Contract types

Contracts form the backbone of professional business. A contract represents an agreement between two parties outlining the specific circumstances of their dealings. For example, a basic client contract might certify risk and pricing, scope of work, timing of payments and timely review of deliverables.

The tighter the contract, the more certain both parties are of their responsibilities and legal accountabilities. A contract represents a legal document that can be referenced and cited in a court of law when disputes are raised.

There are many varieties of contracts, depending on the businesses involved and the nature of their interaction. Different contracts follow different style models specific to their function. It is the responsibility of the operational business leader to ensure that the right contract is used for maximum relevance with appropriate emphasis on terms and conditions.

A key and very important choice is whether a fixed-price contract or a time and materials contract is agreed. This article explores the merits of each and explores broadly when should they be used?

Obviously an article like this can only give broad guidelines so if you are in anyway unsure you should of course seek appropriate advice from Tiffany Kemp who's thinking influenced me in writing this article or from your normal advisor.

Fixed price and Time and materials contracts

When is each appropriate?

Fixed Price Contract

A fixed-price contract is defined as a contract where the payment is set, and not dependent on the time taken or amount of materials used. Of the two contract types outlined here, this is the simpler because the price does not need to be worked out on a running basis. It is set from the out, leaving both parties clear of the financial transactions involved.

The advantages of a fixed-price contract include:

Time and Materials Contract

By contrast, a T&M (Time and Materials) contract refers to an agreement in which a contractor (or subcontractor) is paid on a rolling basis in accordance with time and resources expended. If the project takes longer than expected to complete, payment increases. Similarly, the volume and quality of materials used will influence the final price.

The advantages of a T&M contract include:

Why the right contract matters

A contract is of critical importance when entering into a business relationship. Whether you are agreeing to long-term employment, or merely offering/accepting contracted work, a contract is the rock to which you will cling should anything go wrong. 

In an ideal business interaction, agreed work will be completed on time, to quality standards, according to the outlined spec. Correct payment will be received by the employee and both parties walk away happy.

But in business, as in life, any number of things can and do go wrong. Sometimes this is through manual error. Other times they cannot be helped. Mistakes happen. Accidents occur. Take the time to stop and consider what could potentially go wrong before deciding on which kind of contract to use.