The Advantages & Disadvantages of Contracts for Service

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A multinational corporation can afford in-house staff to handle any and every situation. When you're a small business or a startup, that's not so easy. By outsourcing services to freelancers, you can find someone to take care of bookkeeping, marketing or other projects outside your skill set. You don't need a written agreement to hire freelancers, but the advantages of contracts for services are huge.

Employee or Contractor?

It's often cheaper to hire a contractor than an employee, even for long-term work. Freelancers don't get benefits, unemployment insurance or worker's comp and they pay their own taxes. The IRS scrutinizes businesses employing freelancers to confirm the contract workers aren't really misclassified employees.

One of the advantages of contracts is that a written agreement can clarify your relationship to, for example, the contractor that handles your billing or your IT needs. If the IRS audits you, the contract helps show that the relationship is legitimately freelance.

Contracts Clarify Everything

Suppose you put an IT consultant on retainer to check your security, patch security holes and restore your website if it crashes. You can do it with a verbal agreement, but that makes it easy to overlook important details:

  • If there's a system crash, does your consultant start work immediately, even at 2 a.m. Saturday? Or will they get back to you during regular business hours?
  • What services is the consultant actually committing to provide? Are all the services you want covered by the retainer, or is the consultant entitled to charge extra for some jobs?
  • How long does the agreement last? Can either party dissolve the contract if it's not working out?

Among the advantages of contracts are that negotiating an agreement and signing it gets the two of you on the same page. A good contract spells out exactly what you're paying for. It reduces or eliminates misunderstandings about what "prompt service," for example, really means.

Contract Details to Include

A good contract describes the scope of the project and the price. It can, and probably should, cover a lot more:

  • What outcomes do you want from the services provided? That your website will be up in six weeks? That if you put the plumber on retainer, you'll get same-day service?
  • How do you measure the contractor's performance? 
  • What hours is the contractor available?
  • Do you want constant communication and updates? Reports when they accomplish benchmarks on the project? Or just to hear when there's a problem?
  • How should the contractor account for their time? By the hour? The quarter hour? Do they need to document or substantiate the hours billed? 
  • Can they provide the same services for your competition? Or compete with you directly?
  • If you don't like, for example, a web designer's finished work, can you ask them to do it over? How many times?
  • If repairs or fixes are necessary after the work is done, what are your rights?
  • Are there financial penalties if the work isn't completed? 

The Downside of Contracts

The advantages of contracts for services are considerable, but there are some negatives too. One is that contracts that are badly written may not give you the results you want. An agreement that doesn't conform to contract law won't hold up in court.

For example, suppose your ad agency's contract with a freelance copywriter includes a non-compete clause banning him from selling his services to your clients. If the clause is too restrictive, a court could toss it out.

A big disadvantage of contracts for many business owners is that they don't want to pay money for a lawyer. Drafting and negotiating a written contract also takes time they may not want to spare.

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About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

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