Death by Contract — Or Lack Thereof

Being nice is great for family and friends. However, in business it can be a killer.

A mistake so many business owners make is thinking they don’t need contracts with clients, subcontractors, and employees. They don’t want to be seen as untrusting. In a perfect world that would work. In a perfect world a handshake would seal a deal. All parties would understand the expectations and never vary, never take advantage.

Guess what? The way you create that perfect world is to have standard contracts in place that everyone signs and commits to. Contracts prevent the possibility of harm. It isn’t that you assume everyone is out to hurt you. It’s that the most successful businesses have systems in place to safeguard against any possibility of harm. It prevents the conversation down the road.

Everyday I watch companies fail to initiate a contract with their clients only to find out there is a significant difference in the understanding of the scope of work. Your relationship with your client is of the utmost importance. You want to be sure there is a clear understanding of what you are going to do for them, what the cost is, and how you expect to receive payment. This clarity eliminates any misunderstandings.

Example:

A web developer meets with a prospective client to determine the need. He takes lots of notes, goes away, and creates a proposal. He goes back to the prospect to deliver the proposal. The proposal gives an overview of client needs, as well as an overview of the proposed site. This includes number of web pages, an idea of some graphics to be used. At the end of the proposal is the total cost. The prospect reads it and agrees to proceed.

However, the web developer doesn’t then have the new client sign a contract. A contract that would have stated the payment cycle as well as the production schedule. And the proposal was an overview – not a detailed discussion of what the site would be and do.

When the website is complete the developer invoices the client. However, the client is unhappy and states that he didn’t get what he thought he was going to get. Because they didn’t hammer out the details and sign a contract that included those details, the developer left himself open to the client’s conclusion — conclusions that did not track with what the developer believed the client wanted.

Consider your own business. Do you have contracts for your clients? Do you spell out the scope of work along with the payment schedule?

If you have employees or subcontractors who work very closely with your clients, you may even want to have a clause preventing clients from taking your employee or subcontractor away from you.

Example:

An IT firm specializes in providing on-call IT specialists to small and medium size companies. They match the specialist with the client so the relationship builds over time. The client likes it because they have the same person dealing with their system. The IT firm has a contract that details the work to be performed, the payments and the payment cycle. Unfortunately, there is nothing that protects them from a client taking their employees.

One day the IT specialist turns in his resignation and goes to work directly for the client. The IT firm has now lost not only a skilled staff member, but a client as well.

This same scenario applies to using subcontractors. And make no mistake. Having excellent people is a double edged sword. Because they do such a great job for your clients they are attractive to those same clients.

Your responsibility to you, your company, and your staff is to have a contract clause that prevents the client from taking your people.

When it comes to your clients, clarity is key. The best relationships grow out of clearly defined expectations. And I submit that having contracts is the truly kind thing to do. It shows professionalism, foresight, attention to detail. It prevents misunderstandings that can be damaging to the client relationship.

Always remember that your actions today will determine your future with that client, and referral possibilities down the road.

* * * * *

Diane HelbigAbout the Author: Diane Helbig is a Professional Coach and the president of Seize This Day Coaching. Diane is a Contributing Editor on COSE Mindspring, a resource website for small business owners, as well as a member of the Sales Experts Panel at Top Sales Experts.

42 Comments ▼

Diane Helbig


Diane Helbig Diane Helbig is a Professional Coach and the president of Seize This Day Coaching. Diane is a Contributing Editor on COSE Mindspring, a resource website for small business owners, as well as a member of the Top Sales World Experts Panel at Top Sales World.

42 Reactions

  1. Martin Lindeskog

    Diane Helbig:

    I recognize the first example. I had the same experience with a client. He said he wanted a certain style and content of his site and later on he changed his mind.

    Could you recommend a site with forms and templates for standard contracts?

  2. IMHO it actually the opposite. The principle of clear expectations and scope of work is valid, but the contractual engagement process is a very inefficient if not the worst possible way of doing it.

  3. I agree with the overall perspective of this article in that contracts are useful in detailing the terms of an agreement and what may happen should the circumstances change during the course of the agreement. However, I really disagree with “contracts prevent the possibility of harm.”

    Contracts may give a course of action and protection. No contract is bullet proof and they aren’t a guarantee of anything. Too often, I’ve seen people assume nothing can go wrong and the contract is money in the bank.

  4. Denise O'Berry

    I have always been a fan of some type of written agreement. As you indicated, it helps clarify what is expected, by when and what the payment arrangements will be.

    Contracts aren’t a guarantee that the business situation won’t go south, but without having the information documented, all you’re left with is a he said / she said situation.

  5. Contracts saved our butts many a time. If you work with large corporate customers, your internal champion can leave the company and leave you hi and dry in a flash.

  6. A contract doesn’t have to be complicated to be effective. Simpler is better. I use a one-page letter of agreement with my clients. This outlines the scope of work and the results as well as the price and terms. I’ve found this to be ideal for managing scope creep and budget creep. When a client asks for something that it not included in the letter of agreement, I will tell them that what they are asking for is, say, a $500 decision. If they still want it – I create a NEW letter of agreement outlining this new requirement. I’ve found my clients really appreciate this – because NO ONE wants to be on the receiving end of a surprise bill.

  7. Brent Leary

    I know some people who think their word is better than any piece of paper. But what if something were to happen to you? Or to the other person? It just makes it easier for everybody concerned to have a contract as a “back up” to your word.

  8. When it comes to covering your behind, you have no choice but to use contracts. You can never predict someone else’s behavior, therefore better safe than sorry.

  9. Diane Helbig

    Martin,
    Thank you for the question. I’m sure there are many sites online where you can pick up particular templates. I’ve had luck with http://www.findlegalforms.com

    Hope that helps!
    Diane

  10. There is also the “or-else” factor. Suppose that, despite the clarity of the contract, things don’t go well. The contract should specify limits of liability in the event that either side doesn’t fulfill what was agreed to. Otherwise, a controllable project problem can become a giant legal problem.

  11. Diane Helbig

    These are all really great comments! Thank you so much for your input.

    Dennis, I’m wondering if you can shed some light on why you believe contracts are inefficient. It feels like you may have had an experience where a contract made things more difficult instead of easier.

    Paul, I understand what you ar saying.If someone wants to argue a point they will no matter what is written. However, the contract goes a long way toward helping to prevent misunderstandings and issues once the work is completed.

    I’ve seen so many people come to me for assistance because they are being burned by their clients. These are usually people in service industries – where there is room for interpretation. Once we implement a short contract – as Ivana says – it not only keeps the clients in check, but the contractor as well! The creep does not happen as much.

  12. Martin Lindeskog

    Diana:

    Thanks for the link. I want to recommend “International Commercial Transactions” by Jan Åke Ramberg. It is important to understand the international rules when you are involved in global trade. I got this book when I attended a three day course called Commercial Contract Law & International Mercantile Law in November 2008. The course was arranged by Silf Competence.

    You could get a review of the book at Pace Law School Institute of International Commercial Law.

    http://www.cisg.law.pace.edu/cisg/biblio/ramberg1.html

    Did you know that the United Kingdom doesn’t belong to the Contracts for the International Sale of Goods?

    I hope that UNIDROIT Principles of International Commercial Contracts will get more attention in the future. Personally, I think that these paragraphs and articles have a more hands-on approach and a positive outlook on business than the general Jack-in-office type you easily could bump into in the jurisprudence sphere.

    http://www.unidroit.org/english/principles/contracts/main.htm

    I agree with Ivana that you should use a letter of agreement and contract so both parties understand and agree on what you pay and what you get. Take away the risk of misunderstandings and conflict in the future. The contract has to with negotiation skills and how you build a (long term) relationship with the other party. You should clearly state what the price is if the customer demands this or that. It is good if you include positive measurement and rewards if you fulfill the contract instead of having all the negative aspects and punishment fees that you often find in contracts. Think the trader principle! :)

  13. I have never had a bad experience. Never been sued or sued. But a contract is no guarantee of preventing a souring of relationships (any marriage is an example :-()
    But I have never seen a contract that couldn’t be broken. As I said originally clarity around scope (written) is good – it is just not a guarantee and problably not a remedy…

  14. Richard Faulkner, Esq.

    Louis Mayer, when head of Metro, Goldwyn Mayer studio is reported to have said, “Oral contracts are worth the paper they are written on.” Over the years as a lawyer, Judge and arbitrator, I realized Mayer was an optimist.

    A contract is the only effective way to convince a later decision maker that your claims are correct. Dueling memories are simply not persuasive and leave judges and juries confused. It is important to spend the time to document your agreements.

    Martin Lindescog’s observations are correct, but reading a 5 volume series is probably not the best solution. The International Chamber of Commerce is a great place to start seeking help. If you are going to successfully do business internationally, it is absolutely essential to obtain the advice of qualified counsel. The New York Convention, CISG etc all contain any number of nasty surprises. For example, judgments of US courts are often not recognized in many foreign jurisdictions. So, proper use of the NYC is critical.

    The New York based North American arm of the International Chamber of Commerce is a great resource and they are always willing to help new international businesses.

  15. Martin Lindeskog

    Richard Faulkner, Esq.:

    I am not an expert in the field and you are right that you shouldn’t rely only on a 5 volume series book. But I am glad that this book was included in the course material. I will use it as a reference and resource.

    It could be good to know a little about the different laws before you start to do your own versions… It is a danger to “cut & paste” stuff from different law text and combine them into one document.

    Richard Faulkner is right about the great service of the International Chamber of Commerce. I have a former classmate who is working at the West Sweden Chamber of Commerce and Industry in Gothenburg.

    Richard Faulkner: Are you a member in NYC?

    I am thinking of becoming a member of the World Trade Centers Association in Gothenburg, Sweden.

  16. Within my company, we always do contracts because agreements are often complex/intricate and a year down the road, no one will clearly recall the details. Thus a contract is necessary.

  17. TJ McCue

    Gotta have the written contract. It has nothing to do with one’s word. It has nothing to do with trying to complicate things or simplify things. It has to do with clarifying and clearly communicating what each party thinks will be done as part of the work effort.

    I have had both verbal and written agreements, but the best agreements, the best working relationships I should say, that I’ve had as a contractor have always come when we put ink to paper and spelled out what we each expected in terms of money, outcomes, etc.

    This was often just as important to my understanding of what my client, my customer expected, as to what they expected. “oh, i didn’t realize you wanted that 500 page book written by this friday…” and we’re starting on this Tuesday…

    Thanks a ton, Diane.

  18. TJ McCue

    Re-do: This was often just as important to my understanding of what my client, my customer expected, as to what I thought they meant. “oh, i didn’t realize you wanted that 500 page book written by this friday” and we’re starting on this Tuesday

  19. Diane Helbig

    Love the quote by Louis Mayer! And so, so true.

    In my experience with my clients, who are very small business owners, they have all kinds of reasons that they don’t want to use contracts – or don’t think they are necessary. Until –

    Until the problem occurs – their client is unhappy, my client is feeling taken advantage of, their client doesn’t pay, and on the list goes. When the client takes one of your employees it can really hurt your business. That’s why I mentioned it – I’ve seen it happen.

    In my humble opinion, a lot of these problems can be avoided by putting the expectations in writing. And as TJ said, it helps you understand your client’s expectations as well.

    My wish is that business owners would decide to put things in writing at the onset of the relationship. It helps to build the professional relationship over the long term. Conversely it can shed light on possible problems that may crop up. If your client balks, that may be a red flag.

    Thank you all for your insightful comments. I’ve learned a lot in this thread!

  20. I’m with you Diane. I consider it a big mistake to just base your business to a he said/ she said situation.

  21. I could’t agree more about how important it is to document business relationships and transactions in order to avoid potential misunderstandings and problems down the road.

    If you are looking for high quality contract templates, please visit http://www.WhichDraft.com to create contracts with fast,
    free tools from expert attorneys. WhichDraft.com offers a variety of contract templates (including Confidentiality Agreements, Services Agreements, Manufacturing Agreements, and Software License Agreements, among many others).

  22. I work from a letter of understanding or proposal with my clients – signed by both of us. It simply makes the process (of invoicing and collecting) easier at the end; I also make sure that any ‘change requests’ or work requested outside the scope of the original proposal is approved before I proceed.

  23. I think there is a line to be drawn. For example, I would not insist on a contract for jobs paying less than

  24. Hi Diane,

    I am very new to this world of business and I am really confused with your title –>Death by Contract — Or Lack Thereof.

    Hope you can clear it to me, Diane.

    Thanks! :)

  25. Agree with your analysis completely. Here is my legal forms web site:
    http://www.medlawplus.com/legalforms/

    This site has a free trial that allows you to create the exact form you shall be purchasing in non-printable format for free so you know what you shall be purchasing.

  26. Diane Helbig

    Hi Mary Grace. Thank you so much for the question. The point I’m trying to make with the title is that the lack of contracts or the use of incomplete contracts can kill a small business.

    Through this series I am visiting the relationships between the company and it’s clients, it’s subcontractors, and it’s employees. My goal is to shed some light on the value of putting the expectations in writing, as well as what I consider to be the real danger of not putting these things in writing.

    Does that clear it up for you?

    Diane

  27. I strongly agree with your post. I have learned the hard way too many times. Not all conflicts are worth going to court over, but atleast all parties are clear on the terms, so there are no “Misunderstandings” amongst parties. Contracts protect all parties, so no-one should be opposed, if they are you shouldn’t do business with them anyway. Once you have been burnt a few times, you will learn.

  28. Diane, all very good points. Aside from contracts, business owners also need to understand and manage their levels of risk.

  29. Wow, I couldn’t agree more with your first example. Anytime there is creativity involved in a project such a web developing, you run the risk of dissatisfaction simply due to the “to each his own” theory. With experience comes knowledge and hopefully your experience becomes the knowledge of your readers. Get it in writing!

  30. I totally agree with your message. Once you have been burnt a few times, you will learn.

  31. If you are ever offered a service or opportunity, get it in writing. When offering services, like you said, you don’t want to scare them away but a simple agreement of terms in writing can be arranged without needing a formal contract in many situations. Good post, keep them coming :)

  32. Thanks so much for your insightful article. I was looking for subcontractor-contractor agreement when I ran into your article. We experienced similar situation as you mentioned. It’s good to stress the importance of having a contract.

  33. Diane Helbig

    I’m so glad you found it useful!

  34. Getting all your agreements in writing is so important. It isn’t a sign of mistrust – it’s a sign of commitment. Everyone can forget something. Having it written down protects both parties.

  35. Diane Helbig

    Oh Andy you are so right on! Thank you for putting it so eloquently and succinctly.

  36. When I first began consulting to a lawyer regarding my business, he ALWAYS told me to use a contract for any transaction I do. Even if it’s a small transaction, a disgruntled past client could sue you for a lot more. This is something you simply don’t want to risk when you first start out in your own business.

  37. Diane Helbig

    Chihuahua you were fortunate to have that experience so early on in your career.

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