If someone asks you, “what is contracting in business” would you be able to give a straightforward and accurate answer to the question? Or would you struggle to make sense of this business word? Of course, you should be able to do the former as a business owner. But if that isn’t the case, then this article is where you should be.
Any business owner looking to run a successful business should have mastery of certain business terms and concepts.
Contracting is one concept you cannot ignore as someone in the business world.
Thankfully, this article will shed more light on this topic.
Here, you will learn the meaning of contracting in business.
You would also learn several other important things that you should know about this topic, from how contracting works in business, the parties involved in contracts, the different types of contracts, and so on.
Therefore, this article is your ultimate guide to everything contracting in business.
It’ll be an exciting and insightful read, so stick with us to the end.
Meaning of Contracting in Business – What is Contracting in Business
Contracting in the business world refers to getting into a contract with another party or company legally.
For clarity, contracting is when a business entity has a legally binding agreement with another company to have a job done for them.
This legal agreement is known as a contract, and the process is called contracting.
Contracts are documents that state the details and terms of the agreement.
It often states the responsibilities and expectations of all parties involved in the agreement.
This also includes every other important term that all parties agreed on.
For contracting to be possible, the parties involved will then have to sign the contract.
Only after all the parties have signed the contract does it become legally binding.
This process is so common in the business world that you may have to go into a contract with another party at one point or the other (regardless of how small your business is).
You should know that contracting is a very serious business process.
And savvy business owners know better than to take the process lightly.
So, if you want to go into a contract, you have to be as careful as possible.
If you do not properly go through the contract and understand every aspect, you may end up signing what you do not want to do.
Contracts often have legal terms, and it is easy to get confused.
This is why you should consult a lawyer or legal practitioner before signing any contract.
These professionals can adequately evaluate the contract and figure out things you would have ordinarily glazed over.
How Contracting Works – What is Contracting in Business
Suppose you run a shoe manufacturing company and need a raw material supplier.
Now, after going through the souring process and deciding on a particular supplier, you would have to hire them and make sure they’d stick to their end of the bargain.
So, you’d draft a contract that details what you expect from the supplier and what they expect from you.
When you and the supplier sign this document, it means that both of you have agreed that you would do all stated in the contract.
And because the contract is legally binding, the other parties can file a lawsuit against any party that breaches the terms of the contract.
Sometimes, a company can decide to work with another party and have a verbal agreement.
If a company does this, it won’t have any written document to prove the terms of the agreement.
Therefore, if the other party fails to keep to its end of the bargain, the company may not have any legal proof it can use in court.
It would just be their word against the word of the other party.
This can make the court dismiss their claims, and the other party can walk away free.
But written contracts take away this issue because a contract contains the signature of all parties involved.
In this way, written contracts provide a safety net for companies that go into agreements with other entities.
It also helps the company know and understand their rights and responsibilities in any agreement they go into.
Therefore, contracts ensure transparency and honesty between all parties in an agreement.
It also goes a long way in mitigating the risks of doing business with another company or entity.
How Contracts are Enforced – What is Contracting in Business
As you have seen so far, contracts are backed up by law.
However, a contract can be enforced under private, common, or state law.
The manner of the contract often determines the law that enforces the contract.
The state laws enforce certain contracts, such as secure transactions and sales agreements, based on the Uniform Commercial Code.
Sometimes, federal laws may enforce a contract.
This is often in cases where the contract involves a very regulated activity or is within a specialized industry.
Regardless of what law enforces a contract, one thing is sure; all contracts are legally binding.
Types of Contracts – What is Contracting in Business
There are several types of contracts in the business world.
Typically, the type of contract you decide to use for your business process will depend on the situation and your company’s needs.
Knowing the different types of contracts will make it easier to know which to go for in any contracting process you are looking to embark on.
However, this article will not be able to discuss the different types of business contracts.
We’ll only look at 6 important ones.
As you’d expect, the government often needs to purchase services and goods to operate.
And because the government requires these in large volumes, they often patronize companies (both large organizations and small businesses).
To do this, they would have to contract with these businesses.
Government contracts can be divided into two main groups; fixed price and cost-reimbursement.
Let’s take a closer look at these categories below.
Fixed Price – What is Contracting in Business
As the name suggests, this type of contract has a fixed payment despite how long a contractor works on the project or how much money they spend on it.
Therefore, let’s say a company gets a 10,000 dollars contract for a project.
It doesn’t matter how much they have to spend to complete or how long they spend on the project; they would only be paid 10,000 dollars.
Cost-reimbursement – What is Contracting in Business
Here, the government would pay the contractor for any charges relating to the project.
With this contract, there is a particular amount that both the buyer and contractor are aware of from the beginning of the contract.
If the contractor has to exceed this amount, they have to seek the buyer’s permission first.
The contractor can also stop working on the project if it exceeds the amount.
Equipment and Property Lease Agreements
This is the type of contract that a landlord and tenant or equipment owner and lender go into.
The person leasing the property and the owner would agree on the rental fee.
The contract, in this case, would detail the rental fee and the lease duration.
It would also contain other important lease details such as monthly payments, maintenance agreements, deposits, etc.
If you are using a rented building to run your business, you are most likely familiar with this type of contract.
Also, if you can’t afford the equipment you need to start your business, you can decide to rent the equipment.
Partnership Agreements – What is Contracting in Business
Partnership is yet another very important business topic.
If you would like to share the risks and responsibilities of running a business, you may find it wise to get a business partner.
In this case, you would have to go into a partnership.
Going into a partnership is not child’s play, and if you want everything to go smoothly, you would need to draft and sign a partnership agreement.
This document will outline the duties and responsibilities of each partner.
It will also detail the capital contribution of every partner, profit and loss sharing ratio, partnership dissolution, and so on.
Having a written partnership agreement is very important.
This way, every partner will clearly know their roles and responsibilities.
Also, it would be easier if they needed to amend the contract since it is written.
Indemnity agreements are also known as no-fault agreements or release of liability.
As you can guess from these terms, this type of contract offers protection from losses and damages.
Such that if one party involved in the agreement experiences losses or damages, the other party will offer protection for them.
This type of contract creates confidential relationships between the parties in the agreement.
This means those signing this contract agree that they wouldn’t disclose certain information.
Many businesses use this type of contract during their processes, especially when discussing sensitive information their competitors can use to get an edge over them.
This way, parties involved can discuss sensitive information without fear of it leaking out.
Employment Contracts – What is Contracting in Business
Employees are typically the backbone of business operations.
From time to time, a company would need to hire new staff.
In this case, it would benefit the company and the employee to have a written agreement.
This contract will detail the employment terms, from the employee’s duties to their salary, perks and incentives, things that can lead to employment termination, employment length, etc.
The contract should also outline not just the obligations and rights of the employee but also those of the employer.
This way, spelling out the full details of the employment would ensure transparency between both parties.
Contracting Parties – What is Contracting in Business
For any contracting process to take place, it must involve at least two parties.
This means that a contract can have more than two parties.
A party in any contracting process is anyone with a duty under the agreement which also benefits from the agreement.
The different parties involved often have different roles and functions.
Every party in a contract often has a specific function.
Based on this, you can classify the parties involved in a contract into two main groups; the promisor and the promisee.
The promisor is the party that makes a promise to the other party or parties.
On the other hand, the promisee is the party that will receive the promise.
The promisor has to deliver on their promise and deliver on their end of the bargain.
However, when looking at the parties involved in a contract, you can classify the types of contracts into two broad groups; unilateral and bilateral.
With unilateral contracts, one party promises the other party or parties payment or an asset of equal value for the performance of a project or task.
Whereas with bilateral contracts, the parties exchange promises.
Apart from the promisee and promiser, another party can still benefit from the agreement even though they aren’t a part of it.
This is the third-party beneficiary.
Overall, for a contract to go smoothly, all parties have to fulfil their parts and avoid breaching the contract terms.
Contracting Breach – What is Contracting in Business
A breach of contract is one term that you will surely hear when discussing contracting in business.
So, what does this term mean?
Simply put, it is when one party fails to follow the agreement terms.
Therefore, when you say that a party has breached a contract, it means they have deflected from the contract terms.
There are different types of contract breaches.
Let’s take a look at some of them below.
Material Breach – What is Contracting in Business
When this type of breach occurs, one party does not get what they should have according to the contract specification.
An example of a material breach is if one party fails to fulfil their part of the contract on time.
Or if they do not meet their responsibilities as stated in the contract.
When a material contract breach happens, the party that suffered due to the breach can seek compensation for damages or loss.
This type of breach happens when one party says they won’t fulfil their responsibilities.
So, the other party or parties would anticipate the breach even though it is yet to happen.
Sometimes, the party that wants to breach the contract may not even outrightly say so.
They may exhibit specific actions that would make the other party or parties know they may not keep to their end of the deal.
With a partial breach, a party would receive deliverables as stated in the contract, but then the party breaching the contract fails to deliver on their part of the deal.
When this happens, the party that incurs financial loss or damages because of the breach can take legal action against the party in breach.
Contract Violation Breach – What is Contracting in Business
A contract violation occurs when any contracting party fails to perform their contractual duty, does not do them on time, does them incorrectly, or does not even complete them.
The party affected by the breach can take different courses of action to remedy this situation.
They can seek out compensatory damages.
And they can also get consequential or special damages.
This would cover the losses that do not directly relate to the breach but resulted from the breach.
Advantages of Contracting – What is Contracting in Business
Contracting is a very serious business process that comes with multiple advantages.
You may be wondering if this is something that you should explore for your business.
If you are ever going to work with another party outside your business, then it would be better to do so under a contract.
The following are two primary reasons to practice contracting in your business.
Reduces the Risks Attached to Working with Other Parties
The most significant advantage of contracting is that it helps mitigate the risks of working with others outside your business.
While contracting may not protect you from the other party breaching the terms of the agreement, it gives you something to fall back on in case they do.
Contracting is a great way to network with people from different companies, niches, and industries.
It allows you to meet people and helps your business interact with companies.
This can significantly work to the advantage of your business.
It would help you broaden your experience and grow your business as a reputable brand.
Conclusion on What is Contracting in Business
Contracting is an essential business process that would help your business grow in several ways.
And as a business owner, you would, at one point or another, need it to carry out certain business processes.
At this point, it won’t be wise going to into it blindly.
This article has discussed some important things you need to know about this business process, but more than having this knowledge is required.
You must practice caution whenever entering into any contract.
Overall, it would be wise to hire a lawyer in most cases.