Contractor Agreements: What to Include and Why They Matter

Businesses often rely on independent contractors to complete specialized projects, but without a strong contractor agreement in place, miscommunications and legal risks can arise. A well-drafted contractor agreement protects both parties by clearly defining expectations, responsibilities, and payment terms. Looking for a template, check out my Contractor Agreement Toolkit!

But first, do you understand the differences between employees and contractors?

The Best Format: Master Service Agreement (MSA) & Statements of Work (SOW)

The most effective way to structure a contractor agreement is to use the MSA/SOW format:

• Master Service Agreement (MSA): A long-term agreement that establishes key legal terms that apply to all projects.
• Statement of Work (SOW): A project-specific document that details the scope, deliverables, and payment terms.

This structure ensures that a single MSA covers all legal protections, while each new project gets its own SOW, keeping things flexible and organized.

Key Provisions in a Contractor Agreement

Scope of Work

A detailed scope of work helps prevent misunderstandings by outlining exactly what the contractor will do. This section should:

• Clearly define the services provided.
• Specify what is not included to manage expectations.
• Reference any additional documentation, such as project proposals.

Use of Subcontractors

The agreement should state whether the contractor is allowed to hire subcontractors to help complete the work. If subcontractors are permitted, the contract should:

• Require prior approval from the company.
• Ensure the contractor remains responsible for their subcontractor’s work.
• Include subcontractor confidentiality and intellectual property provisions.

Payment Terms

Clear payment terms help avoid disputes over invoices and timing. Important details include:

• When invoices must be submitted.
• When payments are due (for example, within 15 or 30 days of invoicing).
• Whether expenses will be reimbursed and under what conditions.
• Payment structure (hourly, fixed fee, or milestone-based payments).

Ownership of Work Product

Many businesses hire contractors to create intellectual property, such as software, marketing materials, or designs. The agreement should state who owns that work product:

• Typically, businesses require a work-for-hire or IP assignment clause to ensure full ownership.
• If the contractor retains any rights, the agreement should specify what the business is allowed to do with the work.

Confidentiality

Contractors often have access to sensitive business information. A confidentiality clause should require contractors to:

• Keep proprietary information private.
• Limit sharing data to only those necessary for the project.
• Return or destroy confidential materials at the end of the contract.

Termination & Post-Termination Obligations

The agreement should outline whether either party can terminate the contract early (if at all) and what happens after termination:

• Specify how much advance notice is required.
• If the contract is terminated early, determine what works must be delivered (for example, works in progress, or already completed works)
• State whether any unused funds or prepayments must be returned.

Why a Strong Contractor Agreement Matters

A well-drafted contractor agreement helps prevent disputes, protects intellectual property, and ensures both parties understand their rights and obligations. Using the MSA/SOW format adds flexibility while maintaining legal protections, making it easier to manage multiple projects over time.

*This article is general in nature and is not legal advice.