Looking for Types of Contracts?
What are the different types of contracts in business?
How does it work?
In this article, we will break down the notion of Types of Contracts so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
Let’s dig into our business and contracting knowledge!
Are you ready?
Let’s get started!
Types of Contracts Overview
In today’s market and economy, there are countless contracts being signed and entered into every day by individuals, businesses, governments, companies, agencies, and others.
A contract, by definition, is a legally binding document reflecting the agreement between the contracting parties.
The notion of “contract” is quite broad as it refers to every type of agreement out there.
This begs the question: what are the different types of contracts?
There are different types of “contract” from a “business” perspective but also other perspectives like legal and pricing.
For example, in business, we can refer to:
- Construction contract
- Service contract
- Purchase contract
- Shipment contract
- Non-disclosure contract
On the other hand, the law can also qualify the contract in different classes or types as well, such as:
- Unilateral contract
- Bilateral contract
- Express contract
- Adhesion contract
In this article, we will break down the different types of contract you may find.
Types of Contracts: Legal Classification
To start with, let’s look at the different types of contracts from the legal vantage point.
What types of contracts are there from a legal sense of the word?
In law, we can classify contracts in different ways, such as:
- Adhesion contract
- Aleatory contract
- Bilateral contract
- Express contract
- Implied contract
- Unconscionable contract
- Unilateral contract
Although this is not an exhaustive list, let’s look at each of these legal classifications of contracts to understand their meaning.
An adhesion contract is a type of contract where one party defines the terms and conditions of the agreement and imposes it on the other.
A contract of adhesion, also known as a “standard form contract”, “boilerplate contract” or “form contract” is a contract drafted by one party and given to another party to accept as-is or sign without any modifications.
In many cases, it is said that an adhesion contract is a type of contract where you have to “take it, or leave it”.
An aleatory contract is a type of contract where the parties’ obligation is linked to a future and uncertain event.
In other words, the contracting parties promise to execute certain obligations or perform certain things upon the happening of a specific triggering event.
Typically, we see aleatory contracts in:
- Gambling contract
- Wagering contract
- Speculative investments
- Insurance contract
- Life annuities
In these types of aleatory contracts, the parties’ rights and obligations are materialized when an event is agreed to happen effectively in the future.
A bilateral contract is an agreement reached by two parties where each party commits to performing certain obligations in exchange for something in return.
For example, when you purchase an automobile, you enter into a bilateral contract.
You obligate yourself to pay the car dealer a certain amount of money and the car dealer obligates itself to deliver to you the car you intended to buy.
Bilateral contracts are the most widely used type of contract, particularly in the business world.
Nearly all business contracts are bilateral.
The contracting parties can use words, orally or in writing, to clearly manifest their intention to be bound by the terms of the contract.
For an express contract to be formed, its terms must be unequivocally accepted by the parties.
There must be no ambiguity as to whether the parties intended to form a contract or not.
An implied contract is a contract that is inferred or literally “implied” based on the behavior and actions of the parties.
In other words, implied contracts are not written down or expressly agreed by the parties but rather it is formed by actions and conduct manifested by the parties.
For example, when you walk into a restaurant, order a meal and eat it, you are legally bound to pay the price of the meal even though you did not expressly exchange words of agreement.
In fact, through your actions of ordering and eating the meal, you legally commit yourself to pay for the meal.
You do not have a written contract with the restaurant but the law imposes an obligation on you to pay considering you received the intended service from the restaurant and there was an exchange of consideration for both parties.
An unconscionable contract is a type of contract that favors one party so much that the law considers it to be unfair and non-enforceable.
When a party files a lawsuit claiming that a contract was unconscionable and if the courts agree, then the consequence is that the contract will be declared void.
Typically, when one party has a much stronger negotiating power, influence, or authority over another, an unfair contract may be signed.
Let’s be clear, it’s not easy to sign a contract and eventually have it voided by the courts.
However, when evidence is presented demonstrating that one party took advantage of another and that the contract terms are not fair, then the courts will void the contract.
A unilateral contract is a contract where one person offers to perform a certain obligation in favor of another without reciprocity or something in return.
The other party or the offeree does not have any contractual obligations towards the offeror and can elect, in its discretion, to do something.
You can consider a unilateral contract as a one-sided agreement or an agreement where the obligations flow unilaterally from one party to the other.
Types of Contracts: Business Classification
In business, individuals, entrepreneurs, companies, and organizations do not refer to contracts the same way as lawyers do or how the law classifies contracts.
We can therefore speak of “type of contract” or classify contracts in a more “business” fashion, such as:
- Construction contract
- Procurement contract
- Supply contract
- Leasing contract
- Licensing contract
- Service contract
- Employment contract
- Non-disclosure contract
- Partnership agreement
- Indemnity agreement
Let’s look at each of these contract types.
A construction contract is a type of business contract where one party agrees to build a property, building, structure, or other for another.
For example, the building of a bridge, a new house, an office building, or other structures will require a construction contract where a general contractor will agree to build and deliver a specific type of work.
A construction contract will typically include the terms and conditions applicable to the construction project, the work that is required to be done, and the sharing of responsibilities.
An employment contract is an agreement signed between an employer and an employee establishing the terms and conditions of employment.
Typically, the employer commits to paying an employee a salary in exchange for the employee’s services.
As such, an employment contract governs the working relationship between the employee and the employer.
An indemnity agreement is a type of business contract where one party agrees to indemnify another in regards to a particular risk, liability, or exposure.
The party benefiting from the indemnity is called the indemnitee and the other party is the indemnitor.
You may also hear names such as “hold harmless agreement” or “waiver of liability”.
These agreements are substantially similar but you’ll need to be careful as to their formulation to ensure you understand their scope.
A leasing contract or leasing agreement is a type of agreement entered into between a property owner and a tenant (lessor and lessee).
As such, a lease contract is between a landlord, or property owner, and a tenant who is given the right to use the property for a period of time as defined in the lease.
For example, in the context of a residential lease, the landlord authorizes the tenant to use the residential property for the duration of the lease.
A licensing contract is a legal document or agreement where one party gives another party the right to use an owned intellectual property such as a brand, patent, software, trademark, or other.
The licensing agreement is entered into between a licensor (property owner) and the licensee (the party authorized to use the property).
License agreements will generally define the scope of the license and how the licensee may use the property by defining terms like duration of the license, exclusivity, royalties, sub-licensing rights, licensing fees etc.
A non-disclosure agreement or NDA is a fairly common type of agreement in the business world.
A non-disclosure agreement is a legally binding agreement where the parties agree to maintain certain information exchanged between them as confidential.
The objective of an NDA is to ensure that the contracting parties protect their secret, sensitive, or commercially valuable internal information.
When two business parties commence discussions to form a new relationship, alliance, or cooperation, an NDA is typically signed right from the outset to protect the parties’ confidential information.
A partnership agreement, as the name suggests, is a type of agreement where individuals or companies join their resources, knowledge, and means for the common good.
When individuals get together to form a partnership, they may choose to enter into a “partnership agreement” as general partners of the business.
Companies may also engage in a partnership relationship by signing a contract where they form a partnership.
In a partnership, the general partners will typically provide the business with capital contributions, knowledge, and time.
The profits and losses of the business will be shared by the general partners.
A procurement contract is a business contract where a company purchases (or procures) materials, supplies, and services for a specific business need.
Practically speaking, procurement contracts are generally called purchase contracts as the objective is for a company to purchase something required for its business to function.
Depending on the companies involved and the nature of the contract, the procurement agreement can be quite complex and involved covering aspects like vendor selection, product management, payment conditions, contract pricing, and others.
A service contract is a type of agreement where a person or company, the service provider, provides services to another person or company, the client.
The service agreement will cover aspects like the nature of the services required, payment terms, acceptance testing, post-delivery warranties, and so on.
Service agreements are quite common in business as companies purchase from service companies different types of services such as project management, marketing services, development services, and so on.
A supply contract is a type of agreement where a company agrees to supply to another the merchandise, goods, or services that the other party needs over a certain period of time.
The companies looking to get a regular supply of goods or services will typically want to achieve a certain level of price certainty during the term of the contract.
As a result, there will be an important emphasis on the pricing of the contract such as fixed price, locked-in discounts, payment terms, and so on.
Types of Contracts: Pricing Classification
You can categorize, classify, and divide contracts into different types based on the pricing structure they offer.
For example, in construction contracts or service contracts, it’s quite common to classify contracts based on how the pricing of the contract is established.
Here are different types of contracts based on contract pricing:
- Cont-reimbursement contract
- Cost-plus contract
- Fixed price contract
- Hourly contract
- Lump sum contract
- Time and material contract
- Unit pricing contract
From a pricing point of view, the three types of contracts outlined below are the most common ones found:
- Fixed-price contracts
- Cost-plus contracts
- Time and material contracts
Let’s briefly look at each of these agreement types.
A cost-reimbursement contract is a contract type where the final cost of the project is determined at the end of the contract or at a date the parties mutually agree.
When a contract is signed, the service provider will estimate the project costs and the client pays according to the estimation.
When the project is completed or at a specific date, the actual project costs are determined for the client to pay.
A cost-plus contract is a type of contract where the total price paid by the client is the total cost of the project along with a fee paid on top of that to the contract.
In a cost-plus agreement, the client will pay for all the labor, material, and expenses incurred during the project along with an extra fee to compensate the general contractor.
The cost “plus” refers to the extra fee charged by the service provider.
Within this category, you have different types of cost-plus contracts:
- Cost-plus award fee contract
- Cost-plus fixed fee contract
- Cost-plus incentive fee contract
- Cost-plus percentage-of-cost contract
Fixed price contract
A fixed-price contract (or a lump sum contract) is a type of contract pricing where the total contract price is fixed by the parties in the contract.
The objective is for the parties to define the scope of the contract as clearly as they can and agree on the total price associated with the contract.
If the scope or the parties’ cost forecasts do not change during the term of the contract, the fixed price agreement will give stability to both parties.
Generally, if the payment does not depend on how many resources were used during the contract or how much time was spent, then a fixed-price contract can work just fine.
Hourly fee contract
An hourly fee contract is a type of contract where the service provider will charge the client a certain rate per hour
In an hourly fee contract, the service provider is paid for every hour of services rendered.
The costs and project costs will generally be assumed by the client.
Time and material contract
A time and material contract (T&M contract) is similar to a cost-plus contract where the client pays the service provider for the cost of the material and something extra.
In this case, the extra fees paid to the service provider is quantified in units of time.
In many cases, the unit of time used to charge fees is on an hourly basis but it can be in days, weeks, or months as well.
This type of contract is used in cases where the service provider cannot accurately estimate the overall requirements to complete a project when the contract is signed.
Unit pricing contract
Unit pricing contracts are contracts where the services or projects are presented in terms of units that can represent time, material, or even both.
The parties will estimate the number of units required to complete the project upon signing of the contract and the client will be required to pay based on the number of units delivered.
Generally, this is a contract suitable for construction jobs or supplier projects where the service provider can charge based on estimated quantities of items included in the project.
Contract Types Takeaways
What are the different types of contract?
How do the different types of contractual agreements differ from one another?
Let’s look at a summary of our findings.
Types of Contracts
If you enjoyed this article on Types of Contracts, we recommend you look into the following legal terms and concepts. Enjoy!
You May Also Like Related to Types of Contract
Bill of sale
Classes of contracts
Contract under seal
FAR types of contracts
List of contracts
Lump sum contract
Related to Business And Types of Agreement
Cash flow diagram
Indefinite delivery contract
Indefinite quantity contract
Internal rate of return (IRR)
What is a contract
Work for hire