Outsourcing is a great way for businesses to save time and money by contracting out work to third-parties. Not only can this help your business meet its goals in the short and long term, you can also contract out things that whole departments cover, like IT, accounting, payroll, and more. However, no matter what your goals and needs are, you will always have to come up with an outsourcing contract to make sure the work gets done.
An outsourcing contract can be as simple or complex as you see fit. As always, make sure you consult a lawyer to fully nail down what you need to include in your contract to make sure you're not forgetting anything. We are not lawyers.
With that said, in this blog we will go over the high-level details of what to include in an outsourcing contract.
Let’s get started.
What Is an Outsourcing Contract?
In short, an outsourcing contract is a legal document that goes over what work will be handled by the third-party, what expectations you have, what timelines should be achieved, and things of that nature.
It basically protects your investment and also dictates how the third-party gets paid.
There are, of course, legal issues that are handled in the contract, too, such as intellectual property rights and the protection of confidential information that you may have to share with the third-party so that they can do their jobs.
Sometimes, there are variations on how a contract looks, what verbiage is used, and what it covers based on what service is provided. For example, if you are having design work done, that contract is going to look different than one that is outsourcing your entire payroll system.
Normally, when you work with a platform to outsource your needs - keeping with the payroll example here - the company will already have a contract and terms of service readily available for their new clients. Always look these documents over with your legal counsel before signing.
Making your own contract is typically reserved for areas that aren’t done through platforms. These are typically project-based contracts.
So, what areas need covered if you were to make one yourself?
Outsourcing Contracts: Services Rendered
One of the major areas that your outsourcing contract needs to establish is what work is actually being done.
Again, this can be as simple as ‘design work.’ It really depends on your need and what the third-party company is offering.
Sometimes this can get complicated if the provider is doing a plethora of things for your business. However, you should always make sure to complete this section of the contract so that everyone is on the same page and in agreement with the work being done.
This section of the document usually comes right after the intro paragraph that establishes that this contract is between the buyer and seller of the service. It can be a simple table on the document that lists the work being done with a brief description of that work next to it.
From there, but in the same vein, you need to show what deliverables the company will be responsible for. This goes hand-in-hand with the services, though it is important to list everything out so that everyone agrees on the total end result of the contract.
Outsourcing Contracts: Payments
After you have listed out the services and deliverables, you should move on to how the third-party will be paid. Are they getting lump sums over the course of the work based on the deliverables? Are they under a retainer where you are paying them for X amount of work over X months where payments are rolled out based on time?
These are things that need explained in this section of the outsourcing contract.
In other words, this is an invoice area that shows what work was done, what rate it was done for, and what payments are sent out. Like everything else on this document, it largely depends on what you’ve negotiated with the third-party.
We recommend making this section as easy to understand as possible so that you and third-party provider are all on the same page, which can negate conflicts down the road.
However, the real legal part of the document comes next.
Outsourcing Contracts: Terms and Conditions
This is really the bread and butter of the document, legally speaking. Of all of the sections we’ve talked about already, this is where your lawyer will come into play the most because there are specific things that you need to say in order to protect your business when working with a contractor.
Since we are not lawyers, we will not go into the nitty-gritty details here. Instead, let’s look at a few things that are typically listed under the terms and conditions header:
- Retained Rights: This explains what pre-existing intellectual property each company has and dictates that those parties will keep all of the rights to their previously created intellectual property.
- Pre-existing Intellectual Property: This piggy-backs off the first part, explaining what pre-existing intellectual property is, how it can be used, what it can’t be used for, etc.
- Deliverable Ownership: Who owns the deliverables when they are complete? Typically it's mandated that the client owns all deliverables in the end.
- No Rights to Customer Intellectual Property: Basically a way of saying that the third-party will not retain any intellectual property from their clients even though the client will allow them to use this property to complete their contract.
- Confidential Information: This section describes what ‘confidential information’ is and how it can be used, how it is protected, and things of that nature. This section can have a staggering amount of legalese in it. After this, typical contracts move to ‘customer confidential information,’ which helps cover both parties - the contractor and contractee.
- Non-Disclosure: This basically covers how information can be doled out to the public and things of that nature. You can read more about this type of document here. Also typically includes information on the right to disclose.
- Conflict of Interest Statement
- Termination and How It Works: This section is quite long, going over who can terminate the contract, when, how, and under what circumstances. Then, it moves on to say what the next steps are if the contract is terminated.
- Ensuring Provider Compliance: The final section has the provider agree that they will not infringe upon patents and things of that nature, they will complete the work in a professional manner, they will do the best work possible, they have all of the permits they need to complete the work, and they will comply will all laws in doing so.
As you can see, even the overview of this section is quite daunting, and we even left out all of the legal jargon.
Outsourcing Contracts: Final Sections
After the terms and conditions, there are just a few other areas that need addressed, such as:
- Inspection and Acceptance
- Such as, governing law, severability, what an independent contractor is, and force majeure.
- Signature Area
Outsourcing Contracts: The Final Say
When it comes to outsourcing contracts, you need to seriously cover your legal bases by explaining a bunch of things is detail.
To pull this off, work closely with your lawyer who can make this process extremely easy.
In short, your outsourcing contract needs to cover what work is being done, how much that work costs, when it's due, and what the deliverables are. Other than that, it’s mainly terms and conditions that are pretty standard in any contract, legally speaking.
Want to learn more about outsourcing? Check out our research guide here: