Contract price: how to determine correctly
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The contract price, in essence, represents the monetary value of goods or services (work) for which the parties will perform specific actions. The contract price typically has a contractual nature and depends on the agreements made by the parties. From practical experience, there are the following methods for determining the price:
1. Fixed and firm price. This type of pricing applies to contracts that involve clear and well-defined pricing. These are often real contracts that specify the delivery of certain items. For example, when you purchase goods for resale, acquire a vehicle or real estate, you typically know the price upfront.
2. Percentage. It's often the case that compensation is determined as a specific percentage of another amount. This pricing system is highly prevalent in agency, dealership, or other contracts involving commercial intermediation. It can also be found in contracts for recruiting personnel or when services are provided based on specific performance metrics. For instance, we developed an agency agreement for a client in which the agent, on behalf of the company, enters into equipment supply contracts for a predetermined amount, for which they receive a corresponding percentage of compensation.
3. A combined option, which includes a fixed rate and a percentage of compensation, was common in our practice. For example, we had a contract for providing advertising services where the performer would receive an additional percentage of the base remuneration upon achieving specific criteria. This incentivized the performer to complete the work on time and to a high standard.
4. Hourly rate. In some cases, work is performed or services are provided based on an hourly rate of a specialist involved. This pricing model is prevalent in the consulting industry.
Regardless of the pricing structure, when it comes to contracts involving compensation, it's crucial that the contract price is clearly defined, and the mechanism for its determination is understood by all parties involved. If the contract price is not explicitly defined, or if the method of its calculation is unclear, it can lead to uncertainties during invoice payments, which is not conducive to maintaining healthy business relationships.
Our company specializes in contract law services. We assist in drafting various types of contracts, and, most importantly, we conduct thorough risk assessments on behalf of our clients. If you want your contract to be handled by a seasoned professional with over a decade of experience and ensure that your interests are fully protected, don't hesitate to get in touch with us.
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Payment Terms in a Contract
The payment for services or goods must be clearly defined within the contract. Otherwise, there is a risk of the parties failing to agree on a precise payment procedure. For instance, let's illustrate this with a practical example. One of our clients had entered into a contract (without legal counsel), where the payment for our client's services was to be made after signing acceptance certificates. However, there were no specified deadlines for signing these certificates, and the payment terms were not outlined. Consequently, the client, upon receiving the service, was in no hurry to make the payment. It was only after legal intervention and providing the client with information about the "negative" consequences of their behavior that we were able to secure payment for our client. Of course, amendments were made to the contract.
In cases where the payment terms are specified in the contract, one should always consider the following:
- One-Time or Systematic Payments. If it's a one-time payment, a specific event, action, or deadline triggering the payment should be established. For instance, in a purchase contract, payment can be set to occur after the signing of an acceptance certificate. In service contracts, payment may be tied to services provided within a certain reporting period, like a calendar month.
- Payment Linked to Specific Events or Actions. For example, payment for goods may be made upon the delivery of the goods.
- Staged Payments. Contracts in construction often specify a staged payment method. This means that each preliminary stage of work is paid for, after which the contractor moves on to the next stage.
In essence, while parties have flexibility in establishing payment terms for goods and services, it is crucial for the convenience of contract execution that the payment procedures are clear and accurately reflect the actual agreements between the parties.
Currency Restrictions in Determining Contract Prices
When dealing with currency or fixing contract prices tied to a specific currency, it's essential to consider certain restrictions that may apply. According to Ukrainian legislation, settlements between residents must be conducted in the national currency of Ukraine, which is the hryvnia. Non-residents can be paid in foreign currency, which needs to be purchased from a bank. However, it's quite common for parties in a contract to attempt to specify obligations to pay the contract price in foreign currency. In such cases, the equivalent in foreign currency is applied.
This means that payments will be made in hryvnia and documented in the contract and/or its appendices, acts, and specifications.
Moreover, contracts often include provisions that stipulate that changes in the exchange rate of foreign currency will result in changes to the cost of goods, services, or work. This aspect should be taken into account.
If you receive payment in a foreign currency, be aware that you will need to convert that currency into the local currency within a certain timeframe.
Additionally, it's essential to remember that during a state of war, additional restrictions on currency settlements may be imposed, and these must be considered. Currency restrictions during wartime can change, so we won't focus on them in this material.
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Tax Obligations for Contracts in Ukraine
Any contracts involving the transfer of property rights or the receipt of income have tax implications in Ukraine. This is because profits (income) must be subjected to taxation in accordance with Ukrainian law. Therefore, when entering into a contract and either receiving or making payments under the contract, it is essential to consider that the income will be subject to taxation. In terms of income taxation, it is crucial to identify four primary scenarios that may apply to the parties involved:
1. Contract between an individual and a legal entity. When a legal entity makes a payment to an individual, the legal entity becomes a tax agent and is obligated to withhold and remit income tax for individuals (at a rate of 18%) and a military levy (at a rate of 1.5%) from the individual's income. For example, if an individual provides specific services to a legal entity under a civil law contract (although it is generally advisable for individuals to register as sole proprietors), the legal entity, when making payments, must deduct and remit 18% personal income tax and a 1.5% military levy to the budget. Therefore, we recommend that clients consider registering as sole proprietors in such situations.
2. Contracts between individuals. In such cases, each individual is responsible for paying taxes independently. For instance, when buying or selling real estate, both the seller and the buyer are individually responsible for their tax obligations.
3. Contracts between business entities. When a contract is entered into between two independent business entities, it is assumed that these entities independently fulfill their tax obligations to the state. In other words, if your individual entrepreneur (sole proprietorship) receives income from a legal entity, that individual entrepreneur is responsible for paying taxes on that income and including it in their tax declaration.
4. Contracts with non-residents. This is the most complex tax scenario, as tax obligations depend on the contract terms, payments, residency status, and other nuances. Additionally, when entering into a contract with a non-resident, a lawyer will analyze the provisions of the relevant Double Taxation Avoidance Agreement (if one exists) between Ukraine and the respective country where the non-resident is registered. Therefore, when entering into a contract with a non-resident, it is essential to involve a qualified attorney who can effectively navigate these complexities.
Our company provides a range of contract-related services, including:
- Service agreements.
- Real estate transaction agreements (such as sales, leases, loans, servitudes, management, etc.).
- Licensing agreements and agreements for the transfer of intellectual property rights.
- Partnership and corporate agreements.
- Franchise agreements.
- Agreements for the repayment of financial assistance.
- Purchase and supply agreements.
- International trade contracts.
- Pledge agreements.
- Transport and forwarding agreements, and more.
Please note that the list mentioned above is approximate, and we are capable of handling contracts of various complexities and types.
We offer our expertise in contract law to assist you with drafting, analyzing, and optimizing contracts.
Regardless of the size of your business or project, our team is dedicated to ensuring successful transactions and protecting your interests.