The business environment is full of agreements between businesses and individuals. While oral agreements can be used, most businesses use formal written contracts when engaging in operations. Written contracts provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved. Contracts also are legally enforceable in a court of law. Contracts often represent a tool that companies use to safeguard their resources.
Business contracts typically include a negotiation process in which various terms to which each party must abide are stipulated. The negotiation process may take days, weeks or months, depending on the contract and the contractual responsibility of each party. Contracts also can include a process for making changes or addendums to the agreement. Businesses frequently use contracts to ensure that a certain level of service is maintained or that competing companies do not have access to specific economic resources
Fix Resource Costs
A common use of business contracts is the creation of an agreement or company that agrees to sell economic resources to another at a fixed cost. These contracts ensure manufacturing or production businesses can obtain economic resources at a specific price for a defined time period. Businesses also use these contracts to hedge against the potential cost increase of economic resources. Fixed cost contracts may backfire on companies if a decrease in economic resources occurs in the future.
Service contracts outline the specific duties a company will perform in a contractual agreement. These contracts typically are used when companies contract with other businesses to perform services such as maintenance, technical support or call-center operations. Service contracts usually include information relating to prices for each service and the frequency at which the company will perform the services. Businesses use these contracts to ensure that they do not complete work without being compensated.
Businesses often use contracts to enforce non-compete agreements. Non-compete agreements prohibit individuals or other businesses from offering goods or services in the economic marketplace. These contracts create strategic relationships between two companies and allow them to provide unique goods or services to consumers. Companies also can use non-compete agreements to limit the type of services offered by former employees who have specific knowledge about the company’s specialized business services.