12 types of contracts in business: Learn which is right for you

Whether you’re in Sales or part of a legal team, contracts form the foundation of business. Handling relationships between parties requires a document that gives them terms, legal protection, and understanding. Your organization uses contracts every day to give employees structure and secure suppliers.

While contracts reduce risks, you need the right one for the job. Contract types affect the agreements you’re making, and choosing the wrong one could leave your company at a disadvantage. There are several contract types in the business world that help parties build an agreed-upon contract framework. Legal professionals, contract managers, and business leaders must understand these types of contracts in business to stay compliant and successful.

1. Bilateral contracts

Bilateral contracts are one of the most common types of business contracts. Each party agrees to fulfill specific terms, creating an agreement that goes both ways. Supplier agreements are usually bilateral contracts — one party provides the goods, and the other pays upon delivery. Other examples of bilateral contract agreements include employment contracts, leases, and sales agreements.

Procurement managers often use bilateral contracts. These agreements clearly define timelines, roles, definitions, and responsibilities. Since they need to source and manage goods, they rely on clear bilateral contracts to ensure deliveries and establish budgets. While bilateral agreements are excellent for accountability, they need precise language to work. Gray areas and poor negotiation can leave companies with mismatched expectations.

2. Unilateral contracts

In unilateral contracts, one party agrees to deliver something in exchange for a specific action from another party. A unilateral contract example might be a business warranty promising a replacement for customers. If their product experiences issues within a set time frame, they get a replacement.

Unilateral contracts do have some challenges for compliance and legal teams. You must be able to enforce terms and prove performance to make these agreements work. Because of this, unilateral contracts are more common in sales promotions or performance-based rewards. They need clear, enforceable terms to prevent confusion.

3. Fixed-price contracts

A fixed-price contract sets an amount that one party will pay for a service or project. These contracts do not take time or resources into account. If the party providing the services spends more than the fixed price on the project, they’re out of luck. Fixed-price contracts are great for projects with a clear scope and deliverables. Each party gets a predictable result from the agreement.

Procurement managers often use fixed-price contracts to control budgets and facilitate financial planning. However, you must thoroughly assess project risks and scopes. Otherwise, vendors might be left with unexpected costs, increasing their risk. Fixed-price contracts help keep costs within expectations while holding contractors to agreed-upon timelines and materials.

4. Time and materials contracts

On the opposite end of different types of company contracts are time and materials contracts. These contracts are based on the actual time and resources spent on a project. They’re more flexible than fixed-price agreements since they rely on the final result. Choose time and materials contracts for evolving projects, like software development or consulting services.

Legal professionals will often include detailed billing terms in these contracts. Specific terms prevent later disputes for both parties during the billing period. Compliance officers will use these contracts to support their cost and hours tracking, ensuring everything is above board. Time and materials contracts are also great choices for business executives. They allow you to adapt to changing project needs as long as you keep an eye on budget overruns.

5. Cost-plus contracts

Cost-plus contracts pay contractors for project costs plus a profit fee or percentage. They’re a good choice for projects with high risk or uncertainty. Exact costs are not always easy to predict upfront, so contractors might need extra assurance to agree to the job.

Risk managers also appreciate cost-plus contracts. They can reduce financial risks, ensuring contractors are compensated for actual expenses. Contract managers should always include safeguards like cost ceilings and transparency. These terms prevent overcharging and keep everyone accountable. Government defense projects commonly use cost-plus contracts since research and development can lead to unexpected costs.

6. Unit pricing contracts

Unit pricing contracts set costs based on a unit of work, service, or materials. They’re popular in manufacturing or construction since the total cost of a project often depends on changing quantities. Getting a set unit price makes budgeting predictable while allowing flexibility for different unit amounts.

These contracts are ideal for projects that are unpredictable and need to reduce waste. Unit pricing contracts let you customize the unit to your project needs. Instead of paying a fixed price for a set quantity, businesses can pay for what they need, avoiding overspending.

7. Service-Level Agreements

Service-Level Agreements (SLAs) define the service delivered to a client. They outline what services are provided, the standards services meet and what happens if the provider fails to meet those standards. SLAs might include performance metrics, agreed roles, monitoring, and penalties. They’re common in logistics, technology, and telecommunications.

Industries that must enforce performance and accountability depend on SLAs to keep everyone performing as expected. SLAs provide excellent accountability and risk mitigation for clients. If providers fail to meet the terms, they must follow the SLA penalties or risk further issues. With clear expectations from SLAs, service providers can have more trusting, reliable relationships.

8. Express contracts

Express contracts focus on precision. All terms are explicitly documented, leaving minimal room for interpretation. Use express contracts for legal purposes, ensuring everyone knows what to expect from the agreement. Compliance officers often use express contracts to keep everyone on the same page. Other operations might use them to set payment schedules and delivery terms. Express contracts take much longer to draft and review since every line must meet expectations and avoid ambiguity.

9. Simple contracts

Simple contracts are much more relaxed than express contracts. These agreements are informal, relying on mutual consent to work. Small businesses might use them to set expectations without the expense of legal drafting. One party offers something, and the other party agrees to the terms.

While simple contracts are more informal, they still need written documentation. Having a written contract protects all parties from disputes. These contracts are still legally enforceable, so everyone must come to an agreement and honor it.

10. Implied contracts

Implied contracts are more challenging than written agreements. They’re contracts that are inferred from each party’s actions. For example, if you order food at a restaurant, you’re expected to pay for it. You didn’t sign a contract, but you’re still legally responsible for paying for the food you ordered in most cases.

Implied contracts can be difficult since they operate without written agreement. Businesses should try to document informal arrangements like contract work to avoid issues.

11. Nondisclosure agreements

Nondisclosure agreements (NDAs) protect sensitive information. They’re common in business relationships and even with celebrities. By signing an NDA, parties agree to keep sensitive information confidential. One party might get a financial benefit for maintaining confidentiality for a set amount of time. Other NDAs protect trade secrets or confidential information. These contracts protect organizations’ proprietary data from getting out.

While NDAs protect confidential information, they’re not always enforceable. If the NDA involves keeping quiet about illegal activity, it’s often not binding. NDAs should expire within a set time and avoid limiting what parties can say if the NDA is about lawful actions.

12. Unconscionable contracts

As the name implies, unconscionable contracts are poor deals. They might be unfairly one-sided, preventing one party from getting better terms. These contracts are often unenforceable in court, especially if they exploit one of the parties. When legal or business professionals draft contracts, they should make sure the agreements are fair. Contracts with hidden fees or clauses might lead to fines or reputational damage for the offending party.

How to choose the right contract

With so many contracts to juggle, how do you find the best one for your needs? The right contract affects your risks, business goals, and partnerships. Consider your project and compliance needs to ensure you get a contract that aligns with them. Look at examples of contracts and consult with your legal and risk professionals to craft the best agreement for all parties.

1. Understand the project scope

Project scope and factors affect contract choice. Is your project straightforward? Are there unpredictable variables? If you have clear deliverables and minimal variability, go with fixed-price contracts. If you need more flexibility, time and materials contracts might work better. By understanding your project’s scope, you can narrow your contract options. Once you have several options that fit your flexibility and structure, you can find the best choice for the job.

2. Assess risks

You must consider risk tolerance when drafting a contract. Different contracts distribute risk between parties. What risk can you handle? Are you looking for minimal risk, or can you afford to take on more? Contracts will require parties to take on risk based on their type, such as:

• Unilateral contracts: These agreements often have minimal obligations for one party. A customer getting a product warranty only has to buy the product to get a warranty in return. Meanwhile, the business must cover the cost of any eligible products.
• Bilateral contracts: Bilateral agreements share risks and rewards more equally. Each party must deliver as agreed.
• Cost-plus contracts: These contracts shift most of the risk to the buyer. High-risk projects usually mean unpredictable costs, increasing the buyer’s risk.

3. Check compliance

Contracts are legally binding, so they must comply with all relevant regulations. The stricter your industry’s regulations, the more specific your contracts should be. Industries like biotech and pharmaceuticals require solutions that support compliance. Express contracts with clear terms facilitate this goal. The clearer and more detailed the terms, the more compliant you’ll be.

4. Consider collaboration

How close are the parties? Does your company have a long partnership history with the other party? The more you’ve collaborated with a party, the more you can trust them based on previous work. You can use implied contracts if you have prior agreements and a long-standing relationship with a party. It’s usually best to choose express contracts for first-time deals. These clear up any gray areas and provide the transparency needed to build trust.

5. Think long-term

Contracts need to accommodate your long-term plans. Any future growth or changes might affect the benefits the contract provides. Cost-plus and time-and-materials contracts are more flexible. You can adapt pricing and units to your needs, reducing waste. If you’re locked into a fixed-price contract, you’ll have to negotiate new contracts with each change.

Managing contracts effectively

Once you have your contracts, you need to manage them effectively. Businesses rely on contracts to reduce risk and improve compliance. But juggling different contracts can be challenging. Organizations can use Contract Lifecycle Management (CLM) platforms to improve contract efficiency and performance. The right CLM platform can make your contract management seamless, providing benefits like:

• Simplified workflows: CLM software offers no-code configurations tailored to your workflows. The platform adapts, making it easier to manage different contracts. Legal and procurement teams can operate without constant IT reliance, boosting efficiency.
• Improved collaboration: Contract management often involves dealing with poor communication. CLM software integrates with your existing systems, making collaboration easier. Teams can collaborate using their preferred tools while working with the platform. You’ll see fewer misunderstandings with everyone working together.
• Better insights: Digging through contracts to get valuable data is time-consuming. CLM platforms offer search capabilities, detailed reports, and customizable dashboards. Contract managers can easily see contract terms, compliance, and performance, letting them make better decisions.
• Increased compliance: Risk and compliance professionals can easily track compliance with CLM software. Use tools like expiration monitoring and performance tracking to reduce noncompliance issues. CLM platforms can even ensure all contracts align with company policies and external regulations.
• Long-term scalability: Robust CLM platforms are built to scale to meet your needs. Regular updates make sure you’re always working with the latest innovations. Having a solution that grows with your business and industry makes contract management easy, even when contracts get more complex.

Make contract management simple

Your contracts are more than just documents. They’re the foundation of your business relationships and a key to driving growth. Agiloft’s CLM platform helps you manage contracts seamlessly. With user-friendly, no-code configuration, teams can easily customize workflows. You can make sure every contract aligns with your organization’s unique needs.

Gain real-time visibility into contract data while making collaboration simple. Our platform offers powerful reporting tools that help you gain better insights. Plus, we release updates regularly, so you’re always getting the latest features and security. As a globally trusted solution with near-perfect implementation satisfaction, we can help you solve your contract challenges.

Contact Agiloft today for a demo, and see how our award-winning platform can simplify your processes and reduce risk.