Definition of a commercial contract

Written by emily young
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Definition of a commercial contract
Commercial contracts are used to define the terms of a commercial transaction. (signing a contract image by William Berry from Fotolia.com)

A commercial contract is a type of contract that defines the terms of a commercial transaction. There are several types of commercial contracts. The most common types include firm fixed price contracts, fixed price contracts and time and materials contracts.

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Types

A firm fixed price contract, or FFP contract, establishes the cost of a service before the service is rendered, and it does not change if the service costs more than anticipated. A fixed price contract gives the contractor a maximum price and a target price. A time and materials contract determines the cost of services based on fixed wages and materials costs. With this type of contract, labourers are given specific hourly pay rates, and materials are paid for based on their cost with no contractor fee.

Features

Of all commercial contracts, the firm fixed price contract gives the contractor the most incentive to perform the service in the most cost-effective way possible. A time and materials contract is the best choice for contracts that involve multiple labourers.

Considerations

If a party in a contract fails to live up to their part of the contract, the justice system steps in to fix the problem. Generally, a court either enforces the contract or asks the offending party to compensate for harm done.

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