The Six Types of Contracts in Professional Service Firms: An Insider’s View

The Six Types of Contracts in Professional Service Firms: An Insider’s View

When I first began my journey as a founder of a boutique professional service firm, I was engrossed in the logistics of setting up, hiring the right talent, and pitching to clients. As many founders do, I overlooked a critical aspect of the business: contracts. Many founders do not realize they are routinely entering into contracts. Neglecting this can lead to misunderstandings, disputes, and potential legal consequences. It’s important to recognize the different types of contracts to prevent future complications.

There are six types of contracts most commonly used in professional service firms:

    1. Bilateral Contract: At its core, a bilateral agreement involves a promise for a promise. Both parties commit to certain obligations. For instance, in a professional service firm, this could manifest as an agreement where the firm promises to deliver specific services, and in return, the client commits to paying a set fee. These contracts are beneficial when both parties have clear obligations to fulfill. However, they can be restrictive if situations change, and flexibility is required.

    2. Unilateral Contract: Unlike bilateral agreements, unilateral contracts involve a promise in exchange for an act. Imagine a situation where a professional service firm offers a bonus to an employee if they bring in a certain number of clients. Here, the firm has made a promise, but the employee is not obligated to perform the action. These contracts can be motivating, but they also risk no action being taken if the recipient doesn’t see value in fulfilling the task.

    3. Explicit Contract: These contracts spell out the terms and conditions in a clear and unequivocal manner. For a professional service firm, an explicit contract might detail the scope of work, timelines, remuneration, and other specifics. While these are advantageous for their clarity, they can also be time-consuming to draft and may be perceived as inflexible.

    4. Implied Contract: These contracts are not written or spoken but are inferred from the behavior of the parties involved. If a client in a professional service firm continually engages a consultant without a written agreement, and pays them after each project, an implied contract might be in place. They can be useful in ongoing, trust-based relationships but are susceptible to misunderstandings since terms aren’t explicitly documented.

    5. Oral Contract: As the name suggests, these are verbally agreed-upon contracts. A client and a professional service firm might agree on the scope of work during a meeting, and while valid, these contracts can be hard to enforce due to lack of tangible evidence. They’re quick and can be suitable for straightforward, short-term engagements. But they’re best avoided for complex projects or long-term collaborations where the risk of misinterpretation or forgetfulness is high.

    6. Written Contract: This is the most formal type of contract. Drafted and documented, it provides a clear record of the agreement between parties. In our firm, for instance, we always have written agreements detailing service deliverables, compensation, confidentiality clauses, and more. While they might seem cumbersome, they offer protection and clarity for all parties involved. They’re ideal for significant projects or collaborations. However, the only drawback is the time and sometimes the cost involved in drafting them, especially if legal consultation is needed.

In conclusion, contracts form the backbone of professional engagements in service firms. As founders, it’s our responsibility to understand these intricacies and ensure we’re using the right contract for the right situation. It’s not just about safeguarding interests but also about building trust and transparency with our clients and employees.

If you find this article helpful, come join us at Collective 54. Apply here.