Demystifying contracts: Understanding 10 different types of contracts

Contracts play a vital role in various situations, safeguarding the interests of everyone involved – from employees and employers to businesses, sellers, and consumers. They outline the precise terms and conditions of an agreement.

Familiarizing yourself with different contract types can be valuable in developing an effective contract management strategy for your organization. The more familiar you are with the varying contract types, the simpler it becomes to select the appropriate one and safeguard your business.

Here’s a handy guide of the types of contracts you should be aware of.

10 types of contracts

1. Verbal contracts

Verbal contracts or oral contracts are agreements without formal documentation. They may or may not be legally binding, but breaches can often be settled in court. Verbal contracts are typically used for minor agreements.

2. Unilateral contracts

This contract arises when one party in the agreement commits to a specific action, while the other party does not have a corresponding obligation. In this scenario, only the party making the offer is bound by the contract. For instance, a business may offer its customers a discount if they refer a friend. In this case, the business is obligated by the unilateral contract to provide the discount, but the customer is not necessarily required to make the referral.

3. Bilateral contracts

Bilateral contracts are similar to unilateral contracts, but both parties agree to perform something for each other. This leads to reciprocal obligations, where each party owes something to the other.

4. Express contracts

Express contracts are knowingly agreed upon, either verbally or in writing. They clearly define terms, and all parties understand their commitments. These contracts are legally binding, and breaches can be adjudicated in court. They may also incorporate e-signatures depending on their format.

5. Implied contracts

This type of contract involves a tacit understanding that is usually not formally documented or verbally acknowledged by the parties involved. It relies on the conduct and actions of each party. For instance, when a consumer buys a product, there’s an implicit expectation of its functionality. The implied contract is initiated when both parties take specific actions, such as the consumer making the purchase and the seller accepting the payment.

6. Fixed-price contracts

A fixed-price contract is also referred to as lump-sum contracts, are agreements where the involved parties mutually establish the goods or services to be exchanged and set a specific price for them. These contracts prove highly effective when the project’s scope can be clearly defined upfront. Due to their simplicity compared to other contract types, fixed-price contracts serve as a valuable tool for expediting the agreement process.

7. Cost-plus contracts

Cost-plus contracts entail one party being reimbursed for all the expenses incurred during the project, along with an additional fee upon successful completion. This type of contract is beneficial when determining the project’s scope is challenging initially. By having the customer cover expenses, contractors can jointly bear the risks associated with prolonged or potentially over-budget projects. This approach is especially prevalent in industries like construction, where material costs can fluctuate unexpectedly.

8. Time and materials contracts

Time and materials contracts are commonly utilized in construction and other labor-intensive projects. Under this contract type, one party agrees to pay a fixed rate for each hour of labor, along with the expenses for materials. If a project extends beyond the initial estimate or requires additional materials, these costs are integrated into the contract. While time and materials contracts are relatively straightforward, they can potentially result in higher project expenses for the client.

9. Unit pricing contracts

Unit pricing contracts involve a contractor presenting a predetermined price for each unit or segment of work to be accomplished. While the price of each unit is primarily based on material and labor costs, it’s the final unit price that the customer immediately observes. Contractors often provide a detailed breakdown of the calculations used to determine this unit price.

10. Simple contracts

A simple contract is an agreement between two parties, whether verbal or written, that is not formally documented or sealed. The legal binding of these contracts may vary, and any breaches may be subject to court rulings. These contracts are typically more suitable for minor agreements.

How to keep track of different contracts

Your organization may deal with a number of different types of contracts and being on top of them can seem intimidating. However, the right tools can help you manage them effectively and ultimately be a boon for your organization.

Contract lifecycle management (CLM) software can help businesses streamline the entire contract lifecycle. CLM provides a centralized hub for creating, storing, tracking, and managing contracts. These systems work by automating various aspects of contract management, making it easier for businesses to oversee contractual agreements, mitigate risks, and track performance.

Equipped with the right tools, your company will experience immediate positive outcomes, including enhanced compliance, seamless collaboration, and timely contract negotiations, ultimately contributing to your overall success.