If you’re used to having an informal agreement with your clients based on a conversation or a handshake, using a written contract may feel overly formal and stuffy. After all, the part of your work you really love is building relationships, creating/designing, and finding innovative solutions to problems. Making clients sign a written agreement before performing services probably isn’t the first thing that comes to mind when you think about the vision you have for your business. However, contracts can be an incredibly powerful and useful tool when used correctly in your business.
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1. Vendors and Clients Take You More Seriously
The reality is that when you’re first starting out or taking on smaller projects for your very first clients, you might be able to operate without a contract or with a very basic contract you found on the Internet. However, as your business starts to grow and you begin scaling up and working with bigger clients on bigger projects, having a written agreement in place will become increasingly important for several reasons: i) you’re doing more complex work that involves more moving parts and various deadlines; ii) client relationships may take place over longer periods of time; iii) there’s more money at stake and thus more risk involved; and iv) you’re now working with more sophisticated clients and businesses that expect written contracts.
The reality is that when you’re first starting out or taking on smaller projects for your very first clients, you might be able to operate without a contract or with a very basic contract you found on the Internet. However, as your business starts to grow and you begin scaling up and working with bigger clients on bigger projects, having a written agreement in place will become increasingly important for several reasons: i) you’re doing more complex work that involves more moving parts and various deadlines; ii) client relationships may take place over longer periods of time; iii) there’s more money at stake and thus more risk involved; and iv) you’re now working with more sophisticated clients and businesses that expect written contracts.
2. Clearly Spell Out Terms for the Most Important Provisions
Certain sections of a contract are more important than others. These typically include sections discussing: i) when and how payments will be made; ii) a detailed description of what services are included (and which are specifically excluded); iii) how and when those services will be provided; iv) when the relationship or services will conclude; and v) what will happen if either party breaches the contract.
These provisions help protect both you and your clients by making sure you both are getting the deal you thought you were. It also helps provide a guide that can be referenced when questions come up about whether certain work is included, when various milestones are reached that trigger additional payments, and a host of other details.
3. Set Expectations and Get Everyone on the Same Page
If you’ve been in the consulting/freelance/entrepreneur game for any length of time, you’ve probably encountered a situation where a client has asked you to do a little extra work that wasn’t really included in the price for services you originally quoted. The situation typically plays out like this: Client calls or emails and asks you if you can change/modify/create “_____”. Because you care about doing good work and providing the highest level of customer service (not to mention getting glowing Google reviews and referrals), you agree, figuring it won’t be too much extra work. Fast forward to Client sending a few more emails, calling a few more times, and suddenly you’re spending hours of your time working for no additional pay because you went down this rabbit hole. You might even end up pushing back other paying clients to deal with all the little “extras” that keep popping up.
As creatives and small business owners (especially those selling services) typically it is our time, experience, and expertise that are our most valuable resources. This scenario plays out more often than we care to admit because we’re afraid of losing the client, afraid they’ll look elsewhere if we include the full price for the additional services they’re requesting.
You deserve to get paid for your work. Clearly defining what is expected of you, what is expected of the client, what services are included, and which are specifically NOT included, will help get everyone on the same page and start to create a virtuous cycle in your business that looks more like this:It all starts with setting boundaries, controlling your time, and having the systems and documents in place to help you take charge of your business.
4. Have Solutions in Place in Case Something Goes Wrong
When most people think of the benefits of having a contract, a common first thought is being able to bring a lawsuit if things go sideways and the other party doesn’t pay you or doesn’t hold up their end of the bargain. While I counsel my clients that litigation should almost always be a last resort, there are times when it may be necessary to enforce your rights in court.
If you ever do find yourself in a legal proceeding, it will certainly make your life easier if you can produce a signed agreement that clearly lays out what the rights and responsibilities are of each party involved. A well-drafted agreement will also spell out how and where a lawsuit can be brought. If you live in Florida and are working with a client in New York, it will be much more costly and time consuming if you’re forced to sue the client in a court in New York when you could’ve specified in the contract that all disputes must be filed in Florida and will be governed by Florida laws.5. Encourage Clients to Not Break the Contract
While it’s nice to know that you’d have strong legal arguments if forced to file a lawsuit, sometimes having a contract in place can prevent problems from happening in the first place. If you’re working with only a verbal agreement, a client may decide halfway through your project that they actually want to go in a different direction, have different priorities, or want to spend their money on something else. Without a written contract, the client may be less inclined to pay on time (or at all), especially if they owe money to other people that do have written agreements in place. Knowing that there is a written record of the deal and payment terms with their signature on it can be the little push that prevents them from going back on their word.
6. Identify Sticking Points and Weed Out Problem Clients
One of the beautiful things about using a contract with your clients is that it can act as a diagnostic tool that helps identify areas of confusion and problem clients. When going through the ‘scope of work’ provisions with a potential client, you have a chance to clarify any misconceptions about the services that are included. If the potential client asks about services that fall outside of the contract, this is the perfect opportunity to inform them that you’re capable of doing the additional work and what the price would be for those services.
On the other hand, you may have a client that asks for your least expensive service, but really wants more than that and assumes that you’ll throw in some extra work once you’ve already invested so much time in the project. If this potential client complains about certain sections of your contract, puts up a fight, or refuses to sign it, these are all red flags that indicate you might want to pass on that person as a client. As much as you might want the extra income, spending a majority of your time dealing with a bad client is never worth it in the long run.
7. Identify and Protect Intellectual Property
As a creative business owner, trademark and copyright issues are likely to intersect with your work and your business frequently. For many small business owners, their intellectual property, including their brand identity and consumer recognition, is the most valuable part of their business.
In the U.S. and around the world there are specialized rules governing who owns the rights in various forms of intellectual property and often times those rules are not common sense. If you are in the business of creating or designing new works or materials for your clients, if you’re licensing software or the right to sell under your brand, or exchanging confidential trade secret information with another party, it’s important to clearly spell out who will own the rights and what information can or cannot be disclosed to other parties.8. Make Your Intake Process More Efficient and Professional
Having a contract that you use for each client gives you a consistent outline for working through the important parts of a new project or relationship. Instead of exchanging several emails or going back and forth collecting all the small details you forgot about during the first conversation, the contract can be used to create a checklist that you walk a new client through during your first conversation.
This can help provide a more comprehensive and productive initial discussion and also save both parties time by avoiding lengthy email chains and playing phone tag. You’ll thank me when you’re no longer hunting through a 12-email thread searching for some vital piece of information you need to move forward with your work.9. Clarify the Most Important or Valuable Aspects of Your Business
Working through the process of creating your contract will force you to think through all of the different aspects involved when a client hires you to perform services. As you work through the different portions, you may identify areas where you’re spending a significant amount of time but not charging enough for. It can also help you think through best case and worst-case scenarios and how those situations would (or should) be addressed under the terms of the contract. It may also shed some light on how best to communicate with clients and how you’ll deal with invoicing and collecting payments.
10. Help Establish Independent Contractor Status
There are significant tax and legal implications when it comes to classifying someone as an employee or an independent contract. There can also be significant penalties for businesses that pay workers as independent contractors when they are actually being treated as employees.
There is no simple rule or test to decide whether who is an employee vs. contractor. The IRS looks at several factors that generally revolve around how much control the employee has over where, when, and how the work is performed.
A contract stating that you are an independent contractor, on its own, will not automatically make that true. But, it can be very helpful for explaining the nature of the working relationship and will be a factor that the IRS considers if a question should come up in the future.
11. Build Trust
While having a written contract can boost your professional image, it also starts the client relationship out on the right foot by building trust. Think of it from your clients’ perspective: if you were spending hundreds or thousands of dollars for services, wouldn’t you feel better seeing in writing exactly what you’re paying, what you’re getting, when you’ll get it, and how all the other little details will be handled?