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When seeking help as a small business owner, you are presented with various options for types of service contracts. But even before you can reach the conclusion that you need to sign a third-party to a professional service contract, you need to rule out other possibilities.

First, do you need to hire an employee, whether full or part-time? Having an employee gives you the most control over the work you need to be accomplished. You can set hours, anticipate costs, and manage work product. The downside to employees is that they come with legal strings attached.

Instead, you may seek a relationship on a contractual basis. Whether looking for consultants or other types of help, professional service contracts allow you to define the scope of work without any issues from employment law. Instead, the relationship between you and the contractor will be a matter of contract law.

Hiring a contractor may be precisely what you need, but what type of professional service contracts are available, and which is best for your business? This article will briefly touch on five different options while also explaining some basic terms. In addition to defining the types of contracts, we will offer tips on terms to include to protect yourself and your company.

Service Contract Definition

A service contract is a binding legal contract between two parties, the provider of services and the recipient. Typically, as a business owner, you will receive the contractor’s service in exchange for monetary compensation. The extent of the contract, the work required, payment schedule, and roles and responsibilities are all included in the terms of a professional service contract.

Because it is a binding contract, if either party does not do what is required, the other side can sue for breach of contract. Depending on the type of arrangement you have created, the contractor may think of you as a client, boss, or even customer. However, it is essential to remember that the contract is not your employee. The legality of any professional service contract that imposes employment duties on the contract is questionable.

In addition to the work you want to be done, how much you will pay, and other rights and requirements, you should consider adding some security provisions to any service contracts from your company.

These contractual provisions can include:

  • Non-compete clause - prevents the contractor from working for or starting a competitor to your business for a certain time.
  • Non-solicitation clause- prevents the contractor from attempting to hire or use your employees or other contractors after the end of the contract.
  • Confidentiality clause - prevents the contractor from disclosing certain private information they may learn while working for your business.

All of these provisions offer protection for your company from some of the downsides of using professional service contracts.

Now that you understand the basics of service contracts, the following discusses five common types you may encounter.

Start Your Service Contract Here

Common Types of Service Contracts

Depending on what type of services your business requires, you may explore one of the following five types of contracts. Each has different pros and cons and could be more applicable to specific scenarios.

Fixed Bid or Fixed Scope Contract

In a fixed bid or scope contract, the contractor receives a set sum in exchange for completing one project. For example, you could sign a fixed bid contract if you hire a roofer to redo your warehouse's ceiling. The roofer receives the contracted price, and your warehouse gets a brand new roof.

The downside to a fixed bid contract is that it does not help if you need ongoing or repetitive work, but it is hard to beat the cost certainty for a one-off project.

Time and Material Contract

Unlike a fixed bid contract, a time and material service deal includes an hourly rate for work. Imagine you hire an auditing firm to review your finances. You may agree to pay $100/hour for however long the auditor’s associates take to complete the audit.

Your business accepts the risk in a time and material contract if the project exceeds your estimated timeframe. When dealing with professionals, you rely on their good faith to not bill for unnecessary or excessive time.

Not-to-Exceed Professional Services Contract

A not-to-exceed (NTE) contract is similar to a time and material agreement, except you and the contractor negotiate an upper limit to the amount of time or money spent on a project. In the auditing example above, you could negotiate a 50-hour maximum on the project. If the project remains unfinished, the terms of the contract would determine what occurs next.

Retainer-based Contract

Most commonly associated with law firms, retainer-based contracts are used to ensure you have help available when you need it. Your business pays an up-front fee, the retainer, to cover a set amount of possible future work. If the contractor’s work exceeds the retainer fee, you then pay at an hourly rate.

Managed Services Contract

The final example of professional deals is a managed services contract. Under this agreement, you negotiate a fixed price for their future availability regarding a specific service with a contractor. For example, you may agree to a managed services contract with an IT firm to troubleshoot any issues as they arise. The IT company agrees to a defined scope of issues they will respond to and how quickly they will make themselves available if a problem occurs. Essentially, you will be paying the IT contractor to manage an aspect of your business, like your data servers.

Determining which professional service contract type is right for your company does not need to be a time-consuming process. LawDistrict has all the tools small businesses require to identify, draft, and complete service agreements with various contractors. Our easy-to-use contract maker tool contains step-by-step instructions that will deliver individually tailored professional service contracts at the click of a button.

When seeking help as a small business owner, you are presented with various options for types of service contracts. But even before you can reach the conclusion that you need to sign a third-party to a professional service contract, you need to rule out other possibilities.

First, do you need to hire an employee, whether full or part-time? Having an employee gives you the most control over the work you need to be accomplished. You can set hours, anticipate costs, and manage work product. The downside to employees is that they come with legal strings attached.

Instead, you may seek a relationship on a contractual basis. Whether looking for consultants or other types of help, professional service contracts allow you to define the scope of work without any issues from employment law. Instead, the relationship between you and the contractor will be a matter of contract law.

Hiring a contractor may be precisely what you need, but what type of professional service contracts are available, and which is best for your business? This article will briefly touch on five different options while also explaining some basic terms. In addition to defining the types of contracts, we will offer tips on terms to include to protect yourself and your company.

Service Contract Definition

A service contract is a binding legal contract between two parties, the provider of services and the recipient. Typically, as a business owner, you will receive the contractor’s service in exchange for monetary compensation. The extent of the contract, the work required, payment schedule, and roles and responsibilities are all included in the terms of a professional service contract.

Because it is a binding contract, if either party does not do what is required, the other side can sue for breach of contract. Depending on the type of arrangement you have created, the contractor may think of you as a client, boss, or even customer. However, it is essential to remember that the contract is not your employee. The legality of any professional service contract that imposes employment duties on the contract is questionable.

In addition to the work you want to be done, how much you will pay, and other rights and requirements, you should consider adding some security provisions to any service contracts from your company.

These contractual provisions can include:

  • Non-compete clause - prevents the contractor from working for or starting a competitor to your business for a certain time.
  • Non-solicitation clause- prevents the contractor from attempting to hire or use your employees or other contractors after the end of the contract.
  • Confidentiality clause - prevents the contractor from disclosing certain private information they may learn while working for your business.

All of these provisions offer protection for your company from some of the downsides of using professional service contracts.

Now that you understand the basics of service contracts, the following discusses five common types you may encounter.

Start Your Service Contract Here

Common Types of Service Contracts

Depending on what type of services your business requires, you may explore one of the following five types of contracts. Each has different pros and cons and could be more applicable to specific scenarios.

Fixed Bid or Fixed Scope Contract

In a fixed bid or scope contract, the contractor receives a set sum in exchange for completing one project. For example, you could sign a fixed bid contract if you hire a roofer to redo your warehouse's ceiling. The roofer receives the contracted price, and your warehouse gets a brand new roof.

The downside to a fixed bid contract is that it does not help if you need ongoing or repetitive work, but it is hard to beat the cost certainty for a one-off project.

Time and Material Contract

Unlike a fixed bid contract, a time and material service deal includes an hourly rate for work. Imagine you hire an auditing firm to review your finances. You may agree to pay $100/hour for however long the auditor’s associates take to complete the audit.

Your business accepts the risk in a time and material contract if the project exceeds your estimated timeframe. When dealing with professionals, you rely on their good faith to not bill for unnecessary or excessive time.

Not-to-Exceed Professional Services Contract

A not-to-exceed (NTE) contract is similar to a time and material agreement, except you and the contractor negotiate an upper limit to the amount of time or money spent on a project. In the auditing example above, you could negotiate a 50-hour maximum on the project. If the project remains unfinished, the terms of the contract would determine what occurs next.

Retainer-based Contract

Most commonly associated with law firms, retainer-based contracts are used to ensure you have help available when you need it. Your business pays an up-front fee, the retainer, to cover a set amount of possible future work. If the contractor’s work exceeds the retainer fee, you then pay at an hourly rate.

Managed Services Contract

The final example of professional deals is a managed services contract. Under this agreement, you negotiate a fixed price for their future availability regarding a specific service with a contractor. For example, you may agree to a managed services contract with an IT firm to troubleshoot any issues as they arise. The IT company agrees to a defined scope of issues they will respond to and how quickly they will make themselves available if a problem occurs. Essentially, you will be paying the IT contractor to manage an aspect of your business, like your data servers.

Determining which professional service contract type is right for your company does not need to be a time-consuming process. LawDistrict has all the tools small businesses require to identify, draft, and complete service agreements with various contractors. Our easy-to-use contract maker tool contains step-by-step instructions that will deliver individually tailored professional service contracts at the click of a button.