In legal terms, a contract is any agreement between parties to exchange things of value, such as goods and services for cash. Under state laws, only a few categories of contracts must be in writing, such as a mortgage contract or contracts covering more than a year. It’s still a good idea, however, to have a written agreement for other business transactions since a simple handshake agreement is not always provable if a dispute arises. There is no law requiring a lawyer to write your contract. If the transaction is relatively simple, the contract can also be simple, too.
You begin the contract by naming the parties in the agreement. This may seem obvious, but people often write the name of a representative of the entity instead of the name of the entity. If you run a business as a sole proprietorship, it would be appropriate to be identified in the contract as John Jones doing business as Jones Plumbing. If you organized your business as a Limited Liability Company, identifying your participation in the contract by your name could remove any personal liability protection that an LLC provides. Similar issues can arise with a partnership if each individual is identified as a party to the contract. Except for a sole proprietorship, then, enter your business entity’s name and not a personal name as a party to the contract. Otherwise, you will be on the hook and lose the benefit of the limited liability entity you formed.
The terms constitute the body of the contract. Start off by clearly defining what it is the scope of the work or service you are to provide, and the timeline you propose to complete the work. Be specific. Don’t simply say you will renovate a client’s kitchen. Provide details of the cabinet designs and type of wood you will use, countertop dimensions and materials, if appliances will be new or existing ones and other materials and work you will provide. Explain the dimensions of the kitchen if you're expanding it, walls to be removed, etc., and include drawings if that will help. If the kitchen is being rearranged, explain in what ways it will differ and include a sketch of the new design.
If applicable, give a time frame for each phase of a project, but include ranges of time that give you leeway in case one phase runs long or ends early and affects subsequent phases. Think of scenarios where things could go wrong, or not go according to plan, and protect the company's liability with wording that allows for changes, substitutions and occurrences that are out of your control.
Contracts are typically signed for a specific length of time, such as one year. At the end of the contract period, both sides can decide to sign again under the same terms or alter the contract as needed. Or, you or the other party may decide not to sign the contract for another term. Having a defined contract length of time gives you and the other party an easy way to raise prices or alter any part of the contract that wasn't working well, or to end the working relationship without having to break an ongoing contract.
It's natural for disagreements to occur when two or more people work together. Hopefully, these can be resolved easily without outside help. When the two sides can't agree, though, what will happen? To avoid lawsuits, you could stipulate that disputes will be decided by a mediator instead of a court of law. This could save the company many thousands of dollars by only having to pay a mediator instead of lawyers, court costs and possibly hefty settlements. Or, if you have other ideas on how to handle disputes, put them in writing. Specify the jurisdiction of courts or arbitrators that can be used, such as "in the state of Maryland" or "Washington County courts."
Entering your hourly rate and projected time for completion, or the total amount of payment for the project may not be enough. Depending on the project’s scope, the contract should include:
- Any portion of fees to be paid upfront.
- Any fees to be paid at milestones as a project proceeds.
- Payment for work completed if a client cancels the contract.
- Late fees if the client doesn’t pay on time.
- Hourly rate for your time due to delays caused by the client or for client's request to perform additional work.
The signature block should name the entity, then under the signature, the name and title of the person signing, such as:
Jones Plumbing, LLC By:**** John Jones Manager
Each signee should include the date next to the signature. For partnerships, only general partners can sign a contract, not a limited partner. For LLC’s, a managing member or a hired manager can sign. For corporations, the company’s president or chief executive officer is presumed to have the authority to sign. For an organization or association, a board president would have the authority, but may require a vote of the governing board to approve the deal.