13 Types of Contracts (With Definitions and Examples)
Updated 23 August 2023
Contracts can be a necessity in many circumstances, often to protect the best interests of employees, employers, businesses, private sellers and consumers. They typically detail the specific terms and conditions of an agreement. Understanding types of contracts and what they entail might help you create a contract management strategy for yourself or the company you work at. In this article, we list different types of contracts and provide definitions and examples of each of them.
13 types of contracts
Below is a list of 13 types of contracts you might encounter as a professional, including a definition and examples of each:
1. Cost-plus contract
A cost-plus contract occurs when a consumer agrees to reimburse a business for expenses it incurs when completing some work, adding a certain amount to ensure profit for the business. This contract is common where expenses relating to the completed work can vary. Often, the profit amount is a percentage that the parties add to the final price. You might encounter this contract working with a tradesperson. For example, a carpenter might use it to ensure they receive profit, even if the expenses of materials vary. There are four main types of cost-plus contracts. Here are their definitions:
Cost-plus fixed fee contract: This type of contract covers the expenses and adds a fixed fee.
Cost-plus award fee contract: This type of contract allows the contractor to receive a fee, typically for excellent performance.
Cost-plus incentive fee contract: This type of contract allows the contractor to receive a fee if they complete their work within or under budget.
Cost-plus percent-of-cost contract: This type of contract allows for the reimbursement amount to rise if the contractor's expenses increase.
2. Cost-reimbursement contract
A cost-reimbursement contract is when you determine the total amount to pay at the completion of a project or at another specified date. With a cost-reimbursement contract, the contractor typically provides an estimation of total costs, which provides the consumer with a budget. If the contractor reaches the total cost before completion, they can seek approval from the consumer to continue with the project or cease work. Once the consumer and contractor agree to a total estimated cost, the consumer pays an amount to cover incurred expenses before the project begins.
This type of contract might be necessary when cost flexibility is a requirement for a project, for example, if the scope of work is difficult to determine or if the project itself is at high risk. This type of contract might be common among government agencies.
3. Fixed-price contract
A fixed-price contract is an agreement between the consumer and business or private seller to pay a specific amount of money for determined goods or services. In this type of contract, the cost of the goods or services remains the same, regardless of how long it takes to complete or provide them. For example, you may agree to pay a certain amount of money to a person who cleans your house, no matter how much time they require to complete the job.
4. Time and materials contract
A time and materials contract is an agreement whereby a consumer agrees to pay a contractor for the time the latter spends on the project and the expenses they incur throughout the project. This type of contract might be common when the scope of the project is difficult to determine. For example, some hairdressers establish the exact cost of their services after they've completed them because the amount of product and time they need for a person's hair can be difficult to predetermine.
5. Implied contract
An implied contract is an unspoken agreement that the parties don't typically write down or verbally agree to. It usually depends on the actions of each involved party. For example, if a consumer purchases a product, they assume that it's functional. The implied contract occurs when the parties take an action that begins the contract. For instance, the consumer pays for the product and the seller accepts the payment.
6. Unit price contract
A unit price contract is an agreement between a contractor and consumer to pay for a project by units of the job. The contractor breaks the project up into units before beginning to work on it. For example, a pool installer might be unable to predetermine the amount of dirt they might remove from a location. In this scenario, they can use a unit price contract where the consumer agrees to pay a certain amount for each load of dirt the installer removes.
7. Express contract
An express contract includes an agreement to pay a certain predetermined price to receive specific goods or services. All involved parties can agree to the contract verbally or in writing. They typically express the terms and conditions of the contract to each other before agreeing to it. For example, if you make an oral agreement to pay a neighbour a certain amount to mow your lawn, this could be an express contract.
8. Bilateral contract
A bilateral contract is an agreement that binds two or more parties to mutual obligations. It can occur when a consumer and seller make an exchange of commitments to supply a product or perform a service. Both parties agree to the contract, and they make promises to perform a certain action. For example, during the sale of a vehicle, the consumer agrees to pay a certain amount, and the seller agrees to transfer the ownership over.
9. Unilateral contract
A unilateral contract occurs when one party of the agreement makes a commitment to perform a certain action. The other party doesn't make a commitment to the agreement, so only the offerer has a contractual obligation. For example, a business can offer a discount percentage for their customers when they refer a friend to the company. The business then has a unilateral contract obligation to provide the discount, but it generally isn't necessary for the customer to refer their friend to the company.
Related: Why Is Conscientiousness Important?
10. Adhesion contract
An adhesion contract is an agreement between two or more parties, where only the business or seller who has initiated the contract has the power to negotiate its terms and conditions. The contract is non-negotiable to the consumer. A common example may be an agreement between a lender and borrower pursuing a mortgage contract. The lender determines the agreement's terms and conditions, and they're non-negotiable to the borrower.
11. Aleatory contract
An aleatory contract is an agreement between parties to perform a service or provide a product if a certain event occurs. The parties only have the obligation to fulfil the action if the pre-determined event happens. A common example of an aleatory contract is an insurance policy. Both the insurer and the insured enter the agreement, but the obligation for the insurer to fulfil it only occurs if the damage or destruction of the insured product aligns with the terms and conditions.
12. Unconscionable contract
An unconscionable contract is an agreement that happens under an unreasonable circumstance. It often involves a dominant and a weaker party, and one party typically takes advantage of the other's vulnerability. An example of this type of contract might include tricking an uneducated person into accepting an agreement, a minor signing a contract with a business or one party of an agreement experiencing an unfair and undetermined surprise after entering the contract. This type of contract generally isn't honest, and the party signing it often lacks adequate information.
13. Simple contract
A simple contract isn't an officially sealed contract but rather a mutual agreement between two parties that either write it down or orally agree to it. A simple contract typically requires three key characteristics to be valid. These include an offer, a consideration and an acceptance. A simple contract might include an agreement between two acquaintances to exchange one service for another. For example, if one person is a plumber and the other an electrician, they might agree to complete certain work for each other as a trade exchange.
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