Blog10 Reasons Why Contracts are Important for Business

In this blog, we will understand the reasons behind contracts being important for business.

In an episode of the DevReady Podcast, we were joined by Jeremy Streten,  CEO of Business Legal Lifecycle. One of the quotes from the podcast that stood out was:

“A saying that you hear often, you know, the agreement is not worth the paper it is written on. Ah, that’s true if you just get any old sort of agreement and you download it off the internet or if you copy someone else’s agreement. If you actually do it properly, it is 100% worth the paper it’s written on, and it’s 100% worthwhile doing.” 

Jeremy Streten, DevReady Podcast

We’ve all heard about contracts! What’s more? We’ve all signed countless contracts when it comes to our business, but have we taken time to consider it we’ve done it the right way or if we understand what the implications of not having a good contract are? Perhaps yes. Perhaps not.

In layman’s terms, business contracts are important because they outline expectations for both parties, protect them if ends aren’t met, and lock in the price that will be paid for services. Having a written contract means that everyone knows what he is supposed to do and when, and makes it easier to resolve any disputes that might arise.

Characteristics of a Contract

What makes for a good contract, then? One with these basic characteristics is a good start:

  • The contract should include the full scope of work, including all deliverables.
  • The contract should outline a general timeline.
  • The contract should state the amount to be paid and the associated terms.
  • The contract should also outline how disputes will be handled.
  • If necessary, one or both parties may choose to include a noncompete or nondisclosure clause.
Benefits of a Contract

Contracts help businesses build new relationships, extend existing ones, and close transactions. Contracts also outline the various legal obligations each party owes to the other.

Businesses sign legal agreements in the masses, with partners, customers, and suppliers. The truth is that contractual agreements form the backbone of every commercial relationship.

Briefly discussed below are the major advantages of contracts that businesses should not only understand but also put into practice.

benefit of contracts
Serve as a record of commitments

In the world of business, two or more parties form a mutually beneficial relationship. A contract is the visual representation of that relationship.

First, the two parties agree to work together and forge a connection. Then they define the commitments that each party will fulfil. All those commitments are recorded in the contract. So, it can be used y hold both sides accountable when it comes to meeting the agreed-upon commitments.

For example, in a SaaS contract, one party agrees to provide the other with software for a specified amount of time and the other party agrees to pay a certain sum for the arrangement. Essentially a good contract details what duties each party has to one another, how those will be carried out, what they will be measured against, and when.

Contracts act as a point of reference for parties to remind themselves of the responsibilities they owe and are owed.  

Help specify rights

Contracts function as a reliable record of the rights of the parties involved.

By nature, contracts address various rights of the parties involved. Both parties to a contract have contract rights. For example, in a SaaS business, one party may have the right to purchase a software platform while the other party can deliver it. Remember that these rights live on both sides of the deal, meaning that all parties involved in the contract are granted specific rights.

Some other distinct instances of contract rights may contain:

  • The right to timely and total payment for all products and services
  • The right to complete ownership and usage of a product, brand, or material
  • The right to resell or transfer ownership rights
  • The right to litigate or file a suit over a contract disagreement, particularly over breaches of contract.
contracts specify rights in business
contracts mitigate risks
Prevent conflicts and mitigate risks

People get into businesses to safeguard their livelihood. Without contracts, businesses are exposed to risks. Contracts are important as they help set boundaries and expectations for each.

As parties to a contract reach a consensus on a list of terms and conditions, they are an effective tool for preventing conflicts and mitigating risks. What businesses want when entering a new relationship is a win-win situation, and a contract represents that being achieved.

In any successful contract process, parties will have had opportunities to discuss, edit and suggest terms. Because it is mutually beneficial and already consented to, there is little for them to disagree about in the future.

Protect the business and clients

Having contracts that outline expectations, makes enforceability easier. That there exists an enforceable contract puts pressure on all involved parties to meet their obligations on time.

For example, if there is a SaaS provider, they will probably even routinely check the contract to make sure the work is progressing as agreed. If an issue arises, then it can also be resolved as per the agreed-upon terms.

If the client decides to work with a different agency halfway through the project, the provider could take legal action to be paid for the work performed. On the other hand, if the service provider performs poorly, the vendor will have legal protection against paying for the work.

contracts protect business and clients
benefit of contracts
Help maintain compliance

Having contracts mean that there are established business procedures to ensure that there is adherence to agreed terms and conditions. Compliance requires businesses to periodically review their active contracts, establish protocols and check to ensure they comply with the clauses within.

Contract compliance helps businesses reduce financial, organizational, and compliance risks. If a company is found in breach of contract, it will likely be fined by regulatory bodies. If companies fail to meet compliance standards, it will likely affect their reputation and relationships with vendors. Compliance helps improve trust and eventually leads to more favorable terms with vendors. 

Guarantee confidentiality

You have heard of NDA (Non-Disclosure Agreement) for sure. That’s a contract that guarantees confidentiality.

When contracts are made, parties are privy to sensitive information about one. Such information could even mean financial details. Where parties are reluctant for this information to be shared, contracts come in handy. Contracts ensure that the client or business they are dealing with holds these in secrecy using non-disclosure provisions and confidentiality clauses within the written contract.

benefit of contract in business
Serve as a collaboration and communication tool

Contracts are collaborative by nature. Both parties work together and communicate their needs before agreeing to the terms and conditions of any contract.

Contracts are not just a collaboration and communication tool for the parties involved but also for teams and departments that each side has. Teams can also work together to determine their needs by creating a contract and building healthy communication.

Provide an opportunity to increase revenue

Contracts are binding agreements that outline how one side will deliver services in exchange for payment. Further, processing contracts efficiently and under the right terms helps companies generate more revenue.

Let me explain how. When the terms and conditions in a contract aren’t met, then payments aren’t made. Conversely, faster contract processes mean organizations can sign more deals and bring in more income.

reasons why contracts are important for business
Increase operational efficiency

Looking at contract processes and evaluating the greatest needs for improvement will help organizations work more efficiently as a whole. In turn, working faster and smarter means using the right tools.

Contract compliance means having all people, processes, and documents in one place. This is critical for aligning with the goals of the business.

Extend brand and values

Contracts are an extension of the company brand. Having well-drafted contracts means that a business cares about having a detailed relationship record.

Everything from wording to negotiations gives each party an idea of how the other functions. A solid company brand shows through care in contract creation and the interactions that follow.

reasons why contracts are important for business
Just get it in writing, please!

When you run a business, you need to get set this as your mantra – “Just get it in writing, please!’ Contracts will help you manage your business better.

Businesses need contracts for service, independent contractors, employees, and vendors. Most people find this overwhelming, but it need not be so. Contracts are a vital part of building relationships and completing business transactions. As discussed above, contracts have many purposes and thus, many different reasons as to why they are important. 

Listen to our DevReady Podcast with Jeremy Streten to understand how contracts are totally worth it!
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