a timely manner. For big projects, this generally means multiple small payments as certain milestones are reached. A publisher buying an author’s book, for instance, will often issue one advance payment when the contract is signed and another when the completed manuscript is submitted.

However, a written contract may not always be enough to get paid on time. You’ll still have to issue invoices in many cases and reiterate the terms on that invoice. Make it as easy as possible for your client to pay, offering as many options as possible.

Closing the Contract

Hopefully, you’ll never have to take legal action based on the contract, which means the project will end and you’ll move on to the next project. Both parties should keep a copy of the contract on file for several years in case a later issue should arise. You’ll also have the template that you can tweak based on the lessons you’ve learned from previous projects.