14 Feb The dangers of contra deals
With limited resources, contra deals can be very tempting for start up entrepreneurs and small business owners, but they don’t come without risks
Especially when just starting out and money is really tight, it’s really tempting to do a deal with another business to essentially exchange or barter services – a contra deal. But there are a lot of dangers and pitfalls in contra deals. Here’s why:
One or even both are going to feel short-changed in a contra deal
Invariably in each transaction there will be a trap. One person or even sometimes both parties will feel like they are getting the “short end of the stick”. Therefore animosity ensues.
It’s a fact that, in a contra deal, neither party will truly know how much work or value the other is giving and we all value highly what we do and don’t really understand what goes on in the background of another person’s business.
Contra deals should still have invoices exchanged reflecting the value exchanged
The only way of truly knowing is by invoicing each-other for the work that you do. Then no-one should feel like they are getting taken advantage of.
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The contra deal work is never going to be prioritised
The other potentially unforeseen consequence is that if you have other work that you can charge for, that will take priority over the barter work or contra deals and eventually what you have is both sides’ work being put to the bottom of the pile – so essentially no-one wins in the transaction.
You each become lesser priority and eventually you both receive poor service. And it becomes a big of a “grudge” transaction.
What if the work goes wrong? Then what?
You guessed it, it’s as dangerous as entering into a contract on a handshake, with the boundaries not clear on either side. It can be very messy and you’re asking for trouble.
Beware being taken advantage of
The final point is that if you’re naturally a giving person, you’ll find that people will often approach you for barter services and contra deals when they know they will be getting a better deal out of the transaction and you can be left doing far more work and feeling worse off for it.
In the right situation, with clear terms and expectations, contra deals can be a great thing for small business owners to leverage outside resources and skill sets. But, they should be treated with a high degree of caution and only with the relevant discussions about allocation of work, value exchange, delivery etc. being discussed upfront.
From a legal/tax perspective though, if you’re registered for GST, you must invoice as technically, the other party needs to be paying GST on the goods and services and so do you. You both need to be collecting GST and paying each-other’s GST to the government. If a dispute arises or a complaint is made, you could very well get in trouble with the ATO. And no-one wants that.
(c) Progressive Legal Pty Ltd – All legal rights reserved (2020)
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Ian Aldridge is the Founder and Principal Lawyer Director at Progressive Legal. He has over 15 years experience in advising businesses in Australia and the UK. After practising in commercial litigation for 12 years in major Australian and International Law Firms, he decided to set up a NewLaw law firm in Australia and assist growing Australian businesses. Since then, he has advised over 2,500 small businesses over the past 6 years alone in relation to Intellectual Property Law, Commercial, Dispute Resolution, Workplace and Privacy Law. He has strived to build a law firm that takes a different approach to providing legal services. A truly client-focused law firm, Ian has built Progressive Legal that strives to deliver on predictable costs, excellent communication and care for his clients. As a legal pioneer, Ian has truly changed the way legal services are being provided in Australia, by building Legal Shield™, a legal subscription to obtain tailored legal documents and advice in a front-loaded retainer package, a world-first. He has a double degree in Law (Hons) and Economics (with a marketing major). He was admitted to the Supreme Court of NSW in 2005.
