A Service Agreement is a legally binding contract between a service provider and a client that defines the scope of work to be performed, the compensation terms, project timelines, and the rights and obligations of each party. It governs the relationship for any engagement where one party delivers professional, technical, or manual services in exchange for payment.

Under common law contract principles and the Restatement (Second) of Contracts, a service agreement is enforceable when it contains an offer, acceptance, consideration, and mutual assent to definite terms. Unlike an employment contract, a service agreement engages an independent contractor who controls the methods and timing of their work. The IRS applies a multi-factor test (outlined in Publication 15-A) to distinguish independent contractors from employees -- misclassification can trigger back taxes, penalties, and liability under the Fair Labor Standards Act (FLSA).

Service agreements are governed primarily by state contract law, though federal regulations apply in specific contexts such as intellectual property assignments (Copyright Act, 17 U.S.C. Section 101 -- work made for hire), data protection (state privacy laws, CCPA), and consumer protection statutes. The agreement creates a clear framework that prevents scope creep, payment disputes, and ambiguity about deliverables. Without a written service agreement, both parties rely on implied terms and oral representations, which are notoriously difficult to prove in court and frequently lead to costly litigation.

When hiring an independent contractor, freelancer, or consultant for any project -- web development, marketing, accounting, legal consulting, graphic design -- a service agreement establishes the deliverables, deadlines, and payment structure before work begins.

When a business engages a recurring service provider such as a cleaning company, IT support firm, property management company, or bookkeeper on a monthly retainer, the agreement defines the ongoing scope, rate adjustment procedures, and termination terms.

When a client commissions a project-based engagement with defined milestones and completion criteria, such as a software build, construction project, or event planning engagement.

When intellectual property will be created during the engagement -- logos, software code, written content, photographs -- and ownership rights must be explicitly assigned to the client upon payment, since under default copyright law the creator retains ownership unless a written assignment exists.

When confidential business information, customer data, or trade secrets will be shared with the service provider during the course of work, requiring enforceable confidentiality and non-disclosure obligations.

When either party operates across state lines, creating potential jurisdictional questions that must be addressed by a governing law clause to avoid confusion about which state's laws control the agreement.

The scope of services must be defined with specificity -- listing all deliverables, acceptance criteria, and explicit exclusions. A well-defined scope prevents the single most common source of contract disputes: scope creep, where work gradually expands beyond the original agreement without corresponding compensation.

Payment terms should specify the total fee or rate structure (flat fee, hourly, milestone-based), payment schedule, accepted payment methods, invoice submission deadlines, and late payment consequences. A standard late fee of 1.5% per month on overdue balances provides incentive for timely payment.

Timelines and milestones establish when specific deliverables are due and what happens if either party causes delays. Client-side delays (late feedback, missing materials) should trigger automatic timeline extensions to prevent unfair breach claims against the provider.

Intellectual property ownership must be explicitly addressed. Under the Copyright Act (17 U.S.C. Section 201), work created by an independent contractor is owned by the contractor unless a written "work made for hire" agreement exists or rights are assigned in writing. Most clients require full IP assignment upon payment.

Confidentiality provisions protect sensitive business information shared during the engagement. These should define what constitutes confidential information, the duration of the obligation (typically surviving termination), and permitted disclosures.

Liability limitations cap each party's maximum financial exposure, typically at the total fees paid under the contract. Exclusions for consequential and indirect damages are standard.

Termination clauses should address both termination for convenience (with a notice period, commonly 30 days) and termination for cause (material breach with a cure period). The agreement should specify payment obligations for work completed prior to termination.

Indemnification provisions allocate risk for third-party claims arising from each party's negligence, breach of warranty, or intellectual property infringement.

A dispute resolution clause establishing a tiered process -- negotiation, then mediation, then binding arbitration or litigation -- reduces the cost and time of resolving disagreements. The governing law clause determines which state's laws apply.