Contracts 101 - The OverviewThis is our first in a series on contracts. We’ve only got the first and the last ones written so far, so it may be a short series. But we’re shooting for at least 4 entries on this one.

Over the years, I’ve used every kind of contract there is. The way you set up your pricing will determine the kind of contract you use. For those of you just starting out, you may not have decided on how to price your services just yet. If that’s the case, you still need a contract, even if it’s just a placeholder until you define your pricing and services more concretely.

Contracts can be long, beastly documents. And there’s no quick and dirty solution that’s going to keep you and your business dry in a bad weather situation. The most common contracts are:

  • Milestone or Deliverables-based contracts
  • Time and Materials Contracts
  • Retainer Contracts
  • Rules of Work contracts

Milestone or Deliverables-based Contract

In a milestones contract, you tie payment to the completion of a specific deliverable. You can negotiate your pricing to be based on a flat project fee or a fee per deliverable. Setting clear milestones, like performance measures or outcomes, is another way you can set up a deliverables-based contract. The challenge is in establishing measurables that are meaningful and results you can actually achieve.

Time and Materials Contract

The opposite of a deliverables-based contract is one based on time and materials (T&M). The client agrees to pay you based on the work you do based on your hourly rate and the cost of any expenses, such as sub-contractors or pre-built software. The biggest advantage is that you never have to worry about you and your team being under-paid for a project. The challenge is finding clients who are willing to pay on time and materials. Many clients are wary of hourly rates because isn’t a ceiling on how much a project will cost. I believe, however, that so long as you are open and transparent with the client about costs then a T&M contract will be to both parties’ benefit. With time and materials contracts, you may still encounter scope creep, but clients are less likely to let it go on if they are paying for every new feature or change..

Of course, you can saddle the fence and set up a T&M contract that has incentives linked to milestones.

Retainer Contract

In a retainer contract, the client agrees to pay you in advance for a certain number of hours of work during the billing cycle. It’s great for you because you get recurring revenue on an ongoing basis. It’s great for the client because they can bank on you putting in hours for them. Gregory Cicotti in Bidsketch says the biggest advantage of working on a retainer contract is that it gives “stability that is often lacking in many freelance careers.”

Business writer Thursday Bram advises freelancers to include these important items in any retainer contract:

  • The amount you’re to receive each month
  • The date you’re to be payed by
  • Any invoicing procedures you’re expected to follow
  • Exactly how much work and what type of work you expect to do
  • When your client needs to let you know about the month’s work by
  • What notification you need before the retainer relationship can be ended
  • Anything else that is relevant for ensuring that work is completed in a timely fashion

Rules of Work Contract

After cycling through the other contracts over the years, rules of work has been the stickiest for us. The “rules of work” are simply your terms of service that the client agrees to, and you don’t need to include deliverables. The advantage is that you don’t have to create a new contract for each new job, no matter what it is. The one disadvantage of a rules of work contract is simply how big it is. It can be a challenge to get a client to sign a 20-page Rules of Work agreement, plus send them 15-20 pages of project scope. The thing that makes this easy is that you can send your rules of work contract with no deliverables and tell the client “these are the rules by which we work, no deliverables here” and they are more likely to sign your contract.

Budget Projections

The budget projection is a document we usually send off at the same time we request contract agreement. It’s like a project proposal, but less in depth and more informal. Our budget projections include, a project staff list, an executive summary, and an estimate. We have separate budget projection templates for small, medium and large projects.

For projects that involve larger institutions or more bureaucratic entities (government, boards, committees, etc.), we would use a formal proposal and skip the budget projection.

There’s a lot more to be said on contracts, and we’re only just getting started. I hope you’ll return for the next post in the “Contract Negotiation” series where I’ll share actual examples of contracts my business has used for clients.

Which contract are you more likely to use for your business?