Contract Checklist: a guide to the basics of preparing a good business to business contract

There are lots of resources out there written by lawyers, aimed at lawyers. This checklist is focused on the pragmatics of running a small business.

Basic Principles

What is a contract?

A contract is just an agreement but to avoid ambiguity you need clear evidence of that agreement.
Clarity on commercial terms is usually more important than technical legal clauses.

Risk factors

This checklist contains generic advice but you should always take the time to consider the particular risks of the deal you are about to agree.

Here are a few questions to help:

  • Are you doing something for the first time?
  • Are you working with someone for the first time?
  • Are there external factors that could affect your ability to deliver?

The Biggies: scope and price

The really important questions are what is being bought and what is being paid.

Deliverables

Is it clear whether the deliverables are measured in time (e.g. # of days), outputs (e.g. a report) or a hybrid of time and outputs? Are the deliverables defined clearly (i.e. are the number of days stated, are the outputs described fully and clearly)?

Price

Is the project price clearly set out? Is the price clearly linked to deliverables so that changes in scope can lead to an easy recalculation if necessary?

Payment terms

How long will it be between the date or the invoice and receipt of the cash?

Payment milestones

Payment milestones are a powerful project management tool and crucial for cash-flow management.

  • Always fight back against a ‘full payment on completion’ model.
  • Always ask for an initial deposit. This concentrates the mind of your client on the terms of the contract and quickly flags up issues with credit worthiness or slow payment.
  • Aim for phased payment over the duration of the contract.
  • If all deliverables fall at the end of the project then either introduce a ‘draft’ deliverable or take a larger deposit.

Extras

Try to anticipate the areas in which the scope of the project is most likely to creep. ‘Out of scope’ sections can come across as overly defensive. Instead, refer to ‘optional extras’, which seems proactive. Ideally include a costing mechanism.

The important details

Contracting parties

Is it clear who the parties are? Are the contractors acting as individuals or through a company? Is the recipient of the services a limited company? Is the recipient of the services in good standing and credit worthy?

Expenses

Who pays for planes, trains, taxis, food, etc? How are expenses approved?

Completion

Who determines when the project has been completed? If completion rests on a subjective judgement how will this process be managed?

Subcontracting

Are you allowed to draft in other people to help you deliver the contract?

Duration

How long is the contract set to run for? Is delivery within a particular period a term of the contract?

Early termination

Occasionally one of the parties will have a reason to try to end the contract prematurely. Is this provided for?

The legal bits

These clauses are not essential. Don’t worry if they are absent from someone else’s document, but they should be part of your standard template.

Liability

Who is liable if something goes wrong? A good starting point is to limit your liability to the contract price.

Law

The question of ‘which law applies’ is particularly relevant to international transactions. English law is accepted as a solid basis for international trade.

Tax

It is often prudent to add a catch-all tax clause, in case confusion creeps in over whether the price includes or excludes applicable taxes. It is most common to clarify that, unless stated, prices exclude VAT.