How to create a contract: format and 9 steps to draw one up

If you work with clients, you’re probably at least somewhat familiar with contract drafting. A contract addresses important details like the scope of the project, deliverables, payment, schedule and other contingencies, and it protects your company if any of those details are not met.

But how exactly do you create a contract? How do you get you and your client on the same page? And if your customer breaches the contract, how do you make sure the terms protect your business?

Why are contracts so important?

Before we get into how to create a contract, let’s look at why contracts matter. Contracts are a must for your business for a number of reasons:

• They get you and your client on the same page: before working with a client, make sure you both have the same expectations for the relationship and the project.
• They establish the key details of your working relationship: contracts spell out when the client must pay you and when you must deliver, creating a roadmap for how the project will unfold.
• They protect your business: a written contract is evidence of what was agreed. If your client doesn’t keep to its terms, you can take legal action (and vice versa).

Contract format: how a contract is laid out

Most business contracts follow the same format, whether they are two pages or forty. Using this structure makes your contract easier to read and harder to misunderstand:

1. Title: what kind of agreement it is, for example “Service Agreement” or “Sales Contract”.
2. Date and parties: the effective date and the full legal names and addresses of all parties.
3. Recitals (background): a short explanation of why the parties are entering the contract. Optional, but useful in complex deals.
4. Definitions: terms that are used throughout, such as “Services”, “Deliverables” or “Confidential Information”.
5. Main terms: scope, price and payment, schedule, responsibilities of each party.
6. Term and termination: how long the contract runs and how it can end.
7. Legal provisions: liability, warranties, confidentiality, intellectual property, governing law and dispute resolution.
8. Boilerplate: standard clauses such as the severability clause, entire agreement and notices.
9. Signature block: names, titles, dates and signatures of the people signing for each party.

Number the sections and use short headings. A business contract format like this lets both parties find a clause quickly when a question comes up months later.

How to create a contract in 9 steps

Draw up a contract using these 9 steps:

1. Contact information of both parties
2. Defining terms and scope of services
3. Define payment terms
4. Define schedule
5. Consequences of terminating the contract
6. Determination of copyrights
7. Choice of law and place of jurisdiction
8. Consideration of an arbitration clause
9. Both parties sign the contract

Let’s go over each step.

1. Contact information of both parties

A contract must clearly state who is legally bound by the agreement, so the contract creation process starts with complete details for all parties.

Each contract should include the legal name of each company, the main contact person, the address, the billing address and the contact details of both the customer and the contractor. Be sure to use your legal business name. For example, if you have formed a limited liability company, you must use the exact name that appears on the registration documents.

You can use the parties’ names throughout the agreement or define short terms such as “Client” and “Contractor”. Defined terms are legally harmless and keep long contracts readable; just use them consistently.

2. Defining terms and scope of services

The main point of a contract is to record the details of your agreement. Be as specific as possible about what you’ll do, how you’ll do it, and what each side expects.

For example, let’s say you’re creating a contract to design an informational brochure for a client. What is the scope of the project? Are you only responsible for the design or also for writing the copy and sourcing images? What does the client need to provide before you can start? How many rounds of revisions are included, and what happens if the client wants another one?

The goal is to set expectations and manage the working relationship with clear, predefined parameters. You don’t want to deliver more than you agreed, and you don’t want your customers to feel they’re not getting what they paid for.

3. Define payment terms

When defining payment terms, cover the following:

• How you will be paid: by the hour, by the project or by milestone?
• Minimum and maximum hours: if you are paid by the hour, a minimum protects your time if the project shrinks, and a maximum protects the client from an open-ended bill.
• Project deliverables: if you’re paid per project, specify what the price covers, so the scope doesn’t creep.
• Billing schedule: when you invoice, for example weekly, monthly or on reaching specific milestones.
• Payment schedule: how long the customer has to pay after receiving an invoice (for example 15 or 30 days), and the consequences of late payment, such as a late fee.
• Accepted payment methods: if you only accept certain methods, such as bank transfer, say so.

4. Define schedule

In addition to billing and payment schedules, define all deadlines associated with the project, including milestones and final deliverables. If the customer needs to provide something, be specific about what you need from them and by when.

5. Consequences of terminating the contract

Sometimes projects don’t go as expected. If your client backs out and terminates the contract, you want your business protected and to be paid for the work you’ve already done.

Include a termination clause that says how either party can end the contract, with how much notice, and what happens to payments already received. Many service providers state that payments for completed work are non-refundable and that all work done up to the termination date will be invoiced.

You can also add wording that says if the project is delayed for a certain period (for example more than 30 days) because of the client, you will invoice all work done up to that point. If you bill per project, consider a termination fee: an agreed amount, often a percentage of the project price, that the client pays if it ends the project early.

6. Determination of copyrights

If you create work for a client, such as a graphic or web design project, the contract should say who owns the final deliverable and any drafts. Without an agreement, the rules depend on the applicable law, and the creator often keeps the copyright even after being paid.

A common arrangement is that the service provider keeps the rights until final payment, and the rights then transfer to the client. Whatever you agree, state it in the contract so your client is comfortable with it before you begin.

7. Choice of law and place of jurisdiction

Specify which law applies to the contract and where disputes will be decided. This matters most when you and your customer are located in different states or countries. Unless you have a specific reason to choose otherwise, choosing your own state or country saves you time and travel if a dispute arises.

8. Consideration of an arbitration clause

With a well-drafted contract, you may never face a dispute. If you do, you may want to settle it through arbitration, in which case you should include an arbitration clause. A neutral third party then hears evidence from both sides and makes a decision.

The advantage of arbitration? It’s usually faster, simpler and easier to schedule (though not necessarily cheaper) than a court case. It can also be less adversarial and more private.

Even without an arbitration clause, you can still agree to use an arbitrator once a dispute arises. But if the relationship has already broken down, agreeing on anything may be difficult.

9. Both parties sign the contract

Once the contract is fully drafted, sign it and get your client’s signature before starting the project. Many contracts are binding without a signature, but a signed written contract is the clearest proof of what both sides agreed, and some contracts must be signed to be enforceable. An electronic signature is valid for most business contracts and gets the contract signed in minutes. For more on what makes an agreement hold up, see what makes a contract enforceable.

How to create a simple contract

Not every agreement needs forty pages. For a small, low-risk job, a simple contract on one or two pages can be enough, as long as it covers:

• Who the parties are
• What will be delivered, and by when
• The price and when it is paid
• How either party can end the agreement
• Signatures and dates from both parties

The quickest way to create a simple contract is to start from a template for your contract type, fill in the details and send it for e-signature. In fynk you can do that from a document template, with dynamic fields that fill party names, dates and prices into every clause at once.

Contracts set your client’s expectations, record the project details and make sure you get paid for your work. With a clear format and these nine steps, you have what you need to draw up contracts that protect your business.

FAQs

• How do I create a contract?

  Identify the parties, define the scope of work or goods, set the payment terms and schedule, agree on termination, intellectual property, governing law and dispute resolution, then have both parties sign. Starting from a template for your contract type is the fastest way to make sure nothing is missing.

• What is the standard format of a contract?

  A typical contract has a title, the date and parties, optional recitals, definitions, the main commercial terms, term and termination, legal provisions such as liability and governing law, boilerplate clauses and a signature block. Numbered sections with short headings make it easy to read.

• Can I draw up a contract myself?

  Yes. Businesses can draw up their own contracts, and many routine agreements are created from templates without a lawyer. For high-value, unusual or regulated deals, have a lawyer review the contract before you sign.

• Does a contract have to be signed to be valid?

  Not always. Many contracts are valid without a signature, even verbally. But a signature is the clearest proof that both parties agreed to the terms, and some contracts, such as land sales or guarantees, must be in writing and signed. Electronic signatures are accepted for most business contracts.