Importance of Contracts for Your Service Business

March 16, 2013 | By | 1 Reply More

If you are involved in a service business, contracts with customers are a must. It ensures that both you and your client agree to the services that you will deliver, in what timeframe, and under what conditions. It protects your business, while giving your clients the confidence they need in dealing with you. After all, as the movie mogul Sam Goldwyn once said, “a verbal agreement isn’t worth the paper it’s printed on.” A written contract is a symbol that proclaims, “We’ve got a deal.”


A contract enhances the professionalism of your business. Since everything is written down on paper and signed by both parties, it is easier to stick to the agreed deliverables. You will not be easily intimidated by your client’s whims and changing preferences in the middle of the project. If things run smoothly, you may never see the contract after the client has signed it. However, if you and the client disagree, you can refer back to the contract to guide you how to resolve issues of dispute.

Imagine that you are computer consultant creating a web application for a client. Without a contract, clients could easily add ten more items on the agreed work plan (and they always do!) – and expect to pay the same amount of money. If you have a contract from the get-go, you can simply issue an addendum to your contract including the price increase to accommodate the ten tasks that have been added. Hence, it will be clearer that the ten new tasks are beyond the scope of the originally signed contract, and to do them would require additional resources on the part of the client.

Contracts need not be long or complex; it can be a simple two-page letter of agreement as long as it covers all the bases. You can do it yourself, or seek the help of a lawyer in drafting your contracts. If you want to save on legal fees and draft the contract by yourself, your first step should be to gather sample contracts from similar businesses or to check out sample contracts from books and other resources. The key in preparing a contract is to be specific about your expectations and more thorough about planning for problems.

Your contract should comply with special rules governing your business or profession in your state or locality. While there is no such thing as one-contract-fits-all given the variety of businesses, the following elements are normally covered in a contract:

The parties to the agreement

The contract must clearly state the parties to the agreement, specifically you (either your name or the name of your business) and the name of the other party, whether that’s a customer or a vendor.

Specific description of your deliverables

The contract must clearly specify the services that you are going to perform. If you are engaged in a design-oriented business, it may be a good idea to include a sketch, diagram or illustration of the work the client will be getting. Having some visuals will ensure that you and your client are on the same page with the same expectations.

Price to be paid for the work and what that is based on

Specify if the rate is based on a fee, a flat fee, a per diem fee, an hourly fee with an estimate, and whether reimbursement for expenses will be covered.

How and when the payment will be made

Be clear on the payment modalities that you want, keeping in mind that you should get as much of your money as you can upfront. Avoid spending out-of-pocket money for materials, as your clients have to shoulder these expenses. Also consider imposing penalties for late payments, or a clause that states that “the work stops if the payments do.” You may require 50 percent down payment due at signing of the contract and the remaining 50 percent after the completion of the service or a different combination that will work for you and your clients.

Clear definition of when the work will be completed.

It is important to be very clear about the circumstances for the required final payment.

Other items in the contract

Additional terms you could include in the contract:

  • conditions under which either party can terminate the contract,
  • whether either party can transfer or assign the contract to another person or company,
  • whether disputes arising from the contract may be arbitrated or mediated,
  • in the event of a dispute, whether work should stop until the dispute is resolved
  • payment of attorney’s fees if one party breaches the contract,
  • an address where legal notices can be sent to each party, and
  • state law that will apply if questions about the contract arise.

Execution of the contract, making sure that both parties sign the contract and the person signing (if he or she is representing a company) has the authority to sign. Each party should receive a copy of the final signed agreement.

If you drafted the contract yourself, you may want to hire a lawyer to go over the contract to check if you missed any important provisions. The extra cost can give you additional peace of mind regarding the strength of your contract. But if you cannot really afford or do not want to consult a lawyer, having a contract that you drafted yourself is still much better than a handshake.

More importantly, review the contract with your clients to make sure that you are on the same boat. You may be dealing with clients who are unfamiliar with the language and intricacies of your profession. Sitting down with them to discuss every single point in the contract can help them understand what they are getting into, and clarify issue points before the start of the business engagement. You will find that clients appreciate your effort to educate them about the business, thus producing more goodwill between you and your client.

Recommended Readings on Contracts for Your Business:


George Rodriguez

George Rodriguez is a writer for An entrepreneur with experience in running several businesses, he writes on various topics on entrepreneurship and small business.

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Category: Business Management

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