Why Are Contracts Important in Business?

In the business world, it is said that opportunities do not just happen — you create them. This is especially true when it comes to contracts. Contracts are a way of crafting an opportunity for your business in the most specific terms possible. Of all the advantages of a contract, it gives you clarity and structure as to how to operate and navigate a business relationship.

So, you may be asking yourself, "What are contracts and why do I need them?" There are many reasons for a contract.

Who is responsible for what? Contracts use language to be clear on what the responsibilities are of each party involved in a deal. Most likely, one party provides a service or a product in exchange for payment. There can also be clauses and sections determining when and how parties can terminate the relationship or change it in specific ways, such as restructuring payment schedules and so forth.

Additionally, sections can determine what parties are not responsible for. For instance, a marketing consultant may choose to add in an indemnity clause stating that they are not responsible for any false claims that the company makes, and therefore cannot be implicated in any legal action that outside parties may take against the contracting client.

Contracts bind parties to their stated responsibilities. In the event that one party does not honor a part of their agreement, they are in breach of the contract, which can be grounds for legal action. Also, contracts usually include terms that state that if one part of the agreement is breached or nullified, all other sections of the contract remain intact (unless otherwise stated).

Schedules and deadlines for the completion of specific projects are important elements of a contract. Accordingly, contracts can also establish a payment schedule mandating by what date payment for completion is to be rendered and setting exact requirements for what constitutes a completed project. These two pieces guarantee that work is being paid for on time and that said work meets the agreed-upon standards.

In providing clear terms of a timeline, parties add another layer of certainty to hold one another accountable. Parties may establish fees for late payment, and may also ask for additional payment if the client changes their mind on the scope or specifications of the service or product to be provided.

Of all the reasons for a contract, the most important for many people is that it is an agreement that payment will be rendered for a product or service. Payment can be determined in a fee-for-service structure where a product or service is exchanged for a flat fee. Hourly rates or salaries can determine an ongoing fee structure whereby a party is paid at specific iterations such as biweekly, monthly or upon the completion of specific projects.

Bonuses and commissions may be discussed as incentive for providing additional work, or work that yields especially positive results. A kill fee is a payment for the early termination of a service, and constitutes a percentage of the total cost of the service or a flat fee. Licensing fees may be involved where an artist, writer, inventor or other creator exchanges work containing intellectual property for additional payment. Any and all of these fees or fee structures can be built in to a contract.

Ultimately, a contract is an insurance policy that helps to protect both parties. In the event that any part of a contract is breached, whether intentionally or unintentionally, either or both parties involved can take steps to solve the disparity and come up with a solution. In some cases, this may mean that one party takes legal actions against another to settle a dispute. Most contracts contain a governing law section that maintains that the contract is subject to the state law in which it was negotiated and signed, acknowledging that the law has final say over the contract's viability.