Agreement vs. Contract: Why Business Owners Are Using Informal Agreements for Clients

UPDATED: September 8, 2023
PUBLISHED: August 21, 2023
two hands holding pens, each hovering over paperwork to decide between an agreement vs contract

When James Sperling first started his marketing and branding agency Sheep Don’t Bark, he noticed a pattern: His clients didn’t like contracts.

“When we said we’d put together a contract, it would scare some of them,” he recalls. “They didn’t want to sign it.”

With the help of his team, he came up with a plan to offer agreements instead. The agency found that clients were much more willing to sign agreements, which would shield both parties if anything went wrong.

“Business owners may want to work on a handshake if they are hungry for work, and that can be very bad,” Sperling says. “An agreement can protect everybody.”

Bryan Clayton, CEO and co-founder of GreenPal, an online marketplace connecting homeowners with local lawn care professionals, initially used long, exhaustive contracts. But like Sperling, he found that he was scaring people off.

“It seemed like overkill,” he says. “A hefty contract can create an intimidating barrier that can deter potential customers. Based on the results I’ve seen, an agreement is more straightforward, user-friendly and less intimidating, leading to a higher conversion rate with new clients.”

Should you use an agreement in your business like these business owners? Here’s the scoop on agreements vs contracts and how to decide if an agreement is right for you.

Agreement vs. contracts: how are they different?

Many of those who use agreements believe they’re not as formal as contracts but are still highly effective—if not moreso. 

Chrissy Bernal, who does brand management and public relations at Be a Better Brand, says that while agreements have less legalese than contracts, she prefers them “because they’re specific, easy to understand and clearly establish expectations. I feel like contracts are often so vague they are starting the relationship off with ambiguity or concern over a lack of understanding.”

For Therese Skelly, an intuitive business mentor for service-based business owners, agreements make more sense because they are collaborative as opposed to transactional.

“In the coaching industry, there are those who have an ironclad contract,” Skelly explains. “‘Sign up for 12 months for the program and under no circumstances will you be given a refund’ is how it’s positioned. The idea is to use the contract to ‘make the client keep their commitment to themselves.’ Personally, I would not be in that kind of relationship. I know that sometimes, life happens,” she says. “A kid gets sick, there are major house repairs, etcetera, so to have no leeway or the ability to change or amend the contract feels cold and impersonal to me.”

With an agreement, however, you can be flexible, depending on the client’s needs. 

“It’s a client-friendly way of being that works for me,” Skelly adds. 

What to include in your agreement

Let’s say you’ve settled on a decision in the agreement vs. contract debate, and are going to draft your first agreement. When writing your agreement, you’ll need to include what each party is responsible for, as well as the payment terms. When doing this, it’s important to be as specific as possible. 

For example, if you’re running a PR agency, you could say, “I will write a press release and pitch you to 20 different outlets over the course of the month. You agree to make yourself available to interviewers. Payment is due within five days of signing this agreement.” 

Sperling says the agreement should also outline what the final result should look like. “You don’t want any unpleasant surprises,” she says. “With an agreement, expectations are realistic and there are no assumptions.”

Additionally, Sperling recommends adding in your hourly rate if the project goes over the allotted time so that you can avoid “scope creep,” or a client trying to get more out of you. It’s also wise to include a line about what happens if they cancel a project before it’s completed. Make sure that you send the client the agreement to sign, and keep a copy.

“Agreements make sure the client is serious, and they make you look professional,” Sperling says. “Don’t start any work until you have that signed agreement.” 

Protecting yourself legally with an agreement

You can hire a lawyer to look over your agreement to make sure that it will hold up in court should anything go wrong. 

According to Katie Charleston, a founding partner at Katie Charleston Law, the fundamental difference between a contract and an agreement is that a contract is legally binding, while an agreement is usually a mutual arrangement or understanding between parties. 

“If an agreement is specific enough, then, and involves consideration, it may be an enforceable contract even if not in a formal writing,” Charleston explains. “Business owners would be prudent to include specific terms, an intent to enter the agreement and consideration even in the most informal agreements to enforce it if necessary.”

Sperling said it’s critical that you track your hours, just in case you need to go to court. The judge may ask for those hours.

“If you have a signed agreement, you could always plead your case,” he says.

Getting started with agreements

Once you come up with everything you need for your agreement, you can send it to clients before working for them. You can always make changes if any issues arise. 

“An agreement helps to ensure everybody’s on the same page,” Clayton says. “In most cases, it’s more than enough to keep things running smoothly.”