In transacting with other companies to provide your manufacturing and service production, it is advisable to have a legal document that holds all the necessary information regarding the two companies’ relationship. An outsourcing contract helps organizations set up a working relationship under law. What is an outsourcing contract, and what advantages does it present to participating businesses? The article below presents the definition, composition, and construction of these documents. Read on to find out more, including answers to frequently asked questions.

What Is an Outsourcing Contract?

In its simplest definition, an outsourcing contract is a form of legal documentation between two parties that contains specific details about the terms and conditions of the hiring party and what it expects from the outsourcing company. The contract protects the business owners from unfavorable situations that can stem during its duration. The agreement is binding as the two parties sign for an outsourcing project or partnership. Aside from the work expectations, it also indicates information and details about quality control parameters, project timeline, merchandise pricing, additional rewards, among other things. The outsourcing contract also contains statutory provisions and statements, including intellectual property clauses, non-disclosure agreements, and many others. It serves as a guide for the professional connection by both parties that both benefit their businesses.

According to the data published by the Statista Research Department in February 2021 regarding the global outsourcing market size, an accumulation amounting to 92.5 billion US dollars came from the global outsourcing market. From 2000 to 2019, the revenue of the outsourcing market has been fluctuating.

Components of an Outsourcing Contract

Before learning to draft an outsourcing contract, it is necessary to familiarize yourself with its essential components. Depending on the type of outsourcing contract you intend to create, you must understand the terms, conditions, and provisions it must contain. Read through the section below to grasps the essential components you need for a well-written outsourcing contract.

Detailed Project Scope: In any outsourcing contract, it is essential to define a clear project scope. The project scope details the required services that a company needs for the outsourced project. Ensure it is comprehensible for the offshore teams to function and do their job efficiently. It indicates the deliverables that the outsourcing company wishes to offer the hiring institution. Service Legal Agreements: Otherwise known as SLA, are the components to obtain a service guarantee from the outsourcing company. It helps set the benchmark for service quality a company offers its potential clients. It is also a key to motivating remote workers to meet the expectations set by the company. Indicate the expected performance levels and contractual provisions for penalizing the outsourcing company for failing to meet quality performance or standards. It also helps to use comprehensive metrics and criteria for measuring performance productivity.Transfer of Assets: The asset list involves various components, including telecommunication equipment, equipment leases, and software licenses, among others. A sales transfer agreement is a requirement for formal transfers of these assets to an outsourcing company. Also, consider that there are license fees, taxes, stamps, and other costs linking to the transfer of these assets and that the outsourcing contract details these costs.Product or Project Warranty: When hiring outsourcing companies, there are uncertain and risky situations. An outsourcing company may breach a contract or litigations that drain the company’s time, effort, and resources. Mention warranty statements and recovery tactics in your outsourcing contract to prevent losses. Product Ownership: The outsourcing contract must detail the complete ownership of intellectual property and final product. In some cases, both parties decide to keep a share, but it is imperative to indicate the vital detail in the contract. Business operations might cease to function if the intellectual property is not in the hands of the hiring company. Protection clause: From the beginning of the contract, the relationship of both parties holds legal liabilities and repercussions to ensure the protection of the hiring and outsourcing company. Indicate non-disclosure agreements, non-compete clauses, licensing terms and conditions, and data sharing restrictions. As necessary, a company can also trademark or patent information.Cost and Payment Structure: Price lists, payment methods, and payment structures must be present in your outsourcing contract. Remember that the prices visible on the contract must undergo the approval of both parties, including availed services, product licenses, taxes, and other fees. It must also detail re-negotiation costs when changes to the economy affect market prices.Contract Duration: It is necessary to account for a decision regarding the project’s duration. The plan’s success or failure relies on a well-structured timeline. Creating smaller milestones within the contract’s term helps keep track of certain deadlines. It is also advisable to start with a short-term contract, extending as necessary instead of a long-term agreement.Dispute Resolutions: When working with outsourcing companies, it is inevitable for disputes to arise. Incorporating a dispute resolution process in the contract prevents problems or misunderstandings from reaching legal circumstances. The contact must name an arbitrator in the outsourcing contract to handle and resolve disputes.Subcontracting Clause: There are instances of outsourcing companies seek out help from subcontracting companies. In instances that the hiring company agrees to hire subcontractors, the contract must state the extent. State that the outsourcing company takes responsibility for shouldering the costs of rendered services.Indemnification Clause: The indemnification clause ensures that neglect coming from the outsourcing company protects the hiring company from incurring any loss from the project.Exit Strategy: The exit strategy section must cover details regarding reacquisition or transfer of assets, product rights, and duration of asset transfers.

How To Draft an Outsourcing Contract

Outsourcing contracts must define and cover every aspect of the business relationship and anticipate situations and circumstances. Constructing these agreements must involve management going through several consultations, meetings, research, and revisions before finalizing and producing the document. Below are the steps you must take to draft a comprehensive outsourcing contract.

Step 1: Define the Scope of Outsourced Week

Defining the scope of work is the most basic step and the main purpose of producing an outsourcing contract. Guarantee that the document contains customer support services, service levels or business targets, work schedules, agreed deliverables, and business owner’s tasks. The scope of work determines the parties’ responsibilities and expectations to avoid misunderstandings and disagreements. Ensure tasks descriptions are specific and accurate for reference.

Step 2: Seek Legal Advice From Experts

When offshoring, it is best to review local policies, laws, regulations, and provisions that can affect the business. It is also wise to consult with legal practitioners, like licensed attorneys familiar with existing deals similar to the contract you are drafting. The step ensures accounting for all related provisions.

Step 3: Go For the Win-Win Situation

The construction of contracts emphasizes treating each party fairly. During the drafting of the contract, ensure that both parties under the contract win. Instead of thinking about personal gains, it is necessary to think about long-term sustainability instead. Remember that the best contracts stress equal amounts of compromise and flexibility, subject to necessary revisions.

Step 4: Agree On Penalties, Benefits, or Rewards

High-quality performance and achieving exceptional performance levels equate to benefits and rewards. These are additional incentives for motivating people to continue producing peak quality performance. If there are incentives, there must be necessary penalties set for failing to satisfy standards, including security issues, contract breaches, and poor performance.

Step 5: Planning the Finality of the Deal

It is necessary to plan for a contract’s termination. Planning all depends on the conditions of the business relationship set by the two parties. Compose a detailed exit plan for both parties to get information in coping with consequential results or changes easily, especially if the termination is abrupt.


What are the three types of outsourcing contracts?

Outsourcing contracts are prevalent in various businesses, and it is critical to make use of the agreement that suits your business project. The three types of outsourcing contracts include time and material outsourcing contracts, fixed price outsourcing contracts, and dedicated team outsourcing contracts.

What are examples of outsourcing?

Outsourcing activities include human resource management, facilities management, accounting, customer support and services, content writing, legal documentation, among others.

What is the difference between contracts and outsourcing?

A contract is a binding agreement enforceable under the law that exists between two or more parties. Outsourcing is the transfer of tasks to an outside entity through an agreement of the two parties, usually to reduce production costs.

Outsourcing is a helpful tactic to lessen the company’s production costs. Aside from lessening labor rates, it also produces benefits, including increased efficiency and flexibility, access to innovation, and increased focus on core competencies. Before drafting your outsourcing contract, you must take the time to consult legal entities to cover the necessary provisions and sections of the document. It is always advantageous to gain knowledge from experts instead of doing everything on your own. The article also provides outsourcing contract samples you can use and download for your outsourcing needs, but remember to seek professional help before signing these legal documents.