How Contracts Help Your Business

Q: I own my own small business. Should I have my own standard “form” contracts?

A: Yes. A standard or form contract is a valuable tool for a small business owner. Having a standard contract with customers or clients prevents misunderstandings and protects the business owner.

With the magic of computers, a business can even make its “fill in the blank” contract look customized and special for each customer. This can be helpful in marketing. Some business owners don’t label it as a “contract,” if that word would be intimidating to customers. Some business owners put the contract provisions in a brochure or flyer format that also describes and promotes their business, to combine marketing and contract efforts. Companies who use estimates can add terms and conditions, with a special section for the customer to sign so as to turn the estimate into a contract if the customer wants to go ahead with the work.

One important way a contract helps the business person is to describe what work is to be done for the customer, what the payment arrangements are, and when payment is expected. This avoids later misunderstandings.Contracts also protect you if a customer does not pay.

You should make sure your contract includes two important things:

  1. Be sure it reads that interest at a certain percentage accrues on unpaid balances after 30 days. Having an interest provision (usually 18% per year or less) will allow you to collect a higher rate of interest than the judgment rate (currently 8% per year) between the time the balance is due and the time any judgment is entered in court. Once a judgment is entered, you will be limited to the judgment rate of interest from then on.
  2. Be sure the contract reads that the customer will be responsible for attorney’s fees if you must take legal action to collect unpaid balances. If you do not have a written attorney’s fee provision, you cannot recover your attorney’s fees if you have to sue for collection. You may only need an attorney’s fee provision once every few years, but the time that you do, you will be glad you took the time to put it into your contracts. Otherwise, what you pay an attorney to collect the account comes out of what is already owed to you.

If you are making a warranty on your work, your customers will appreciate your including it in the contract. Because you will be bound by that warranty, think carefully about whether you want to make a warranty and what it is before you put it in your contract.

Depending on your type of business, your contract may need more specialized provisions. These might include indemnification (where another party agrees to reimburse you for any claims against you) or ownership of intellectual property rights (like who owns the computer code from the programming work you do for your client). A lawyer can help you decide if you need specialized provisions. A form contract designed for your business needs is a one-time effort that will benefit you with every customer you serve.

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