How to understand contracts

A contract refers to a commercial contract made between a contractor and a hirer: 

• Hirer refers to the person or business that engages a contractor. Sometimes, a contract or a law will refer to the hirer as a 'principal'.
• Contractors include people who describe themselves as 'self-employed', a 'consultant' or a 'subcontractor'.

A commercial contract may be for:

• your labour or skills where payment is based on hourly or daily rates
• you to achieve a result where payment is based on a fixed fee

Commercial contracts are different from 'employment' contracts that apply to employers and employees.

As a contractor, you may enter into verbal and written contracts to do work for others. When you agree to do a job for another person or business for money or some other benefit, you’re probably entering into a commercial contract. If so, this is legally enforceable regardless of whether it was just a 'handshake deal' or a written agreement.

By understanding the contracts you enter into, you’ll be better able to negotiate contracts that work for you. However, it’s still important to get professional advice to fully understand your obligations.

It’s important to prepare when negotiating a contract. If you aren’t confident doing this, check our page on how to negotiate a contract that works for you.

Make sure you understand the terms of the contract and what it should include.

Working with contracts is a large part of small business management. Once in place, the requirements of a contract dictate how you operate.

The Treasury provides a guide on working with contracts which outlines:

• the essential ingredients of a contract, with examples relevant to small business
• legal jargon used in contracts
• different types of contracts
• basic content and structure of contracts
• what standard form contracts are and some useful pointers on constructing your own
• basic issues relating to specific types of small business relationships