Seven Types of Contracts in Business You Should Know About
Maybe your business is just starting up, or perhaps you’re in a brand-new role in your company. Whatever your motivation for researching the types of business contracts is, you should know that each one is rather unique and should be treated with care and attention. That’s because each one can have serious legal and financial consequences for your company.
Naturally, though, some agreements are quite complex, while others are refreshingly simple. Some govern a company’s responsibilities for people and relationships. Others control assets, risks, and a number of liabilities. Whatever legal document you’re most interested in, you’d do well to understand the most common types of contracts in business — and the power they each hold for legal departments and organizations. Let’s explore seven of them here.
1. Sell-Side Contracts
For businesses that sell products or services, sell-side contracts cover characteristics, like pricing, delivery, quality, assumption of risk, termination conditions, and timelines.
Bills of Sale
Simply put, a bill of sale is an agreement of transfer of ownership of products or property. This describes terms, like what was sold and the number of goods sold. It also describes the place of sale and the address of the buyer if shipping is required. Usually, bills of sale include policy descriptions for warranties, returns, or payment terms.
More often than not, SaaS contracts are rather complex. (Many administrators and users rush for the acceptance button without even looking at the legally binding terms!) Application licensing contracts, then, provide businesses with important lessons around signing contracts — without thoroughly reviewing them first.
Software License Agreements
In this digital age, license agreements commonly carry unit pricing to regulate utilization metrics like how many users can access an application. Administrative and end-user software license agreements — for on-premise software — are similar to SaaS agreements. But although software licenses are perpetual, they’re generally extended by fixed-term maintenance and support agreements.
Managed Services Agreements
Managed services agreements mostly relate to technology, like cloud hosting for data or applications. They also include service level agreements, which may require a vendor to credit their customer if the former’s reliability or availability doesn’t meet performance levels outlined in a contract.
2. Professional Services Agreements
Lawyers, consultants, accountants, and construction engineers are just a few experts that require a signed contract to engage their services. Here are some standard contract formats they must concern themselves with:
Time and Materials
Time and materials contracts are ideal for application development projects. That’s because circumstances change frequently, and such projects may take longer to complete based on customer availability or other factors. For the most part, contractors invoice based on a negotiated fee for the time they invest in a project — plus any expenses they incur while delivering on the items in their contract. Typically, a formal change request process is associated with these agreements.
Some consulting firms and construction companies work on fixed-price agreements. These commit them to an “all-in” price for all deliverables and costs, within a defined scope of work. Fixed-price contracts require a service provider to be willing to assume a level of risk for which smaller, newer firms may not be prepared. Yet, companies that are awarded fixed-price contracts, with some built-in contingency scope, may end up making higher margins than they would with a guaranteed maximum price (GMP) agreement, for instance.
3. Cost-Plus and Lump-Sum Contracts
At times, companies that provide services to government entities work under a “cost-plus contract.” This is an agreement with a set margin percentage above expenses. Such contracts enable the party to draw up an agreement, ensuring the contractor will make good on their promises to deliver. However, it’s important to note that the party doing the work has a profit margin, to compensate for completing a particular job. This is especially the case when construction projects are completed for a local government entity.
Lump-Sum/Stipulated Sum Contracts and Milestones
A lump-sum contract is an agreement that sees the parties involved negotiate a total cost for a project, instead of contracting individual phases of an initiative. However, there’s some risk involved for the contractor here, like a fixed price project, due to indirect costs or unexpected expenses. Yet, they benefit from taking on a larger project without competing for parts of the overall initiative.
Some lump-sum contracts may allow for milestone payments, whenever deliverables are met and expenses are incurred. To motivate contractors to keep to the agreed-upon delivery schedule, these contract milestones include various incentives tied to due dates.
4. Cost Reimbursement and Incentive Contracts
Cost reimbursement contracts help contractors get repaid for a defined set of expenses while working on a project. After all, these contractors demand disciplined spending on supplies and labor.
Contract incentives may reward a contractor for achievements, like avoiding safety incidents throughout a contract, completing a project ahead of schedule, or other quality-based metrics. Quite often, they are subtypes of cost reimbursement or fixed-price contracts.
5. Supplier or Vendor of Record Contracts
A supplier contract is a “buy-side” agreement between a business and a supplier, which establishes the costs and delivery standards for a defined set of products or services. Basically, these types of agreements are means to measure supplier performance. They enable a client to terminate an agreement if these standards are not maintained. Beyond itemizing the products to be supplied, supply contracts also establish responsibilities and terms for timeframes, payment terms, and pricing.
6. Human Resources Contracts
Companies that employ permanent, full-time, part-time, or contract employees will have a set of contracts that govern the policies, responsibilities, and other binding legal terms required to work for them. These contracts include:
- Offers of employment
- Confidentiality agreements
- Acceptable agreements for company-owned devices, internet, and other assets
- Separation or termination agreements
- Non-compete contracts
Essentially, HR contracts protect both employees and employers, and they generally adhere to practices defined by law. What’s more, given that the cost of an employee exceeds their salary and benefits, HR contracts are quite comprehensive, following standards set by federal government agencies.
7. Partner and Joint Venture Agreements
Lastly, many technologies, telecommunications, healthcare, and construction companies enter into strategic partnerships with complementary products and services firms. Well, joint venture or partnering agreements establish the parameters of their relationship. Some partnerships are exclusive, while others are for specific projects or go-to-market strategies.
So, does your business have an AI-powered contract management system, to create, review, store, approve, analyze, and track all of these agreements? Is your existing system scalable enough to meet your company’s evolving needs? If you want to find out more about selecting the right CLM vendor and growing your business strategically, download one of our latest white papers, “How to Choose a Contract Management Solution,” today.
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