There’s no hard and fast rule about how long business contracts should last, or what the optimal contract duration is. But that doesn’t mean it doesn’t matter. The duration of a contract can dictate everything from how much businesses pay through to how long a business relationship lasts, as well as when they renew.
But what is the duration of a contract, and how can businesses improve the way they manage their contracts to maximize revenue and reduce missed renewals? Find out in this Juro explainer.
What does ‘contract duration’ mean?
Contract duration is a term used to describe the period through which a contract is effective. This can also be understood as the period between the contract effective date and the contract end date - both of which are typically outlined within a contract and will be agreed to by both parties.
Why is contract duration important?
Establishing the contract duration is important as there’s no certainty around when contract obligations will begin and end without it. The duration of a contract is the period during which the responsibilities and obligations outlined within a contract are effective, meaning that if this isn’t outlined, parties are unsure of when contract obligations start and finish.
As one of the primary purposes of a contract is to provide this certainty around transactions, failing to outline a contract duration is a significant contract management mistake, and one that runs the risk of costing your business hundreds, if not thousands, in revenue.
Outlining your contract duration is also an effective way to ensure you’re charging appropriate fees for your services, as the period of time you deliver your services for will often affect the amount you charge for them.
You can set out your promised service levels for clients with this free Service Level Agreement template.
Perhaps most importantly though, having a clear understanding of the duration of a contract means that you can better manage your contract renewals and contract extensions. Without oversight into these dates and deadlines, businesses often find themselves locked into contracts for longer than expected, which can prove costly - particularly as your business grows.
If your business needs better insight into important contract milestones and dates, hit the button below to try Juro’s data-rich contract repository and automated renewal reminders. To find out more about how to set a contract duration, keep reading below.
Who decides the duration of a contract?
The duration of a contract is determined by all of the contract parties, like all other contract terms. Usually, one contract party will draft a contract and propose a specific contract duration. When the contract is reviewed by a counterparty, they then decide whether to approve this contract term or to negotiate it instead.
Once both parties have reached an agreement regarding the contract duration (and other terms), the legal document then goes out for signing, and the period is finalized using either wet ink or an electronic signature.
Is there an ‘optimal’ contract duration?
Interestingly, there’s a common misconception that there’s an ‘optimal’ contract duration for business contracts. Whilst this is true of certain categories of commercial agreements, how long a contract lasts should depend on various different factors, including but not limited to:
❓The nature of the contract
How long a contract ought to last depends largely on what type of contract it is. For instance, many SaaS agreements will follow a subscription-based model, meaning that the contract duration will often be annual or between 3 to 5 years for enterprise-level plans. By comparison, a contract of employment will not usually have a fixed termination date at all, unless the contract is a fixed-term one. Instead, the contract will have certain conditions surrounding contract termination.
⏱️ How long obligations take to fulfill
The duration of a contract will also depend on the amount of time contractual obligations will typically take to fulfill. This means that the parties involved in the contract need to agree to realistic timeframes for deliverables during contract negotiations, and these will naturally vary depending on what the obligations are.
🛑 Situations that might warrant early / late termination
A contract duration should also account for any foreseeable situations that might warrant either early or late termination. For example, if certain outcomes are achieved ahead of the timeframe outlined, some contracts will include conditions for early termination, which can be taken into account when establishing the duration of a contract.
🤝 The existing relationship between parties
Another factor that can affect the duration of a contract, or a contract term, is the type of relationship the parties have already. For new business relationships, legal and business teams will likely be skeptical about entering into long-lasting contracts that span several years. Whereas, if two parties have worked together previously and established trust, a longer contract duration period is often favorable.
What is a duration clause?
A duration clause is a clause inserted into a contract to clarify how the duration of a contract might be subject to change, depending on certain circ*mstances. They can also be used to establish responsibilities that exist outside of the contract duration period.
Types of duration clauses
1. Termination clause
Termination clauses are the most common type of duration clauses and they establish specific circ*mstances whereby a contract can be terminated and on which terms. It will outline when a contract can be terminated before the end of the contract’s duration, how much notice is required, and what actions will be taken leading on from this.
2. Effect of the termination clause
An effect of the termination clause is a contract clause used to establish how the rights and obligations of the contracting parties evolve once a contract is over. These terms will describe how the duties owed by each party conclude at the end of a contract, but also which new obligations come to exist once the contract is terminated.
3. Survival clause
Survival clauses are contract clauses that outline which obligations will continue to exist even after the contract is drawn to a close. These are not included in all business contracts, but they usually exist alongside confidentiality clauses to ensure that contract parties continue to uphold confidentiality beyond the contract end date.
How can businesses keep on top of contract duration dates?
As we mentioned before, not knowing when your contracts begin and end is an expensive contract management mistake. It can result in missed renewals, poor customer nurture, and obligations you can no longer fulfill. The same goes for missing all contract milestones.
That’s why businesses should capture all of their contract data in one place and improve visibility around the duration of contracts. With Juro’s contract automation software, businesses can securely store contracts in one place, filter them to find contract deadlines and set up automated renewal reminders for contracts.
“It’s a stressful situation when you end up in a new contract before you can end it. Juro’s custom reminders prevent this problem from ever happening again” David Köröndi, Legal Manager, Eton Shirts
Frequently asked questions
Can a contract last indefinitely?
It is possible for a contract to last indefinitely. In contrast to fixed-term contracts which outline an explicit end date, some contracts, like HR contracts, last indefinitely. But this doesn’t mean that the contract cannot be terminated. Indefinite contracts, whilst they don’t have a clear contract duration, will have certain terms and conditions that determine whether a contract ends and when.
Is it possible to extend a contract?
Yes, it is possible and common for businesses to extend the duration of a contract. This usually happens when a business transaction has worked effectively, and where there’s a continued need for a certain product or service. Contracts can be extended either by amending the contract and inserting an extension clause, or by establishing a new contract.
Another option is to renew a contract, which can be done either automatically or by creating an updated version of a contract.
Track important contract dates in Juro
If managing key dates in contracts is becoming a pain point for your business as it scales, Juro’s automated contract renewal reminders and data-rich contract repository can help.Juro is the all-in-one contract automation platform that helps visionary legal counsel and the teams they enable to agree and manage contracts in one unified workspace, helping you stay in control of your new and existing contracts. Fill out the form below to find out more.
