Savvy business owners know that setting up a contract is essential to increase the odds of getting paid in a timely manner.
A well structured contract will cover a wide variety of variables, set expectations, and keep you protected in the event of a disagreement in your business relationships.
While a contract in and of itself does not guarantee your invoices will be paid – breach of contract does happen – it can provide you with better legal protections if your client doesn’t pay an invoice.
Read on to find out more about how a contract can protect you and keep your project moving forward.
8 Things Every Contract Should Include
As a rule of thumb, if something is important to your business success, include it as a provision in your contracts. These 8 things will give you a starting point when structuring your contract.
- The exact work to be delivered
- Important deadlines
- Rules for revisions
- Contact information
- Termination clauses
- Intellectual rights & release information
- Payment terms
- Shipping terms
Every business is unique, so it is best to consult with a contract lawyer to lock down the specifics of your contract to make sure it will hold up in court in a worst case scenario.
1. The Exact Work Product To Be Delivered
If you provide digital services, specify the desired length of an article or eBook, the number of webpages to be designed or the number of mock-ups for a logo. Or, as a landscape designer, detail how many plans you’ll deliver and whether the client gets to keep them. An interior designer might indicate which rooms will be overhauled and how many furniture options will be provided for each.
2. Important Deadlines
Create a deadline for the finished work product, but also include milestones along the way to keep the team on track. Don’t overlook adding in dates for deliverables that the client needs to provide, such as background documents, samples and brand guides.
3. Rules For Revisions & Edits
Sometimes, despite your best efforts, you just don’t hit the mark on certain work products. If you’re a service provider who may be asked to make changes, this portion of the contract will detail how many revisions would be included in the original scope of work and how you will handle additional needs should they arise.
4. Contact Information
Confirm your preferred method of contact and make sure you have a day-to-day contact on the client side, plus information on other team members who will be reviewing/approving your work.
5. Termination Clauses
Delineate how much notice either party needs to give if one of you decides to suspend work. This protects both of you: It avoids leaving the client in the lurch and gives them ample time to find another provider if you discontinue working with them, and safeguards your income so they don’t disappear without notice.
6. Intellectual Rights & Release Information
Enumerate copyrights, details on who owns any intellectual property that is created, an indemnity clause, specifics on whether you may cite completed work in your personal portfolio, as well as other pertinent issues related to legal rights.
7. Payment Terms
Answer the following questions when drafting payment terms for your contracts:
- How quickly do you need to get paid to ensure adequate cash flow or working capital?
- Does getting paid early justify offering an early pay discount?
- What happens if you don’t get paid on time?
- Will you charge interest?
- Will you deduct the overdue balance from future orders?
- Will you take the product back?
- Will you refuse future shipment until payment is made?
Payment terms can be quite simple, or very complex. Draft payment provisions in a manner that ensure you will get paid on the terms that best protect your business, and be clear about what steps will be taken in the event that you aren’t paid according to those terms.
8. Shipping Terms
If your service includes logistics, which is the case with a wide variety of businesses from retailers to builders, it’s important to address these shipping terms in your contract:
- When is the product going to be delivered?
- Who is responsible for paying for shipping costs?
- Who is responsible for any damage that occurs when the products are in transit?
- When does the receiving party take title to the goods (i.e. when it leaves your warehouse, or when the party physically takes possession of the goods)?
- Should the receiving party have an opportunity to inspect the goods for conformance upon receipt? How long should that inspection period be?
Similar to payment terms, shipping terms can be quite simple, or complex. Draft shipping terms with specificity so that both parties are clear on roles and responsibilities.
3 Types of Contracts to Fit Your Business Goals
One size doesn’t fit all when it comes to contracts. That’s why you’ll want to set up your contract that works best for your business and also meets your client’s needs.
The 3 most common contract constructs are:
- Retainer contracts
- Hourly contracts
- Project based contracts
Let’s examine what each of these contracts are, their benefits, and what to watch out for when using each type of contract.
1. Retainer Contract
What it is:
A retainer is a lump sum paid to a provider that basically serves to “rent” your services for a specific amount of time each month. Your client will pay a fee upfront, say $2,000, and you’ll bill against that amount for your services, based on an hourly rate. This agreement works well if you regularly do a variety of work for a client that involves different skill sets – for example, a lawyer might include a weekly one-hour planning phone call and review of four contracts.
This type of agreement allows both the client and the service provider to budget without surprises and without having to devote time each month to creating a scope of work. In addition, it means that you, as a service provider, know that you need to be available to that particular client for a set time each month so you don’t inadvertently fill up your calendar just when they need you.
What to watch for:
With a retainer agreement, you’ll want to line out what happens when your designated time goes over or under the agreement. For example, perhaps your client is on vacation and skips two calls and one release. Should you apply that amount to the next month or do additional work to make up the difference? Make sure your contract includes clear expectations for how to handle this situation and a plan for when you will alert the client that you are nearing the limit of the retainer.
In addition, you’ll want to watch for “scope creep,” which happens when projects expand. For example, sometimes a client might come to a builder with a variety of change orders once they see their home materializing, or decide that they don’t like the cabinets after all, which can lead to costly delays. Or, a customer may ask an interior designer to “just take a quick look” at another room while you’re presenting concepts for a kitchen or change their mind and request hues of blue when they had specified shades of yellow. Determine how you’ll deal with scope creep, such as whether you’ll increase the retainer or project fee or bill hourly.
2. Hourly Contracts
What it is:
This one is pretty self-explanatory: You will be billing for your services on an as-agreed upon hourly rate. Some freelancers choose to bill different services at different rates; for example client meetings are billed at less than writing work or strategy bills higher than research. Make sure your contract is specific on the rate, including a cap if needed.
And then make sure to track your time carefully, so that you can provide a complete project summary on the bill of how much time was spent on what activities.
Scope creep is essentially eliminated in an hourly-based agreement because the client is literally getting what they are paying for.
What to watch for:
Hourly work can quickly escalate without the client realizing it, creating a surprise bill. Discuss agreed-upon limits for hourly work with your client, and make sure to keep them in the loop as you approach the cap. They then have the choice of prioritizing the work to stay under the ceiling or allowing you to continue to bill.
3. Project-Based Contracts
What it is:
This type of contract pertains to a specific scope of work; for example, building a deck or installing new fixtures.
Project-based contracts clearly delineate the scope of work and allow you to remain focused on one agreed-upon goal. It also provides the perfect avenue for trying out a client, and vice versa, to make sure that your work styles and expectations are compatible. After the project is over, you may agree to part ways or decide to work together on an ensuing project.
What to watch for:
Parameters and work products should be clearly and completely delineated so there is no confusion over exactly what the deliverables are. In other words, note how many design meetings you’ll hold and exactly what materials will be included. Will you clean up a workspace each day or at the end of the job?
4 Things to Consider When Dealing With The Payment Section of Your Contract
Of course your No. 1 goal as a small business owner is to get paid.
If you’ve experienced clients not paying on time before, you may be surprised to learn that making the “Payments” section of your contract incredibly clear can help make sure you get paid in a timely fashion.
Here is what payment information you should include in your contract:
1. Payment Methods
Your customer might tell you how they typically pay their partners, or you can let them know if you have a preference. Remember that the easier you make it to pay you, the quicker your client is liable to pay.
That’s why it’s important to accept a wide variety of payment methods on your invoice, from credit cards to checks.
QuickBooks also lets you include a “Pay Now” button on your invoice which can get you paid up to two times faster.
2. Payment Terms
This lets your client know when the bill is due. The most common payment term is “Net 30” which means the customer must pay within 30 days, but you can also specify other terms. Always add a deadline to your invoice; clients get busy, too, and they want to know when they need to pay you.
3. Late Fees
Most clients intend to pay on time, but if a payment slips, that can cause havoc on your budget. That’s why it’s smart to let customers know up front that you will be applying a late charge if their account goes past 30 days (or whatever you decide). You can choose to add a surcharge or make it a percentage of the payment. Also let them know if you plan to stop work if they don’t pay in a timely fashion. Even though most contractors don’t want to stop work, you may find it to be an effective method for “reminding” clients that they need to pay.
4. Installment Invoicing
Don’t want to wait until the end of a project to get paid? It’s wise to build in payment milestones all along the way. QuickBooks’s invoicing solution allows you to invoice in installments, as specified in your contract with your client or customers. That is helpful particularly for project-based work where you might want to bill a percentage upfront and then in certain increments along the way as you hit projected milestones. QuickBooks will automatically track payments to show what you’ve collected and what is still outstanding to ease your accounting.
Where to Find Help With Contract Creation
Not sure how to create a contract?
Start by creating a template that you can use over and over, customizing it as needed, and tweaking it as you go with new information that proves valuable to include for your specific business. Here are two places that can help.
Freelancers Union offers a free contractor creator that allows you to generate and customize a contract simply and cleanly.
While initially more expensive, an attorney-created contract can be an excellent long-term investment since a legal professional will make sure you’ve included everything you need to.
It will also lend an air of credibility to your work when you use a professional contract.
The time you put into creating a solid contract will pay dividends on every project: Your client will appreciate your professional approach, and you will be assured that everything is in place to ensure swift payment.