Key Takeaways

  • Contract length impacts revenue predictability, legal obligations, and renewal planning.
  • Average Contract Length (ACL) is a key business metric used to analyze contract performance.
  • Monthly, annual, and multi-year contracts each offer unique strategic benefits.
  • Factors like contract type, business goals, industry norms, and risk tolerance shape ideal duration.
  • Automatic renewal clauses, notice periods, and early termination terms are critical to manage.
  • Best practices include clearly defined terms, renewal mechanisms, and audit trails for compliance.

Contract length in a business is an important part of the contract process that all businesses should know about. The length of your contracts will depend on many factors, including the age of your business, the product or service you provide, your price point, and the like. You do not have to solely rely on monthly contracts. If you want to have more predictability, you can aim to get annual or multi-annual contracts. However, the choice is up to you and how you want to structure your business.

Average Contract Length (ACL)

The Average Contract Length, or ACL, is the average length of a signed customer contract. To get this calculation, you will need to add the total number of contracts in months. A monthly plan counts as one month. You will then divide by the entire number of contracts to get your average contract length figure.

There is only one way to increase an ACL. You will have to encourage customers to switch to either an annual or multi-year type of contract. You may not necessarily want a lengthened ACL, however. The choice is yours, but there are many benefits to having a longer contract with customers.

Key Factors That Influence Contract Length

Several variables influence how long a contract should last. These include:

  • Nature of Goods or Services: Software-as-a-Service (SaaS) providers may prefer monthly or annual contracts, while manufacturers or long-term service providers may lean toward multi-year agreements.
  • Business Maturity: Newer businesses may favor shorter contract lengths for flexibility, while mature companies may push for longer terms to improve financial forecasting.
  • Client Relationship and Trust: Businesses often start with shorter contracts to build trust, then transition to long-term agreements once the relationship is proven.
  • Legal and Regulatory Requirements: Industries such as healthcare and finance may have mandatory contract duration terms or renewal notice requirements.
  • Market Volatility and Economic Outlook: In uncertain economic conditions, shorter contracts can reduce risk, while stable markets may justify locking in longer terms.

What’s a Good Average Contract Length?

The best ACL will actually depend on the type of business you are in. Some companies often prefer to have shorter contracts. If you have a short product development cycle because you produce products more quickly, shorter ACLs will let you renegotiate contracts more often.

If you are still figuring out where you stand in the market with regard to how often you can renegotiate contracts, you will need to rely on monthly feedback to get an idea. When you begin to price monthly, you need to look for as much information as you can about the strength of your product in the marketplace.

A monthly payment plan situation will help decrease any issues that are associated with new buyers signing up for your product. It also allows you to see where they stand with regular payment ability. Having more users means that you can more easily test your marketing strategy, engagement, and conversion funnels.

Having a monthly payment plan will decrease the amount of money a new user has to pay when they are trying a new product. It also helps that they know they can change their minds whenever they want.

If your monthly figures are low, you can be confident that the product is a good market fit. Even if the user can cancel when they want to, they will likely keep using the product. This period of time will provide them with the confidence to continue using your business for years as long as they like the terms you offer.

Once the testing phase with monthly pricing is up, you can then consider hiring a sales team and pay them on a quota system. This is often the next step to getting yearly contracts. Making the decision to hire a sales team will vary from company to company.

As your business grows and you have made all of your pricing decisions permanent, you can begin to opt for multi-year contracts if you wish to do so.

An annual contract helps to reduce any unpredictability. Money paid for 12 months at a time allows you to have a better idea of how you can budget each year. If your business decides to increase prices, you could potentially begin to book contracts up to five years. This will result in more cash in the bank and more money to grow your business.

An annual contract does the following:

· Enables your customer service team to foster long-term relationships with your customers

· Generates account plans to help your customers hit their long-term goals

· Reduces the likelihood of any issues that could cause lost revenue

The buyer will encounter less risk when they commit to a long-term contract with a vendor because it has a reputation as a leader in the marketplace. The vendor will be supported by its brand as well as references from other customers.

Moving to an annual contract after experimenting with it can help you benefit from regular cash collection and strong, regular sales.

Legal Best Practices for Setting Contract Duration

When drafting contract length provisions, follow these best practices to ensure clarity and minimize risk:

  • Define All Timeframes in Writing: Avoid vague references like "short-term" or "long-term" without specifics.
  • Use Calendar Dates When Possible: This helps prevent confusion over what constitutes a contract year or month.
  • Align With Business Objectives: Consider how contract duration affects budgeting, staffing, and operational timelines.
  • Avoid Implied Terms: Make sure all renewal and termination terms are explicit to prevent legal ambiguities.
  • Document Amendments Properly: If the contract length changes due to renegotiation or renewal, update the agreement in writing and have both parties sign.

If you’re unsure how to structure your agreement or manage contract renewals, consulting a contract attorney can help avoid legal pitfalls.

Managing Contract Duration and Renewal Terms

Effective contract management includes planning for how and when contracts end or renew. Consider including the following elements:

  • Start and End Dates: Clearly define the commencement and expiration of the contract to avoid disputes.
  • Renewal Clause: Indicate whether the contract auto-renews and specify the renewal period.
  • Notice Periods: Set the minimum notice required for non-renewal or termination, such as 30 or 60 days.
  • Termination for Convenience: Some contracts allow one or both parties to terminate early without cause, usually with advance notice.
  • Termination for Cause: Include terms that allow early exit due to breach, insolvency, or other material issues.

Failing to manage these components effectively can lead to unwanted renewals or costly early exits.

Types of Contract Duration Structures

Contracts can be structured in various ways depending on business objectives:

  • Fixed-Term Contracts: These have a defined start and end date, such as 12 or 24 months. Once the term ends, the contract may expire unless renewed.
  • Evergreen Contracts: These automatically renew after the initial term unless one party gives notice. They are common in service agreements and subscriptions.
  • Rolling Contracts: These renew periodically—monthly or annually—without a fixed end date. They offer flexibility but may require regular review.
  • Project-Based Contracts: Duration is tied to the completion of a specific task or deliverable, not a calendar period.
  • Indefinite-Term Contracts: These continue until terminated by one of the parties under specified conditions.

Understanding which type of contract duration suits your situation helps reduce disputes and ensures business continuity.

Frequently Asked Questions

  1. What is the ideal contract length for a startup?
    For startups, shorter contracts such as monthly or quarterly agreements offer flexibility and allow rapid iteration based on customer feedback.
  2. Can a contract automatically renew?
    Yes, many contracts include auto-renewal clauses. However, these clauses must be clearly stated, and parties should be aware of notice periods for termination.
  3. How can I change the length of an existing contract?
    Contract duration can be amended by mutual agreement through a written contract modification or addendum signed by both parties.
  4. What happens if a contract doesn't specify an end date?
    Contracts without a defined duration may be considered indefinite and typically continue until one party terminates under the terms of the agreement.
  5. How does contract length affect revenue forecasting?
    Longer contracts provide more predictable revenue and aid in budgeting, while shorter contracts allow for more frequent pricing and service adjustments.

If you need help with understanding contract length, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.