How to develop effective agreements that safeguard your business
Watch the video to learn the importance of contracts and when to use them.
Contract basics
You need repairs done at your child care program and you want to know more about what the contractor includes in the contract agreement. Maybe you want to have a behavioral specialist for a few hours a week and aren't sure how to set that up. You might want to share services with other groups to reach shared goals. These are examples of times when you need contracts. When you make an agreement with another business, all the details should be written down and signed by both businesses. The written document is called a contract.
You shouldn't make an agreement where everything is talked about and nothing is written down, even if it's with someone you know. This is sometimes called a "handshake agreement" because it's only based on what people say. When you only talk about the agreement, it's easy to misunderstand or forget details. The more important the agreement, the more important it is to have it in writing to avoid misunderstandings. Otherwise, one side may feel misled.
The name of an agreement can often tell you how important it is. Agreements that parents sign to enroll their children in your care may be called Care Contracts. When you work with other groups, you may receive a Memorandum of Understanding, or MOU, which is usually a lower-risk agreement. Sometimes groups agree to work together for a common goal 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
When you enter an agreement with another group or individual, here are key items to include in the document you both sign:
Business name
If a business uses a Doing Business As or “DBA” name, include the registered business name.
Business address
Include best mailing address if different than registered business address.
Contact(s)
The contact person(s) for each business, along with their phone number and email address
Start and end date
Agreements should have a start and end date or a job completion date. For small jobs, it's okay if dates aren't specified as long as payment isn't due until the job is done.
Payment terms
Include the amount to be paid, form of payment, payment due date, and any penalty for a late payment.
If you're paying another business to do something for you, you expect quality work. If the job isn't completed the way you thought it would be, you can dispute the work if your expectations are included in a signed contract. Digital signatures are as valid as hard copies with handwritten signatures.
Understand the level of risk
More complicated agreements need longer contracts. The more legally bound your business is to another business or person, the more risk your business could be taking on. It's a good idea to have a lawyer look at higher-risk contracts before you sign them. Be aware of all your obligations and what services or goods you're supposed to get before signing.
Remember that "lower risk" doesn't mean "less work." Always read everything 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're asked to do, speak up. You may be able to get the contract changed to fit your needs or understand things better by talking about it.
Here are some signs that contracts might have a greater level of risk:
- A large sum of money is being exchanged, and/or a large sum is being exchanged as a recurring amount. Your business needs to make money to be successful. If you're 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 you can call. Consider checking in regularly (ideally monthly) to make sure they're doing the job you're paying them for and their work meets your standards. Include what happens if they don’t do the job or if the work isn't good enough in the contract.
- Certain binding clauses are included. Near the end of the agreement, it's common for medium- to high-risk contracts to have legal phrases that are meant to lower risk. Consider if you trust the business or individual you're making an agreement with enough to take on their risk. Also, make sure the contract protects you equally. Binding clauses don't mean you shouldn't sign the contract-it just means the contract has some risk. If you're not sure of what something in the contract means, ask people you trust to review it. If you're unsure about the meaning, you may want to talk to a lawyer to make sure signing the contract is a good idea for you.
- People who aren’t part of your business are coming to your business or you/r business is going on site to theirs. Whenever you're at someone else’s location, they may be responsible if you get hurt unless you agree to something different in writing, which is why you have liability insurance. If a child gets hurt in your home and a family thinks you're responsible, your insurance should protect you from having to pay for medical or legal costs. Some contracts ask for proof of liability insurance or may ask you to add another business as an extra insured party on your liability insurance (or the other way around).
Contracts may have "Hold Harmless" clauses. These usually say you can't hold the other group responsible for something bad that happens while you're in the agreement with them. Hold Harmless statements are usually good for both parties as long as both sides present 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 is when you hire a contractor to do repairs or landscaping. These contractors pose much more risk for your property and your business than you do for them. Contractors should have a liability insurance policy to protect themselves, 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.
Disclaimer:
The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.