Cutting Risk on the Cutting Edge:
Essential Contracts for IT Businesses

Contracts are essential for any IT business: they outline what you will deliver to clients and make clear what each party's responsibilities are. IT businesses can even use contracts to reduce their liability, limiting what they can be sued for.

Despite their importance, business contracts can seem daunting: they are written in "legalese," a twisted version of the English language that only lawyers completely understand. That's why we are going to help you "decode" IT contracts.

Where to Find IT Contract Templates and When to Hire a Lawyer

The Internet has an abundance of resources for small-business owners. ContractEdge is one popular source of IT contract templates. But when should you use a contract template, and when is it better to use a lawyer?

Contract templates are a great starting point and can be a good way to save money, especially for small, routine business agreements. However, just because you use a contract doesn't mean it really protects your business. All contracts need to be customized to describe the particular business agreement they govern. (We'll go over this in more detail in the next section.)

Keep in mind that if you are working on a long project where a lot of money is at stake, it might make sense to hire a lawyer to review your contract and customize it.

IT professionals are usually in a poor negotiating position when it comes to their contracts. Clients will send you a contract, and you'll be expected to sign. You should always read through the document and make sure that it doesn't make any impossible demands on you. Having a lawyer review any contracts with big stakes protects your business from walking into a bad situation.

Project Risk Management: How Contracts Can Protect Your Business from Lawsuits

Every project has risks: coders can overlook software defects, testers can miss security flaws, and project managers can overshoot deadlines. Fortunately, there are ways to minimize these risks and insure against a lawsuit.

Here's how contracts reduce your project risks:

  • Limiting liability. IT contractors can include language in their contracts that limits how much they can be sued for. Some IT legal experts suggest including a clause that states you can only be sued for the amount of your fees. Unfortunately, that "limitation of liability" language won't always hold up in court. But it can't hurt.
  • Leveling client expectations. Be explicit in your contract about what you will deliver and when. Some lawsuits arise out of confusion and claims that the IT contractor didn't deliver the goods they promised. If your contract explicitly lists the service you provide, what you will and won't do, and when you will deliver, it can reduce the likelihood of a lawsuit.
  • Reducing financial risks. If you're working on a long-term project, consider changing your contract to require your client to pay you for milestones along the way rather than in a lump sum upon completion. Having steady, regular business income helps you avoid the financial risks that come with a feast-or-famine income (a common contractor problem). It will also make sure you don't work months on a project only to have a client go out of business and be unable to pay you.

For extra protection, you can also establish "Client Acceptance Procedures," which require clients to sign off on your work at various checkpoints. Client Acceptance Procedures are a great way to prevent miscommunication, especially on large projects.

Decoding Contracts: What Clients Will Require from You

Client contracts often require you to have General Liability Insurance and Errors and Omissions Insurance. Before you sign a contract, you'll have to show proof of insurance. To do so, you can download a Certificate of Liability Insurance from your insurer's website. This document proves you're covered and provides basic policy information.

Check your contracts for language about Errors and Omissions Insurance (also called Professional Liability Insurance) and other IT liability insurance requirements.

These requirements usually extend to any subcontractors you hire to help on the contract. For more about covering IT subcontractors, see our article, "IT Contractors and Subcontractors: What's the Difference?"

A Last Word on IT Contracts

Though it can be hard to understand the "legalese" of a business contract, it's important to know how they work and how you can use them as a tool to reduce your liability. If you're unsure about the insurance requirements in a particular contract, don't hesitate to call one of our IT insurance agents at 1-800-688-1984.

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