The Most Common Types of Business Contracts

A contract is an agreement between two entities or individuals, which serves as legal protection for both parties involved in a potential business deal. 4 min read

A contract is an agreement between two entities or individuals, which serves as legal protection for both parties involved in a potential business deal. There are different types of contracts, and each determines the rights and duties of both sides. A specific type of contract regulates the risks and expenses for the contractor.

Two different kinds of groups of contracts are fixed price contracts and cost-reimbursement contracts. Different types of contracts, which are contained within each of these two types of groups, may be used separately or in combination with one another. Consider hiring a lawyer to review your contract.

Types of contracts
  • Fixed-price contract. …
  • Cost-reimbursement contract. …
  • Cost-plus contract. …
  • Time and materials contract. …
  • Unit price contract. …
  • Bilateral contract. …
  • Unilateral contract. …
  • Implied contract.

Types of Contracts • Different Contracts Explained

Important elements of a contract

The elements of a contract will vary, depending on the type of contract and the purpose it serves. Additionally, a contract may be verbal, written or implied. However, contracts will often include the following parts:

Why are contracts important in the workplace?

Contracts are an important resource often used in the workplace. A contract is an agreement between two individuals or vendors, often used to formalize a verbal agreement. Project managers will often be responsible for the facilitation and review of contracts. Contracts are important in the workplace for the following reasons:

Most common types of business contracts

Here are a few of the most common types of business contracts:

Cost-plus contract

A cost-plus contract is a detailed list of costs, often used in the construction industry. This contract lists the actual cost of materials and labor, as well as other unexpected costs that may occur. Essentially, the company covers the cost of the build, and then later, they are reimbursed by the customer once they know the full cost. For this reason, this type of contract is sometimes referred to as a cost-reimbursement contract.

There may also be additional versions of the cost-plus contract. A cost plus fixed fee refers to the type of contract agreement in which a portion of the expected costs is paid upfront. Then, the rest is paid after the completion of the project. A cost-plus award fee is used when a supplier receives reimbursement for the cost, as well as a pre-set award fee on top if they meet performance requirements.

Fixed price contract

A fixed-price contract is also used in the construction industry and is used to list a fixed price. This means that the customer will be charged a set rate and that rate will not be affected by the cost of materials or labor. It is the opposite of a cost-plus contract. In this type of contract, the buyer carries less risk.

With this type of contract, the seller receives their fixed price for completing the service, but they may also receive an additional amount, based on performance. A fixed price award fee refers to a fixed amount, or bonus, that the supplier may earn if they meet certain pre-set expectations.

Time and material contract

Time and material contracts may also be used when the number of resources and labor hours is not yet known. This type of contract can be riskier to the customer because they dont know what they owe until the project is complete. For this reason, some companies may limit risk by establishing a certain cost or limiting the number of hours before the company must reach out to the customer for further approval.

Unit pricing contract

A unit pricing contract works based on the cost of a unit. A unit could mean a set cost per hour worked or item supplied. Unit pricing contract is often referred to as an hourly rate contract. When using this type of contract agreement, work is often divided into various phases to provide a more accurate unit rate in each industry.

General employment contract

A general employment contract is a common type of contract used when hiring new employees. It is an agreement signed by the company and the employee. It includes the employees salary or hourly rate, schedule, type of employment, duties, benefits and any specific terms of the employment, like confidentiality of company information.

A nondisclosure agreement (NDA) sometimes included with a general employment contract and is used to protect confidential company information. It is used when an employee, or contractor, will have access to a businesss confidential or proprietary information. A project manager may require an employee or contractor to sign an NDA if they will be working with customers personal information.

Contractor agreement

A contractor agreement is used when a business works with contractors or freelancers versus full-time employees. A contract agreement is signed by the company and the contractor. It should include a description of the project, project timeline, payment rate and terms, potential penalties, expected expenses, requirements of the contractor and any special notes related to the project or employment agreement.

Implied contract

An implied contract is a contractual agreement that is assumed and expected to be carried out. Implied contracts can be “implied in fact,” which means both parties created an agreement of obligation and expectation based on the situation, even if it is not in writing. An implied contract can also be implied in law, which means a duty of contract is expected, even if you do not intend to enter into a contract. Instead, the contract is created based on the contractual behaviors of both parties. An example of an implied contract includes any agreement in which an intention is made, such as a person who enters a restaurant and sits down at the table. It is implied that the business will then serve them food, and they will pay for it.

Express contract

An express contract is a dual-exchange of an obligation or promise with another party, either orally or written. The responsibilities of each party are clearly defined and listed in an express contract. It is common to use express contracts when a company orders a large number of products or labor hours from a contractor or supplier. An express contract can be formed both written or verbally. An agreement to lease equipment or business space is a type of express contract.

Simple contract

A simple contract refers to any type of contract between two parties that is verbal or written. It is important to note that a simple contract does not need a witness, signature or an official seal to be official. They do require consideration, but an implied contract will also qualify as a simple contract.

Bilateral contract

A bilateral contract is a contract that includes two parties who agree to certain terms. This type of contract is common, especially in the workplace. A supplier may agree to manufacturer a certain number of products and in return, the customer will agree to pay the price. A bilateral contract may also include a contractor who agrees to complete electrical work for a company building a house, in return for money.

Unilateral contract

A unilateral contract is the opposite of a bilateral contract, in that it is one-sided. One person, or company, promises to complete an act or service, for the other party. In this type of contract, the other person cannot be sued, because they were not expected to complete any requirements, based on the contract.

For example, a business offers a consultant a fee to complete a project, and if they do, they receive the fee. If they dont complete it, they have no legal obligations. However, most companies enter into a bilateral agreement by accepting the contract terms.

Unconscionable contract

An unconscionable contract refers to a contract that is not fair. This could be due to one person benefiting more than the other in the contract agreement. If a contract is clearly one-sided, failing to offer one party any benefit, it may be deemed unconscionable.

FAQ

What are the 5 basic types of contracts?

Learn below about the four most common types of construction contracts.
  • Lump Sum Contract. A lump sum contract sets one determined price for all work done for the project. …
  • Unit Price Contract. …
  • Cost Plus Contract. …
  • Time and Materials Contract.

What are 3 types of contracts?

Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.

What are the 2 types of contracts?

The three most common contract types include:
  • Fixed-price contracts.
  • Cost-plus contracts.
  • Time and materials contracts.

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