Prepare a contract

A well-written contract helps both parties understand what to expect and protects their businesses.

You can:

• write your own contract
• get a lawyer to draft one
• use a standard form contract – an industry or profession specific template sold by some industry associations, or one the hiring business uses.

Don’t use complicated language. Use simple and plain language so you both easily understand the contract. This can also help reduce disputes.

If you’re using a lawyer to draft the contract, ask them to use simple, plain language. Get them to explain anything that you don't understand.

Contracts, such as standard form contracts, often use language such as 'the principal' and 'the contractor' for convenience. Consider using the contractor and hirer's names instead.

A short, simple contract may do for some jobs.

Simple contracts should include:

• what work the contractor will do or results they will achieve
• how much, when and how the hirer will pay
• what conditions the contractor must fulfill for the hirer to consider the contract finished
• how both parties will handle any disputes.

All written contracts should have some basic details about each party to the contract.

Make sure you include at least these details:

• Full legal names and business addresses. You’ll need to know this if you go to court for a dispute. It’ll also help you find information about the other party and assess the risks of signing the contract.
• Australian business number (ABN) – include both parties ABNs (if needed).
• Australian Company Number (ACN) – add this if a company's ACN is different from the last 9 digits of the company's ABN.
• A statement that the person or business is a genuine contractor, not an employee. Sham contracting is illegal, and a court may consider this statement if the relationship status is in dispute. It shows what both parties intended when they signed the contract.
• Signatures – both the contractor and hirer must sign the contract for it to be valid. Include the signatures of any witnesses (if needed).

Every contract should include:

• a description of the work to do or result to achieve
• when the work starts and ends (specific dates)
• where the contractor will do the work, such as the hirer's business premises, contractor’s business premises or another location.

Contracts generally don’t say how to do the work, as this can indicate an employment relationship. But there are times where a contract may include some direction. For example, a builder constructs a house based on the drawings and specifications given by the client.

Fixed fees and hourly or daily rates are the most widely used fee structures.

The contract should show:

• the fee structure and calculations
• if the fee includes goods and services tax (GST) or not – the Australian Taxation Office explains when to charge GST
• the timing of payments.

The timing of payments depends on your contract type and fee structure. For example, there are several ways to set when a hirer pays in a fixed-fee contract.

The contract should clearly explain how each party will handle payments. This helps avoid confusion and supports timely and accurate payments.

Include in the contract:

• if the contractor needs to issue an invoice for the payment
• when the payment is due (terms of payment) – for example, in 30 days of receiving a correct invoice
• how to pay – for example, give bank account details and ask for a direct deposit.

The contract should specify which details to include on the invoice. For example:

• invoice date
• contractor’s business or company name and contact details
• the hirer's business or company name
• contractor’s ABN
• contractor’s invoice number
• description of services or milestone achieved
• costs
• payment amount
• terms of payment.

Costs

Contracts can include costs such as meals, travel and photocopying. The contract should specify if the hirer will:

• pay for the contractor’s costs during the contract
• give the contractor supplies needed to do the work.

Intellectual property (IP) ownership clauses in contracts are critical for working out who holds the rights to any IP created during a business relationship. For example, creating software programs, documents or house plans.

The owner of the IP rights can license or sell the creation and stop other people from making money out of it.

Under IP laws, the contractor automatically owns any IP they create. If the hirer wants to own the IP, the contract must state this. Contractors should get legal advice about any clauses that give IP rights to the hirer.

These are 2 common IP ownership scenarios:

• The contractor owns the rights to anything they create. The hirer owns the rights to anything they create. Each person keeps the rights to their own work.

• The hirer owns the rights to everything the contractor creates under the contract. If the hirer agrees, the contractor can use the work for free, but they can’t pass it on. The hirer can stop letting the contractor use the work at any time.

Either party can include a confidentiality clause to protect and keep control over their confidential information, such as:

• client lists
• pricing information
• trade secrets.

The contract should specify the type of information that is confidential so that both parties know exactly what needs protecting. For example, information about the contractor's profit margins.

A contract can include an indemnity clause which shifts any risks from one party to the other. For example, a contractor may accept the risk of paying for any loss or damage the hirer suffers because of their work.

Contractors should carefully consider if the risk they’re agreeing to is something they can control. For example, if the indemnity also applies to work performed by their subcontractors.

Indemnity clauses are common when the advice and expertise of certain professions are central to the contract. For example, accountants, architects, lawyers or builders. It’s important that these contractors know exactly what responsibility an indemnity clause imposes on them.

If the contract contains an indemnity clause, consider getting professional advice and professional indemnity insurance.

The contract should clearly identify each parties’ insurance obligations.

Check that the insurance covers everything you might be liable for under the contract.

Contractors are often responsible for keeping their own insurances, such as:

• professional indemnity
• public liability
• income protection.

Contractors who need to engage a subcontractor to help them do the job should discuss this with the hirer and include it in the contract.

The hirer may want to set out what work the contractor can subcontract or add other limits to the contract.

The contractor is responsible for any work done by the subcontractor and enters into a separate contract with the subcontractor.

One of the benefits of being a contractor is being able to work on multiple projects for different clients. An exclusivity clause restricts a contractor from signing contracts with other clients. Contractors should carefully consider these clauses and ask for fair compensation if they’re unable to take work elsewhere.

A court may not enforce an exclusivity clause that is too restrictive or unreasonable. The court will consider factors, such as:

• if the clause protects only the genuine interest of the hirer
• the period of exclusivity
• the geographic area to which the clause applies.

It's best to make the contract clear so a court doesn’t need to interpret it.

Break free clauses

Consider adding a break free clause to contracts with an exclusivity clause. It lets a contractor recover costs or losses if the hirer cancels the job, either:

• before the contract starts
• after the contract starts but before the contractor completes the work.

Contractors who can’t get an exclusivity clause removed from a contract should consider negotiating this clause.

Break free clauses can specify different types of compensation:

• Cost recovery is where the hirer reimburses the contractor for all reasonable costs they incur until that time.
• Lump-sum payment is where the hirer agrees to pay the contractor a set amount to cover potential losses.

Contractors may need to give the hirer evidence of any costs or potential losses.

Hirers can include a restraint of trade clause to stop a contractor taking their clients or competing with their business.

The restraint of trade can cover either:

• the contract period
• a set time after the contract ends
• both.

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

Defect liability clauses deal with faulty or incomplete work. They’re common in the building and construction industry, but contractors and hirers can add this clause to any contract if needed.

Include:

• the faults or incomplete work the contractor and hirer are responsible for
• the defect liability period, which is the time frame the contractor is responsible for fixing the work in scope
• how the hirer will tell the contractor about work that needs fixing or finishing.

Hirers should give contractors a notice to remedy work. This gives the contractor a chance to fix the work before the hirer seeks any remedies for a breach of contract.

The notice should include:

• details of what needs fixing or completing
• a reasonable time to remedy the work
• what will happen if they don’t remedy the work. For example, the hirer may take the contractor to court.

Disputes can happen over matters such as money, work performance or unfairness. It’s good practice to include a dispute clause in the contract. This can help you resolve disputes quickly, cheaply and in a way that lets you continue to do business with the other party.

You should try to resolve a dispute before taking legal action. Consider adding these details to the dispute resolution clause:

• That the disputing party must give the other party written notice of the dispute.
• That the other party will discuss the issue with the disputing party (or their representative) no later than 5 days of getting the written notice.
• That you may refer the dispute to an alternative dispute resolution (ADR) practitioner for mediation, conciliation or arbitration.
• The name of an organisation that will appoint a qualified and registered ADR practitioner if both parties can’t agree on one.
• That both parties will split the costs of dispute resolution evenly.
• Timeframes for a dispute resolution, to avoid the process dragging on.

If the dispute needs the opinion of an expert to help resolve it, the contract can also include an expert determination clause. Include similar details to the dispute resolution clause.

A variation is a change to a contract that’s already in place. For example, a contractor may need to change a contract because the price of materials has increased.

Things to know about contract variations:

• Contractors and hirers can make contract changes verbally, but it’s best to put them in writing and have both parties sign the document.
• A court can enforce a contract variation that both parties have agreed to.
• For building and construction work, check the relevant state or territory’s rules for contract variations.

Add a variation clause to the contract

A variation clause sets out when and how parties can change a contract.

Don’t agree to a variation clause that lets only one party change the work.

Understand the impact of any variation terms, as they can affect costs or the ability to complete the work on time.

Include in the clause:

• what the parties can change – for example, outcomes, timelines, pricing or terms
• that both parties must agree to the contract change
• that variations must be in writing (even if initially agreed verbally)
• how to propose a variation – for example, by email or letter
• what details to include in a proposal – for example, what’s changing, the new date of effect and impact on the scope, cost and timeline
• a time limit for responding to change requests – for example, no later than 5 business days
• a way to resolve variation disputes, such as mediation.

There are different ways a contract can end. Adding a termination clause lets both parties break a contract and can help prevent disputes.

Include in the contract:

• the situations the clause covers – for example, a breach of contract or ending by agreement
• how much notice the parties need to give – for example, 30 days
• how to give notice – for example, by email or letter
• what money is payable if the contract ends – for example, penalties, refunds or compensation
• what happens to other clauses and obligations – for example, confidentiality or intellectual property.