It’s no question contracts carry a lot of weight. Despite knowing this, many contractors, project managers and business owners do not read or write contracts as carefully as they should. When your contracts don’t express specifically or exactly what you want them to say, you’re putting your business at risk of litigation.

There are many factors that can lead to internal confusion between employee and owner, or legal disputes between owner and builder. Let’s take a closer look at why formal, written contracts matter and what businesses can do to avoid disparity between involved parties.

Interpretation and clarity

Carefully worded contracts provide written documentation that clearly defines the relationship, business partnership, project or task at hand. A well-written contract is clear and concise, limiting misinterpretations throughout the course of the engagement.

Project by project

Contracts are your opportunity to define the scope of your project or engagement. How long the project is scheduled to last, who’s in charge of the project, and primary points of contact are all points that a contract can accurately detail for future reference.

If you are starting or already run a construction business, you are probably already familiar with the four most common types of contracts: unit pricing, lump sum, time and materials, and cost plus. The contract type determines whether pay will be decided in advance, or based on the hours worked or units delivered, or whether it will be derived from the full scope of work (plus profit) which is undetermined at the outset of the project.

Other businesses, too, can learn from these four umbrella types, which leave nothing to the imagination about how a project will proceed and how cost will ultimately be determined (as long as the contract is clearly written).

Pricing and financial details

Contracts can also provide businesses with a record of financial costs and payments required for the project, helping involved parties prepare efficient pricing and resources ahead of time.

During the project or business relationship, a contract should help eliminate any uncertainty about where the expenses arise from (i.e. which portion of the project costs what), and also when the money should change hands.

Increase protection and reduce risk

More often than not, a contract will provide a sense of security for everyone involved. Legally binding, written documents essentially remove any unwanted surprises from the equation. Misunderstandings, client betrayal and general deception are more likely avoided with a well-written contract (and you will have legal recourse if not).

Employee contracts and liability

This is all true for employment contracts as well. Do you lay out clearly in a contract how much PTO your employees receive and how they should go about requesting it? When they will be eligible for their first pay increase? What your rules are for tardiness, team work, equipment and gear, etc., and what happens if they break them?

At the end of the day, there are several reasons why contracts matter for both customers and employees. Our advice? Be detailed, be transparent and get everything in writing.