Contracts. Possibly not at the forefront of your ‘things I like to do’ list. But, argues Tiffany Kemp – author and founder of specialist commercial contracts consultancy Devant – a good contract reflects your company ‘personality’, and supports you in delivering great deals.
What does a great deal look like for you? It might include:
- We made the profit we’d anticipated (or even more)
- The client was really happy with what we delivered
- They wanted to work with us again
- They’ve recommended us to others
- Our staff enjoyed working on the deal
To use your contract to create more great deals and fewer bad ones, start by thinking differently. Instead of looking at the contract as your ‘insurance policy’ in case everything goes horribly wrong, consider it as a tool to make sure everything goes brilliantly right! Think of it as the ‘User Guide’ for your commercial relationship and you’re off to a good start.
Many contracts bear little relationship to the commercial deal they’re supposed to govern. They’re stuffed full of ‘legalese’, with obscure language and terms whose special meanings ordinary business people can only guess at.
The good news is that a contract doesn’t have to be written in Latin, or impenetrable legal language, to be enforceable. Increasingly, big businesses use agreements written in clear and easily understood English to contract with consumers. Why not do the same in business-to-business contracts?
A useful contract answers three important questions clearly and thoroughly to help create great deals:
- Who does what, when?
- When does payment occur?
- What happens if things go wrong?
Who does what, when?
Most deals go wrong because this question was not answered thoroughly enough at the start. A clear scope of work that sets out both the supplier’s and the client’s responsibilities helps you both work together towards a successful outcome.
If the deliverables are likely to change or evolve as you go through the project, a simple and easy to use change control provision is essential. Unclear scope and poor change control create the perfect environment for margin erosion. So if you’d like to hold onto your profits, focus on being clear about what each of you must do to deliver the right outcome, and how you’ll manage the inevitable variations and hiccups along the route.
When does payment occur?
Often, it’s only when the client refuses to pay an invoice that we discover they weren’t happy with what we’ve delivered.
Make sure your contract clearly sets out when you’re entitled to invoice. If invoicing is linked to delivery, how can you demonstrate you’ve delivered what you said you would? Being able to prove you’ve complied with your delivery obligations is the first key step to getting paid on time.
Sometimes, even when you’ve demonstrated delivery, clients delay paying you as long as they can. Your contract can help here. Set out clearly what will happen if they don’t pay on time. Suspending service or product delivery can encourage prompt payment. But doing so when you haven’t secured this right in the contract can put you into breach yourself – so make sure you put this into your terms if it’s important to you.
One thing you don’t have to set out explicitly is your right to charge interest for late payment. Under the Late Payment of Commercial Debts (Interest) Act 1998, you’re entitled to charge 8% above base rate, plus debt collection charges, if clients don’t pay when they should. Used politely, promptly and consistently, such charges (and the offer to waive them if payment is received within, say, 5 days of your letter) can be a useful ‘client training’ tool, encouraging them to treat your business with respect by paying on time.
What happens if things go wrong?
This is where scary legalese lurks to terrorise the unwary, with indemnities, liabilities and warranties galore. While these terms carry specific legal meanings (check out ‘The Butler’s Tale’ for explanations), you can answer this question in plain English.
When people buy from you, they trust you to deliver what you promised and deal with problems fairly. Many contracts make suppliers look like they have no intention of being held to account if they mess up.
To make your contracts into positive documents, set out what sort of problems you WILL be responsible for and how you’ll resolve them. So if you’ll take back goods that fail to work within 12 months of purchase, and send the client a replacement new product free of charge, say so. Or if you’ll bear the cost of getting a third-party in to clear up the mess if you can’t fix a problem, say so.
You’ll still want to put a cap on your financial exposure – no business wants to incur £millions of liability on a deal that only brings in £thousands of revenue. But being clear about how you deal with problems will set you apart from your competitors, showing you’re prepared to stand behind the quality of your product or service.
Love your contract
By answering these three questions honestly, clearly and unambiguously, your contract contributes positively to the sales process. It helps you explain what you do, how you do it, and your commitment to fixing problems if they arise. A good contract reflects your company ‘personality’, and supports you in delivering great deals. That means deals that deliver profit, great results for the client, and long-lasting, mutually beneficial commercial relationships. What’s not to love?
Has your experience with contracts been more catastrophic than commendable? Have some tips to add to the above? Got a question for Tiffany? Do share in the comments below…
Professional indemnity cover can help protect you if claims are brought against you by clients due to a problem with work you have done for them. Find out more over on our Hiscox Professional Indemnity page