Contracts are used for managing enquiries, quotations and sales orders. A contract is given a different status and assigned a unique quote number and/or sales order number.
When you first create an enquiry the contract is given a status of "enquiry", this will be automatically changed to quote once a quotation has been printed or emailed. Enquiries are therefore for internal use as items pending a quote being sent to the customer. Quotations have already been sent to your customer.
A quote is a snap-shot of the contract. If you modify the contract and create a new quote, it will be based on the contract details and then the quote is given a revision number. This allows a history of quotes to be tracked.