Proposal vs Contract - What Are the Main Differences?

So you’ve just landed a new business but aren't sure about the agreement form. Is the new client going to pay you? Can you push through a retainer agreement?

As a startup, agency, or small business owner, you spend a great deal of time prospecting for new clients, but when you find a promising lead, you need to make sure everything is legit before diving into the new project. 

The last thing you need is to overextend your resources on a project upfront, only for the client to ghost you when it comes to payment. 

To avoid this from happening, you need a contract template, which is often confused with a proposal. 

While these two types of documents share certain similarities, they are not the same thing. Here’s a cautionary tale from my own experience.

Let’s explain the proposal vs contract enigma and show you how to secure new business with confidence. 

Why do you need a proposal?

If you’ve never handled one yourself, the whole concept of a proposal may be a bit vague. Can you send one out of the blue or at a request? What does a proposal do for you?

1. Makes your offer stand out

If your new client is serious about the business, there’s a good chance you won’t be the only courtier. Your competition will do their best to grab their attention too. In those situations, you need an impressive proposal template.

Better Proposal templates are designed to stand out visually with highly-customizable cover pages and color themes. But it’s much more than that. Our digital proposals are much easier to read, verify, and sign than PDF documents that haven’t changed much since the 1990s.

2. Focus on the value

This is where proposals and contracts go different ways. An engaging proposal template puts a lot of emphasis on your client’s specific needs and then offers a highly personalized solution. It underlines the benefits of your skills and experience to convey the long-lasting value that your services provide. At the end of the day, your proposal needs to make the client realize that your medicine works the best for their ailment. 

3. Sets the timing and payment frame

A well-structured proposal should be absolutely clear and leave no questions unanswered. The trick is to provide answers to clients’ concerns even before they need to ask. 

This is a good place to explain your work process, rates, and timescale for the project, so the client gets the big picture of what you bring to the table. 

How proposals and contracts fit in the big picture

We can go on and smoke out proposal vs. contract differences, but the reality is that these two documents have much more in common than it appears. 

1. Proposals and contracts eliminate the unknowns

The worst thing that can happen to a startup business is to dedicate the bulk of its resources and manpower to a project, only to be told that it’s not what the client wanted. 

To avoid these scenarios, you need to outline everything in writing from the very start of your relationship. This way, you will nip all second-guessing in the bud. What remains is a healthy working relationship that lists project specs so everyone is on the same page. 

When creating a contract, make it clear how many revisions your client is allowed to request. This is very important, or you may end up making endless revisions, losing tons of time and money in the process. 

In short:

• The proposal outlines your basic strategy, or how you’re going to solve their problem. 

• The contract clarifies the project details in depth. 

Both documents lead to a better understanding between the two parties by shedding light on the unknown details. 

2. Proposals and contracts help avoid financial disputes

Another pitfall many startups run into is putting their trust in the wrong client. A winning proposal might land you a new business but without a contract to support it, you’ll be walking on thin ice. 

It's not worth taking, especially since now you can create a contract in just a few minutes using our free contract templates. 

Without a contract, the client can decide to walk out after you submit your work and it gets almost impossible to get paid. 

Even if you track them down, they can get into a dispute and present a series of arguments against paying you, especially if they’ve been in the game longer than you. Because of all this, a contract is a powerful asset to present if push comes to shove. 

Sure, you have the proposal that outlines the workload and your rates, but it normally doesn’t provide the same amount of protection as a formal contract. With a contract in hand, you can refer to it if any disputes about money pop up down the road. 

With both the proposal and contract your client has signed, you’re buying a lot more security to ensure you get paid. 

What goes into a contract?

By now, you should understand the benefits of using a proposal and contract. Now let’s explain the essential elements of a contract and how these two documents complement each other.

1. An offer or proposal

In a way, a proposal is the foundation of a contract. There can be no contract without a business proposal. One party proposes a service that the other party has required. The proposal can also include the initial terms of the agreement. 

2. Consideration

If the client makes an offer in return for the service you proposed, this is known as consideration. Consideration usually comes before the official agreement but both parties must agree that there is significant value in the project for both of them.

3. Acceptance and agreement  

After you’ve sent the proposals and the client has offered something in return, now both parties should work out the terms by negotiating the contract. 
In this phase, either party can still reject the contract or make counter-offers if they are not satisfied with the terms. When the mutual agreement is reached, you can prepare a formal contract to be signed by both parties, which makes it a legally-binding document.

Can a proposal be a legally-binding document?

In the previous section, we’ve seen that a contract consists of an offer, consideration to be received, acceptance of the said offer, and signatures from all parties. 

An accepted and signed business proposal is not a contract if the signature is added for discussion purposes only. Such a proposal can’t be legally binding, because it lacks mutual assent, consideration, capacity, and legality. 

As a submission by one party to buy or provide certain products or services, a proposal itself is not a commitment. 
However, there is a way to convert a proposal into a legally binding contract. To do so, the language of the proposal must be altered to include the elements of a contract.

When you instruct the client to date, sign, make payment, and follow the proposal terms, the proposal becomes a legally-binding document. 

To speed up the process, our proposal and contract templates come with legally binding digital signatures that reduce the turnaround time and add an extra layer of security, while your clients can sign them from any device. 
This is important because our research shows that 46% of proposals are opened on mobile devices.

Wrapping up

As you are about to land a new client, keep in mind that you’ll need both a proposal and a contract. 

Think of a proposal as putting your foot through the door. You already know a bit about one another, and now it’s your job to make the other party realize that you’re an ideal match. 

Yet there are no guarantees until the contract is signed. Both you and your client must agree to the terms of your proposal and the most important aspects – deliverable, payment, and deadlines. 

If all this feels too complicated, we have a solution. 

Sign up for a free trial and see for yourself how our Better Proposals sorts out the whole hassle in a matter of minutes.