A project-based contract agreement or service contract agreement is a legal document detailing the terms agreed upon in a professional contract. The contract's purpose is to legally protect the business and the contractor who sign it.

What Is the Difference Between a Contractor and an Employee?

Project-based contract agreements are made between businesses and independent contractors. Project-based workers usually have a limited time frame for their work with a company. They are not referred to as employees, who typically don't have an end-date for their position.

Understanding the difference between an employee and an independent contractor will go a long way in helping you develop your business.

With an employee, you can:

  • Set the number of hours they work.
  • Provide them with office space.
  • Define specific areas of their work.
  • Limit the employee's work to your workplace.

By contrast, with independent contractors you cannot:

  • Give them set hours.
  • Tell them they can only work for you.
  • Tell them exactly how to perform their job.

To underscore the difference between a contractor and an employee, project-based contracts often contain a clause stating that nothing in the agreement will be interpreted as creating an employer-employee relationship.

What Is in a Project-Based Agreement?

If you create a project-based contract agreement, you must include details of the two parties who are signing it. This means the agreement should briefly explain what the company does and why it needs a project-based worker, as well as what the worker can offer.

You should also include in the agreement a list of services the contractor will perform. The list doesn't need to include every step of the process the worker will need to perform, only a broad outline of the duties.

Additionally, you will need to set out a planned time frame for the project, together with a payment schedule. The project length might change, for example, due to employee absences or software upgrades to your business' computer systems.

Finally, to make the contract legal, both you and the contractor must sign and date the document. Either party can then use the contract in the event legal action is required.

Different Types of Contracts

Project-based agreements can vary depending on the parameters of the work and how much of it has already been planned. Common types of agreements include:

  • Fixed fee contract: When the company and contractor agree on a fee for the entire project.
  • Cost-plus contract: When the contract includes payments for labor and materials, as well as a percentage for overheads.
  • Incentive-based contract: When payments are tied to the project achieving specified goals.

Scope Creep

In some cases, the extent of the work required by the company might expand during a project. This is referred to as "scope creep." Some agreements will outline a process to cope with this challenge. For example, you might agree with the contractor that new tasks can be added to the project following mutual agreement.

Alternatively, the contract might include standard rates of pay and pay rates for additional work requested by the company.

Taxes and Payment

When you hire an independent contractor, you do not make any payments toward that individual's taxes. Instead, the contractor is responsible for making all tax payments for which they're liable. This information will likely be included in the agreement.

The contract will also contain payment terms. These terms could require contractors to submit invoices at the end of each month for work they have completed. Another possibility is for both parties to agree on installments based on the total fee for the project.

Other Provisions

A typical contract could include the provision that the independent contractor has no authority to represent the company while performing the agreed-upon services. Additionally, an agreement usually makes clear that the business will not provide employee benefits to the contractor.

You must also include a termination clause in your agreement. This might confirm that either party can terminate the contract at any time, provided they give one month's written notice.

Project-based agreements generally contain a confidentiality provision. This commits the contractor not to share confidential information with anyone, apart from authorized employees from the company.

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