Prepare a contract

As a contractor, a well written contract can help to set expectations with your hirer and protect your business.

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.

This page is for contractors. If you're after a contract for an employment relationship, check our Create an employment contract page.

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.

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.

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

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).

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.

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.

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.

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:

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.

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.

You may want to retain control over your confidential information, such as:

• client lists
• pricing information
• trade secrets.

To do that, you can include a clause in your contract to protect that information. The contract 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').

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.

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.

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.

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.

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.

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.

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.

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.

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.

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