# Lesson 4: External Contracts

**Formalizing alignment with external contracts**

**Time:** 15 minutes

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## When You Need External Contracts

**External contracts are for:**
- **Consultant → Client**: You're proposing a solution to a client
- **Business Owner → Suppliers**: You're hiring consultants/suppliers to build software

**These contracts:**
- Formalize agreements between separate parties
- Include legal protections (jurisdiction, governing law)
- Cover payment terms, IP ownership, confidentiality
- Protect both parties legally

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## Two Types of External Contracts

### 1. Project Contract
**For:** Consultant → Client  
**When:** You're a consultant proposing to a client  
**Perspective:** You're the contractor/service provider

**Key Focus:**
- Protecting your work and payment
- Clear scope boundaries
- Fair payment terms (upfront payment for fixed-price)
- IP ownership transfer upon payment

### 2. Service Agreement
**For:** Business Owner → Suppliers  
**When:** You're hiring consultants/suppliers to build software  
**Perspective:** You're the client/owner

**Key Focus:**
- Protecting your investment
- Ensuring deliverables meet requirements
- Clear payment terms and milestones
- IP ownership of deliverables

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## Business Models

**Before building the contract, determine the business model:**

### Fixed-Price Project
- Set price for defined scope
- Not-to-exceed clause applies
- Upfront payment recommended (50-100%)
- Clear deliverables and scope boundaries

### Hourly/Time-Based
- Pay for actual time worked
- Hourly rate and time tracking
- Optional not-to-exceed cap
- Flexible scope

### Retainer
- Monthly commitment
- Minimum hours per month
- Availability expectations
- Overage hourly rate
- Hour rollover policies

### Hybrid
- Combination of models
- Multiple payment structures

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## Key Contract Sections

**Saga will guide you through building:**

### 1. Business Model
- Explains selected payment structure
- Sets foundation for all payment terms
- Clarifies expectations upfront

### 2. Scope of Work
- **IN Scope**: What's explicitly included
- **OUT of Scope**: What's explicitly NOT included
- **Deliverables**: What will be delivered
- **The Path Forward**: How work will be done

**Critical for fixed-price contracts** - Clear scope prevents disputes.

### 3. Payment Terms
**Adapted to business model:**

**Fixed-Price:**
- Upfront payment recommended (50-100% is fair)
- Milestone payments tied to deliverables
- Payment on completion (risky, not recommended)

**Hourly:**
- Billing frequency (weekly, bi-weekly, monthly)
- Payment terms (Net 15, Net 30)
- Time tracking requirements

**Retainer:**
- Monthly retainer amount
- Minimum hours included
- Overage billing
- Hour rollover policy

### 4. Availability (Retainer Only)
- Business hours
- Response time expectations
- Meeting availability
- Urgent request policies

### 5. Not-to-Exceed Clause
**Conditional based on business model:**
- **Fixed-Price**: Required (equals project price)
- **Hourly**: Optional cap if desired
- **Retainer**: Not applicable (monthly cap exists)

**Purpose:**
- Prevents scope creep
- Protects budget
- Requires change orders for additional work

### 6. Confidentiality Clause
- What information is protected
- Duration of confidentiality (typically 2-5 years)
- Exceptions (public info, required by law)
- Mutual protection

### 7. Legal Framework
- **Governing Law/Jurisdiction**: Which laws apply
- **Contract Language**: Language of the contract
- **Work Initiation**: When work can begin
- **Dispute Resolution**: How conflicts are handled

### 8. Other Important Sections
- **Change Orders**: How scope changes are handled
- **Termination**: How to exit the contract
- **Intellectual Property**: Who owns what
- **Timeline**: Delivery dates and milestones

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## Best Practices

**Saga will provide guidance on:**

### For Consultants/Service Providers
- Request upfront deposits (50%+ for fixed-price)
- Define scope extremely clearly
- Include change order process
- Set not-to-exceed cap
- Specify IP ownership transfer

### For Clients/Business Owners
- Review scope thoroughly
- Understand payment terms
- Know what's included/excluded
- Understand change order process
- Clarify IP ownership

### Common Pitfalls to Avoid
- Unclear scope definitions
- Unfair payment terms
- No change order process
- Unclear IP ownership
- No not-to-exceed cap (for fixed-price)

**Goal:** Simple, fair contracts that build long-term relationships.

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## After Contract is Finalized

**Once contract is signed:**
- ✅ Alignment achieved
- ✅ Commitment secured
- ✅ Legal protection in place
- ✅ Ready to proceed to Project Brief

**Next:** [Module 04: Create Project Brief](../module-04-project-brief/tutorial-04.md)

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## Key Takeaway

**External contracts formalize** agreements between separate parties with legal protections. They ensure clarity, protect both parties, and secure commitment before starting work.

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**Next:** [Lesson 5: Internal Signoff Documents →](lesson-05-internal-signoff.md)

[← Back to Module Overview](module-03-overview.md)

