Contract Basics

When you enter into an agreement with another business entity, all details of your agreement should be noted in writing and signed by both businesses. The written document is called a contract.

You should avoid entering an agreement where everything is agreed upon verbally and nothing is in writing, even if it is with someone you know very well. Sometimes this is referred to as a “handshake agreement” because the terms are only based on exchanged words. When you and another person verbally discuss agreements, there are many opportunities for misunderstandings or forgetting details. The greater the importance of the agreement or relationship, the greater the importance that there are no misunderstandings lest one side (or “party,” as the entities contacting with one another are often called) feel misled or let down by the other.

There are different types of agreements with varying levels of significance that you could enter. Oftentimes, the title of an agreement can give insight into its magnitude of impact upon your business. Agreements that parents sign to enroll their children in your care might be called Care Contracts. When you are working with other organizations in your community, you may receive a Memorandum of Understanding, or MOU, typically represents a lower risk agreement. Often, agencies that agree to work together for a common purpose without exchanging money sign a MOU. You might sign a MOU if you agree to work with a local Early Head Start agency to comply with EHS program standards.

Get It in Writing!

Whenever you enter an agreement with another entity, there are key pieces of information that you want to ensure are recorded on the document you both sign:

• Business name (If a business uses a Doing Business As or “DBA” name, also include the registered business name)
• Business address (Include best mailing address if different than registered business address)
• The contact person(s) for each business, along with their phone number and email address
• The start and end date of the agreement. Agreements should have a start and end date or a job completion date. For small contractor jobs, it is okay if the agreement does not specify dates as long as payment is not due until the job is done.
• Terms of payment: Will payment be exchanged? If so, how much? What form of payment is accepted? When is the payment due? What is the penalty for late payments?

If you are paying another business to perform a service for you, you will have expectations about the quality of work you will be receiving. If the job is not completed in the way you thought it would be, then you have a right to dispute the work—if you put your expectations in writing in a contract signed by both entities. Today, digitally signed documents are considered equally as valid as print copies with handwritten signatures.

As a rule of thumb, always get clarification from a trusted source if you are unsure about something or do not have the time to read the documents you are signing.

Assessing Level of Risk

More complicated arrangements or more legally binding agreements require longer contracts. The more legally bound your business is to another entity, the greater risk your business could be taking on by entering the contract. It is in your best interest to have potentially higher risk contracts reviewed by a legal representative before you commit your business to the terms of the agreement. You want to be aware of all your obligations as well as what services or goods are due to you before signing. Keep in mind that even short contracts could be legally binding.

Also, be mindful that “lower risk” does not necessarily equate to “less work.” Always read any documents you sign word for word. If you don’t understand something, ask the person who prepared the document to explain it to you. If you have concerns about something you are being asked to do, voice them. You may get the contract language changed to fit your circumstances or you may develop a better understanding of expectations by having a conversation.

As contracts increase in levels of commitment and risk, there are more components to consider. Here are some signs that contracts might have a significant level of risk.

A large sum of money is being exchanged, and/or a significant sum is being exchanged as a recurring amount. Your business’s profitability is critical to your business’s health and success. If you are paying someone else to do a job for you, have you researched if they are reputable? Look at online reviews and ask for past clients who you can call. Will you be able to verify on a regular basis (ideally monthly) that they are doing the job you are paying them for and that their performance meets your standards? It is most beneficial if you can add language to the contract that clearly states what happens if they don’t do the job or if their performance doesn’t meet your standards.

Certain binding clauses are included. Toward the end of the agreement, it is common for medium- to high-risk contracts to include legal phrases that intend to reduce risk. Think about whether the agency you enter an agreement with is trustworthy enough for you to take on their risk. Also, ensure that the contract protects you equally. Binding clauses do not mean you should not take on the contract – it simply is a flag that the contract has some level of risk. If you are unsure of what anything in the contract means, ask trusted people in your business or your life to look at it. If there’s any uncertainty about meaning or interpretation, you might want to consider a legal consultation to confirm that entering the contract is in your best interest.

People who aren’t affiliated with your business are coming on site to your business or you/r business is going on site to theirs. Whenever you are at someone else’s location, they may be put in a position to accept responsibility if you are injured unless you agree in writing to something otherwise. This is why you have liability insurance—if a child is injured in your home and a family suspects you are responsible, your liability insurance likely protects you from having to pay for medical or legal costs. Some contracts require proof of liability insurance or may ask you to add another business as an additional insured entity on your liability insurance (or vice versa).

More commonly, contracts will have Hold Harmless clauses. These usually state that you cannot hold the other agency responsible for a negative event that happens while they are in the agreement with you. Hold Harmless statements are usually beneficial for both parties as long as both parties present each other with a similar degree of risk. In general, Hold Harmless clauses are good to incorporate into community partnership or shared services contracts.

One situation where different degrees of risk are present are when you hire a contractor to do repairs or landscaping. These contractors pose significantly more risk for your property and your business than you do for them. Contractors should have a liability insurance policy to protect themselves from adverse situations, just like you have a liability insurance policy for your business. Only work with contractors who have liability insurance and who will do the job for you without a hold harmless clause.

Example

Center Director wants to bring Chinese language into early learners’ curriculum. She reaches out to contract with a Chinese tutor, Ms. Zhang, to develop and deliver weekly Chinese lessons.

Need more help?

You can sign up for one-on-one coaching with our experts at www.childcare.texas.gov. In addition to registering for business coaching, you can access free information, resources, and tools related to taxes, finances, staffing, operations, and many more topics.

Disclaimer: The information contained here has been prepared by Civitas Strategies Early Start and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies Early Start team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information is not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited.