When it comes to software development, it is not always easy to navigate what to expect, especially if you’re working with a new vendor. A software development contract is essential as it describes the development services you expect from your partner. .
In this article, I’ll explain how to draft a contract and keep expectations clear. I’ll also run through three common contract types and outline the most important elements of a solid agreement.
So let’s get started!
What is a software development contract?
A software development or service contract is a service agreement between you and your software development partner about mutual expectations and responsibilities. Dealing with a vendor without a proper agreement can leave your business in the red. Why? Because along with poor development quality and money loss, you risk putting your company’s intellectual property at stake.
Software development contracts define project scope and cost, intellectual property rights, confidentiality, success metrics, timeframes, and warranties. Though these agreements are similar to other service agreements, they are usually more agile. This, in turn, can lead to ambiguity and inadequate protection of both parties.
But first things first. Let’s look at three types of software service contracts in terms of cost and how you can choose what suits you best.
How to choose the cost structure
Depending on your project’s duration, scope, and budget, you’ll need to choose the cost structure and the contract type that will work best in your case. You need to consider three main types: fixed cost, time and material, or dedicated team. Let’s explore each of them in detail.
Fixed cost
The cost of a fixed-cost contract is agreed before the project starts and often requires detailed and lengthy planning far before the development work starts. Companies need to have a well-defined development scope, conditions, and timeframes to make the estimates accurate. On the one hand, fixed-cost software contracts are straightforward: you pay for the result with no surprise (hopefully). On the other hand, this means little or no flexibility because you won’t be able to change much on the go.
Such contracts are suitable if:
- You have a tight budget
- You have clear and sufficient project documentation
- You’ve used the technology before, or you need a few tweaks to existing software
- Your project is small and lasts up to two months
Time and materials
A time and materials contract is when you pay developers based on the number of hours they worked. This contact type is used when it’s harder to estimate the budget or time frame upfront. For example, when you need to make changes to the project scope or want the developer to offer an improvement over your existing technology. This also means that the project can take longer and the amount paid be higher, with more administrative effort and time on your part.
Opt for time and materials software service contracts when:
- You have a flexible budget
- You don’t have clear and detailed documentation on the functionality
- You’re open to the developer’s ideas and recommendations
- You’re ready to invest your time and effort in the project
- Your project is small and lasts up to two months
Dedicated team
A dedicated team is a business model used in contract software development for long-term collaboration. The vendor selects candidates according to your requirements and helps you choose the team structure and members you’ll work with. The team works exclusively on your project, sometimes even with your in-house teams.
When you hire a dedicated team, you’ll likely need to pay each member’s salary plus the vendor’s fee. Alternatively, you can agree on a fixed weekly or monthly budget. The contract for a dedicated team is usually the most agile among all three software service contract types.
Check our story about how we at Altigee successfully built a dedicated remote engineering team for one of our clients.
You’ll benefit from hiring a dedicated team if:
- You have a flexible budget
- You want non-standard software functionality and don’t have documentation
- You want a full-time team
- You’re ready to invest your time and effort in the project
- Your project is large and lasts more than three months
As you can see, there’s no one-size-fits-all solution for every project. Each contract type differs based on your requirements and willingness to participate in the development process. Now that you know how to choose the right cost structure for your particular project let’s move on to the contract structure itself.
Key elements of software development contracts
More often than not, software development contracts require a high level of agility, making it harder to draft them. You need to balance between flexible general clauses and detailed clauses that better protect you from risks but limit the project’s flexibility.
Regardless of how agile your contract is, key elements constitute a solid agreement. Let’s take a closer look at them.
Services description and project scope
A software development contract should clearly outline what you expect from the vendor. For example, the development of specific features, the number of allowed revisions, and what maintenance services are required. You will need to prepare detailed project specifications and attach them to the contract. Alongside, establish tools and processes, including the source code repositories, software used, and even project management style. Ensure that this section stipulates possible changes to the project scope and the procedure for making them.
Project time and cost
Based on the cost structure, this section of the contract will either define the fixed cost and timeframe or leave more flexibility for the parties to decide on the time and cost. Here, you can state the budget and development stages with milestones and dates. Take into account the possibility of delays that you and your development vendor are responsible for (such as payment delays, slow communication, or development delays).
Acceptance testing and delivery
Acceptance testing is the period during which you can access software and test whether it meets your requirements and specifications. Clearly state that delivery is possible only after successful acceptance testing and specify the acceptance duration and possible reasons for rejection. Here, you also need to describe the procedure for making corrections after failed acceptance and acceptable dates.
Warranties and liabilities
Along with basic warranties like keeping contract terms and deadlines, you may expect the vendor to document and provide an inventory of third-party code, guarantee no backdoor access, and comply with your company policies. Take into account that the development provider can reject or limit their liabilities related to merchantability and legal compliance depending on how you will use software. The vendor will also likely reject any liability for losses and damages you may face as a result of software use or sale.
Intellectual property transfer
Intellectual property is an essential part of your software development contract. This section should clearly define your ownership rights for source code, design, patents, copyright, and trade secrets. In case of contract termination, you should immediately become the owner of what has been completed so far.
Privacy and confidentiality
Your developers need to maintain confidentiality, that’s for sure. The contract should define what information is considered confidential and determine the developer’s responsibility for its disclosure. Some contracts may require developers to destroy all project materials they were working on, such as specifications, technology roadmaps, designs, or mockups. You also need to ensure that the developer meets the requirements of your company’s privacy policy, especially if the project involves proprietary data, trade secrets, and private customer data.
Success metrics
Unlike other more agile contract sections, success metrics should avoid broad terms and vague language. Set exact and measurable metrics for project success to avoid misunderstandings between you and your partner. The more concise and clear your metrics are the fewer delays and arguments with the developer you may expect down the road.
Pricing and billing
This section can help you better protect yourself from surprise bills, especially if your contract isn’t fixed-cost. Request exact developer rates, service fees, or price ranges when a fixed price can’t be set. Clearly define how, when, and where the billing process occurs. Consider attaching a payment schedule to the contract and stick to it to avoid payment delays and penalties.
Adding these sections to your contract will help you ensure that all important points are in place. However, even with these sections, you’re not completely protected from problems in your agreement.
What to keep in mind when drafting a software development agreement
More often than not, you’ll go for time and materials contracts and dedicated teams when there’s a lack of understanding of the final product functionality. Your company may lack expertise in software development or need the developer’s help at the discovery stage to better evaluate end users’ expectations and the project potential. If this is your case, be careful not to make the contract too flexible and thus too ambiguous and vague.
Here are eight of the most important legal issues you need to cover in your contract to mitigate risks.
- Ownership and rights. Clearly define the owner of the software code and determine whether some portions of the code can be reused by the developer for other clients. Be clear in who owns intellectual property rights, including the copyright and patents.
- Project scope. Though the project scope may be unclear at the drafting stage, try to be as specific as possible. Set your development stage expectations and timeline. Consider the success metrics you’ll use to evaluate the project’s success.
- Support and maintenance. Determine whether you need support and maintenance and agree on the terms and costs.
- Payment terms. Clearly outline developer’s rates or their range, service fees, payment conditions, billing, payment schedule, and other terms.
- Unexpected issues. Poor project management, tech stack issues, inadequate planning, and other factors may cause unexpected problems and project delays. Estimate your possible loss and define how the developer will compensate them.
- Order changes. If you don’t have a clear vision of the final product, it makes sense to leave room for order changes in your contract.
- Warranty, indemnification, and liability. Outline the developer’s warranties and, what’s more important, their limitations. For example, the developer may refuse to take responsibility for software after delivery or if your in-house development team has modified it.
- Dispute resolutions and termination. Define how you will resolve issues (mitigation, litigation, jurisdiction, etc.) and what can cause contract termination (for example, contract breach or mutual written agreement).
Ensure that your contract covers all the legal issues above. If you need a more detailed overview, check out a few templates of software development agreements drafted by professional lawyers.
Software development contract templates
Nothing can boost your chances of success more than a well-drafted contract (except for the professional development team, of course). To help you navigate through the contract structure and make sure that nothing is missed, we’ve brought together a few contract templates you can view and adapt to your needs:
- Software development agreement template
- Agile software development contract template
- Mobile application development agreement template
Templates won’t replace a good lawyer, but they can save you time and give a better understanding of what to pay attention to.
Wrapping up
With a solid software development contract in hand, you’ll be better set up for project success. A well-drafted agreement can protect you from losses and poor development quality. In addition, it can become a perfect starting point for long-term cooperation with your development provider.
To draft a contract that meets your needs, make sure to cover intellectual property rights, confidentiality, warranties, liabilities, and success metrics, along with the project scope, payment, and timeline. If you’re not ready to go through contract drafting on your own, opt for a professional outsourcing company like Altigee. We’ll guide you through the entire journey, from hiring a development team and drafting a proper software development contract to running a remote team instead of you.
Sounds too good to be true? Drop us a line to discuss your software development needs.
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