Drafting a contract – where to begin


Where possible, it is best to use a contract that is customised to your profession or industry. This will include terms that are relevant to the work you do or the industry you work in. An industry association is a good place to start. Some industry associations sell industry specific standard form contracts to non-members.

Alternatively, you can use this guide to consider all the aspects of a contract. It may assist you to draft your own or negotiate a better deal in a contract that is provided to you by the hirer.

You could also ask a lawyer to draft a contract for you.

Some hirers that engage a number of contractors use a standard form contract for their business. You can either accept their contract as it is or negotiate to change it.

Consider using plain English

Contract language doesn’t need to be complicated. In fact the simpler and plainer the language, the more easily the contract can be understood. Misunderstandings will also be less likely.

If you use a lawyer to draft a contract, ask them to use simple, plain English and to explain anything that you don't understand.

Contracts often use language such as 'the principal' and 'the contractor'. This is often done for convenience in writing standard form contracts. You might find it simpler to use your name and the hirer's name.

Keep it simple

A short, simple contract may work for you depending on the job you’re being hired to do. At the very least, a contract should include:

  • description of services
  • payment
  • completion terms
  • dispute resolution procedure

1. Provide details of the parties


All written contracts should include some basic information about you and the hirer (the parties to the contract).

  • Names and business addresses - Know who you’re contracting with. Is it a company, trustee, partnership or individual? This will be important if there is a dispute during the contract period and you need to go to court. Understanding exactly who you’re contracting with will also better allow you to assess the risks of entering into the contract and to locate relevant information about the other party.
  • Australian business number(ABN) - You will need to register for an ABN for certain tax purposes, such as GST and pay as you go (PAYG) withholding, include the ABNs of both parties. Use the Australian Taxation Office's ABN entitlement to see if you need to register for an ABN.
  • Australian Company Number (ACN) - Companies incorporated under the Commonwealth Corporations Act 2001 are assigned an ACN. If a company's ACN is different from the last 9 digits of the company's ABN, include the ACN in the contract.
  • Statement about your status as a contractor - If the contract is for a genuine contracting relationship not an employee relationship, the contract should identify you as a contractor. This may be considered relevant by a court if your status as an employee or contractor is in question. It shows what was intended when the contract was signed. Sham contracting is illegal and a statement that says you’re a contractor when you’re actually an employee will not override a sham contracting arrangement.
  • Signatures (and the signatures of any witnesses) - Both you and the hirer must sign the contract for it to be valid.

2. Describe services or results


Every contract should include a description of the agreed work to do or the result to achieve. This should be as detailed as necessary to make it clear.

It should state:

  • what work to do or result to achieve
  • when the work will start and be completed (specific dates)
  • where the work will be done (the hirer's business premises, your home office or another location).

Examples of description of services

Good example of a description service - Lee will deliver training sessions in Biz-Fast software (Version 3) to 15 staff from Rekall Ltd. Sessions will be held on 10 and 11 May, starting at 9am, with each session lasting 3 hours. Training will be conducted at Rekall Ltd, head office in Bigtown. The training services will include providing a Biz-Fast software user manual and a one-page help sheet for each trainee.

Bad example of a description service - Lee will train Rekall Ltd employees in Biz-Fast software.

You may have already discussed the work with the hirer or done similar work for them in the past. However, it’s still important to set out all the relevant information about the work in the contract. Otherwise there might be confusion later. If the contract contains a complete description of the tasks, you’ll be able to refer to it and check what must be done.

Generally, state what the required service or expected result is. You don’t need to detail how it will be done. Giving directions on how to perform the work is more like an employment relationship than a contracting relationship.

Example of results

State the result - Mary will clean the offices of Rekall Ltd each Saturday by 6pm.

Don’t say how to achieve that result - Mary will clean the offices of Rekall Ltd each Saturday by 6pm. Mary must only use cleaning equipment and products approved by the CEO of Rekall Ltd, and must clean each level in the order specified in writing by the CEO each Friday.

Despite this general rule, the type of service or expected result may make it necessary to provide some directions. For example, a builder is not simply asked to build a house. They are asked to build it according to drawings and specifications. But the hirer does not tell the builder how to mix cement. The contractor still retains a high degree of control over the work.

3. Set out payment details


The 2 most widely used methods of payment are fixed fees and hourly or daily rates. Details about how these fees are calculated should be clearly set out in the contract.

  • Fixed fee - Sometimes you will be paid a single, fixed fee to perform an entire job. If the contract is long term, it may be worth including a review clause in the contract that enables your fees to be reviewed if business costs increase.
  • Hourly or daily rate - If you’re getting paid according to the number of hours or days you work, the contract should state how many hours make up a standard working day. You may also wish to specify how many days a week you’ll work. It should set out the fees that are payable for one hour's work and/or one day's work. The contract should always state whether GST is included in the fee (if GST is payable). Contracts that specify hourly or daily rates often require monthly payments.

Example of how a fee review clause

Effie has a contract with Rekall Ltd for one year to deliver catalogues to residential homes for a fixed fee of $500 a week (including GST). Effie must cover long distances to make these deliveries. Two months into the contract, petrol prices increase sharply, and the fixed fee no longer covers Effie's fuel costs each week.

Effie's contract with Rekall has a clause that enables her fee to be reviewed during the contract period. At their review meeting, Effie and Rekall agree to vary the contract to increase Effie's fee to $600 per week (including GST) to cover the increased cost of fuel.

State whether GST is included

Regardless of the payment method you choose, the contract should always clearly state whether GST is included or not. Under GST law, if GST is payable on the supply then the contract price will include GST (even if there is no mention of GST). For more details see When to charge GST.

Payment timing

You can set up the timing of payment under fixed-fee contracts in a number of ways:

  • Full payment when the work is completed - Before you agree to this, you should carefully consider whether this is appropriate for your situation. Is the contract for a long-term job (meaning you might be without payment for some time)? Will you have to pay for supplies and materials in the meantime?
  • Progress payments (payments by milestones, results and/or instalments) - This means you’re entitled to payment either at certain intervals throughout the contract period (for example, on certain dates) or when you have completed a particular task or achieved a particular result. The contract should clearly describe all milestones so there are no disputes about when a task is considered complete.
  • Part payment up front, the rest paid on completion - This arrangement can be used to cover start-up or one-off costs for the contract such as the purchase of materials.

Example of a progress payment clause

The total fee for the services is $9350.00 (GST included) payable in the following instalments:

  • $4400 (GST inclusive) upon delivery of training sessions 1 and 2
  • $4400 (GST inclusive) upon delivery of training sessions 3 and 4
  • $550 (GST inclusive) upon attendance at final feedback meeting

The hirer will make payments within seven working days of receiving a correct invoice from the contractor.

Staging payments in the building and construction industry

If you work in the building and construction industry, check with your state or territory industry association or government building authority to understand the rules about staging payments.

Manner of payment

The contract should set out:

  • whether an invoice is required in order for payment to be made
  • what each invoice must contain – for example, date of invoice, your business or company name and contact details, the hirer's business or company name, your ABN, your invoice number, description of services or milestone achieved, expenses, payment amount and terms of payment
  • the agreed timing for payment or 'terms of payment' – for example, within 30 days of receipt of a correct invoice (standard terms are usually 7, 14, 21 or 30 days, but this can be negotiated)
  • how payment is to be made – for example, specify your bank account details for direct deposit

Expenses

Expenses dealt with in a contract may include items such as meals, travel and photocopying. The contract should specify whether the hirer will:

  • pay for your expenses while you’re performing the contract
  • provide you with supplies that are necessary to do the work

4. Assign intellectual property rights


A contract may require you to create something, like a software program, a document or a plan for a house. However, the creator of intellectual property (IP) is not always the owner. The owner will have certain rights (called 'intellectual property rights') that allow them to license or sell the creation. The owner may also be able to stop other people from making money out of it, even the creator.

As a contractor, you’ll automatically own any IP in the works, articles or inventions you produce, such as copyright. If the hirer wants to own the IP you create, the contract must specifically outline this. It’s advisable to first seek legal advice about clauses that give IP rights to the hirer.

Intellectual property clauses

There are 2 different clauses you might come across.

  1. Where you own the IP you create - The IP rights in any materials prepared by the hirer reside with the hirer. The hirer acknowledges that the IP rights in any materials prepared by the contractor reside with the contractor.
  2. Where the hirer owns the IP you create - The contractor acknowledges that IP rights in all material vests or will vest with the hirer. The hirer gives the contractor a revocable, non-assignable and royalty-free licence to use such material,

Example of IP rights

Lee is contracted to develop a software program to manage Rekall Ltd's inventory for $5000. The contract states that the intellectual property rights in any material developed by Lee under the contract will belong to Rekall Ltd. It states that Lee is provided with a licence to use the software only for the purposes of the contract.

Lee completes the task, and is very pleased with the software. If he tries to sell the software to another company, he will be in breach of the intellectual property clause in his contract with Rekall Ltd. This is because the company owns the software, not Lee.

5. Explain how to treat confidential information


If you want to retain control over your confidential information such as:

  • client lists
  • pricing information
  • trade secrets

Include a clause to protect that information. It can also specify the type of information that is confidential so that both parties understand exactly what needs to be protected (for example, 'information regarding the contractor's profit margins').

Example of a confidentiality clause

The hirer will not, without written consent from the contractor, disclose any confidential information of the contractor to a third party. Confidential information includes profit margins and pricing information disclosed in this contract.

6. Identify who is liable – indemnity


A contract may include an indemnity clause. In a contracting arrangement, this is usually a promise you make to the hirer to accept the risk of loss or damage that the hirer may suffer as a result of your work. Indemnity clauses are usually about shifting risk from the hirer to the contractor. However, it may also state that you’re not liable for risks or losses that the hirer has control over.

While risk is an essential consideration in all commercial contracts, you should carefully consider whether the risk you’re taking on by agreeing to an indemnity clause is within your control. If it’s outside your control, (for example, if the indemnity also applies to work performed by your subcontractors), you may need to get professional advice before you sign.

For people working in certain professions (such as accountants, architects, lawyers or builders), where advice and expertise are central to the performance of the contract, indemnities and indemnity insurance can be a normal part of doing business. It is important that you understand exactly what responsibility an indemnity clause imposes on you. Professional indemnity insurance is strongly advised for a contract that contains an indemnity clause.

Example of indemnity

Lee develops a software program to assist Rekall Ltd's inventory management. However, the software is faulty and Rekall Ltd loses money when it fails to maintain correct inventories.

The contract had an indemnity clause, so Rekall Ltd may be able to recover those losses from Lee. If Lee has professional indemnity insurance (see below), he may be covered for those losses.

7. Provide insurance obligations


Many contracts require you to be responsible for maintaining your own insurance. The insurance might be for:

  • professional indemnity
  • loss of or damage to property
  • public liability
  • workers' compensation

The contract should clearly identify the insurance obligations of each party.

Even if a contract does not require you to have these insurances, it is important that you’re protected in the event something goes wrong (for example, if someone is injured due to your negligence). You should make sure that any potential liabilities under a contract are covered by your insurance.

Professional indemnity insurance

Professional indemnity insurance is most often used by contractors who have expertise in a particular service. For example, engineers may have this insurance to cover against their work becoming unsafe. Medical practitioners may take out cover for protection from being sued if they injure a patient.

8. Outline any subcontracting agreements


Sometimes you may need to engage a subcontractor to do a job for you or help you do a job. Make sure to discuss the possibility of subcontracting work with the hirer and include it in the contract. Some hirers allow you to subcontract part, but not all, of the services. The hirer may wish to specify what work may be subcontracted or place other restrictions in the contract. Alternatively, some hirers insist that you personally do the work and will not allow you to subcontract.

If you do use a subcontractor, you will be responsible for any work performed by them. Remember that if you subcontract the work, you will enter into a contract with the subcontractor as their hirer, even if it is not a written agreement. It’s best to have written contracts with subcontractors for the same reasons that you have one with your hirer.

9. Check any exclusivity arrangements


One of the benefits of being a contractor is the ability to work on any number of projects for any number of clients. An 'exclusivity' clause restricts you from entering into contracts with other clients. You should carefully consider whether you want to agree to a clause like this. Make sure you’re fairly compensated for being prevented from taking work elsewhere.

A court may not enforce an exclusivity clause that is too restrictive or unreasonable. The court will consider factors such as whether the clause protects only the genuine interest of the hirer, the period of exclusivity and the geographic area to which the clause applies. It's best to have the contract clear so you don't need a court to interpret it.

Break free clauses

If you’re offered a contract with an exclusivity clause and you can't negotiate its removal, ensure that there is a 'break free' clause included. This allows you to recover some or all of your costs if the project does not go ahead or is cancelled before you complete the work. You’ll need evidence of your losses. It may be easier to agree on a payment (noting the amount) in the contract clause.

Examples of 'break free' clauses

Cost recovery - Where the contractor is engaged by the hirer on an exclusive basis, and the hirer decides that the contractor's services are no longer necessary, the contractor will be entitled to be compensated by the hirer for all reasonable costs incurred by the contractor in relation to those services until that time.

Lump-sum payment - Where the contractor is engaged by the hirer on an exclusive basis, and the hirer decides that the contractor's services are no longer necessary, the hirer will compensate the contractor with a lump-sum payment of $1000 to cover costs incurred by the contractor in relation to those services until that time.

10. Check for restraint of trade


A 'restraint of trade' or 'no poaching' clause may be included if the hirer is concerned that you might take their clients or compete with their business during the contract period or for a period of time after the contract ends. Usually a period is specified during which you cannot trade with the hirer's clients.

As with exclusivity clauses, a court will not enforce a restraint of trade clause that is unreasonable.

11. Assign responsibility for faulty or incomplete work


A contract may include a 'responsibility for faulty or incomplete work' clause to clarify:

  • who is responsible for fixing any faulty or incomplete work
  • the time frame for fixing it (the 'defects liability period')

This type of clause is particularly common in the building and construction industry where contractors use many subcontractors. The clause may also say that the hirer has to provide the contractor with a 'notice to remedy a breach'. This gives the contractor the opportunity to fix the fault or complete the work before they seek remedies for a breach of the contract.

Example clause about a notice to remedy a breach

If the hirer considers that the contractor has breached this term due to the work being faulty or incomplete, the hirer must first issue the contractor with a notice to remedy a breach. This should include:

  • details of the breach
  • a reasonable time to remedy the breach
  • the consequences of a failure to remedy the breach

12. Include procedures for settling disputes


Business dealings don't always run smoothly. It is good practice to include a procedure for settling any disputes that may occur. Disputes could be over matters such as money, work performance or unfairness.

Dispute resolution clauses

A 'dispute resolution clause' may require you to take the following steps before legal proceedings can begin:

  • give the other party a written notice setting out the nature of the dispute
  • hold discussions with the other party (directly or through representatives) within five days of receiving written notice
  • refer the dispute to an alternative dispute resolution (ADR) practitioner (for mediation, conciliation or arbitration)

The clause should name an organisation that will appoint an ADR practitioner if you and the hirer cannot agree on one. Insist that the ADR practitioner is qualified and currently registered as an ADR practitioner. Similarly, if you work in an industry where the opinion of an expert is required from time to time to help resolve a dispute, you may decide to include an expert determination clause. This may include similar information to the dispute resolution clause.

These processes allow you and the hirer to try to resolve a dispute quickly and cheaply in a manner that ensures that you can continue to do business with each other.

To reduce the cost of resolving a dispute, the contract should state that any costs of dispute resolution will be split evenly between you and the hirer. Include specific timeframes in a dispute resolution or expert determination clause to avoid the process dragging on.

13. Document variations


A 'variation' is simply a change to a contract that is already in place. This is common in contracts that cover a long period. For example, the price of materials may increase or the result aimed for may change. If both parties agree to a variation, a court can enforce it. It is common for contract changes to occur verbally, but it’s important to keep written records of any changes.

If you and the hirer agree to vary a term of the contract, you should put the variation in writing and both parties sign it. The best way of documenting a variation may depend on the nature and detail of the variation.

  • A separate document detailing the agreed variation - This document should refer to the date of the original contract, the parties names and any other important details that will identify the original contract. It should clearly set out the agreed changes to the contract. Make sure both you and the hirer sign and date it. Copies of the variation should be attached to both copies of the original contract.
  • A handwritten variation to the relevant section of your copy and the hirer's copy of the contract - Changes should be signed or initialed and dated by both parties. This type of variation may be used if the change involves an amount or the inclusion or deletion of a few words.
  • A confirmation email or letter and a response from the hirer that shows that you both agreed to the variation - This should be attached to your copy of the contract. If you work in the building and construction industry, you should first check whether there are rules about making and signing variations in your state or territory.

Variation clauses

Contracts often contain a clause for the parties to vary the contract by mutual agreement. You should not agree to a term that allows only one party to change the description of work. Think carefully about the conditions you place on agreeing to a variation term because it can affect your costs or your ability to complete the work on time.

14. State if the contract can end early


A contract can state when one party can end, or 'terminate', the contract, even if the contract has not been completed.