Software Development Agreement: All You Need to Know Before You Sign

Summary: A software project without a legal contract is a recipe for disaster because the parties involved can default in the wink of an eye. However, most businesses cannot zero down the clauses they should be including in their software development agreement. In this blog, we are going to discuss everything that you must and must not do about such a contract.

In the world of software development outsourcing where the client and the IT provider are at two ends of the globe, conflicts can arise at any stage of a project. Trust, collaboration and strategic innovation are the cornerstones of success in these projects. And to ensure that both the stakeholders of the project are reaping mutual benefits from the collaboration, a software as a service agreement is a MUST-NOT-avoidable measure.

Here’s a list of all the things that we will be discussing in this blog:

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What Do We Mean by a Software Development Contract? – An Overview

A software development contract is a legally drawn up agreement between a client and a service provider that clearly lays down the details of the project and execution parameters.

It is the most important document between the client and a software service provider and lists all collaterals like the scope of work, the mutually agreed timeline, performance metrics, confidentiality rules, specifications about architecture and technology to be used and the cost of the project.

This brings us to a very important question:

Why is a Software Development Outsourcing Agreement Important?

An outsourcing agreement for building software serves as a shield for all the stakeholders of the project. We will discuss in detail how a software solution provider and a client can benefit from it individually, as well as mutually.

Benefits of Software Development Contracting for the Client:

As a client investing in development of software products and services, the contract is your protective cover for ensuring transparency and predictability of the project.

1. It gives you a transparent timeframe for the project accelerating time-to-market.
2. It guarantees that you retain the ownership of the product.
3. It works as a guideline to regulate if something goes out of the scope, minimizing risk of the project.
4. It prepares you with the cost of implementing the software development solution.

Benefits of Software Development Contracting for the Software Provider:

Just like the clients, even for the software providers, the contract acts like a vanguard.

1. Clearly defines the scope of work, timelines and resource requirements.
2. It acts as a guideline for the provider in framing the project blueprint.
3. Defines the parameters of project success.
4. Puts down the cost estimation to be paid by the client.

Now, let’s see how a custom agreement mutually benefits both the stakeholders –

A contract for crafting software solutions is a legal coverage for both the service provider and the client, i.e. the project owner. It promotes a collaborative mind-set between both the stakeholders making each entity equal equity partners in terms of innovation and execution.

Take a look at this chart for a better understanding.

Types of Software Development Outsourcing Contracts

Traditionally three forms of software development outsourcing contracts are more popular and in-use. However, to choose the perfect model for your business, you need to make up your mind about the billing.

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Let’s get into the details of these models and explore the kind of projects for which they are the best-fit:

The Fixed Cost Model

Just like the name suggests, if you want a greater budget predictability and avoid additional overhead expenses to the maximum, a fixed cost model/ fixed-price model is your best option. However, the primary requirement of this model is a clearly pre-defined scope of work.

The best part about this model is that as a client, your software partner would majorly need your involvement towards the initial stages where you plan out your requirements and expectations from them. And in the later stages, when it comes to feedback on the solutions developed, the fixed price model allows you to pretty much leave the project management related tasks to your development partner.

Disadvantages of the Fixed-Cost Model:

The only flip side of this model is that at times software projects take a considerable time to reach the market. At the pace the IT industry is moving, it is possible that during an on-going project, new requirements come up to react better to evolving customer demands, rapid market changes and the actions of your competitors.

As a fast-moving business, you need to be far-sighted enough to plan your project goals in a competent enough way to deal with market disruptions.

Which Companies Work Better with the Fixed-Price Model?

Traditionally, the fixed cost model works best for firms with relatively limited budgets. It also works well for short-term projects that are built to address immediate demands of the market. Having said that, a perfect software development partner can actually help you address the loopholes in your project which over the time may emerge as redundant.

Time and Materials Model

If you are planning to pay for software services on the basis of resources used and number of hours these resources devote, then the time and materials model can be a good choice for you. And because the time and materials model doesn’t come with any upfront costs, it enables you to have complete visibility into how your funds are being spent.

Other than control over funds, the T&M model allows you flexibility on grounds of the project scope. Because the T&M methods follows the agile methodology of software development, it enables you to be more responsive to the market changes while you are in the midst of a project. In fact, many CTOs prefer to work with this model because it allows them to be more involved with the software development process – right from regular scrums to feedback sessions, as a client, you do have more control over the prognosis of the solution being developed.

Disadvantage of the Time & Material Model:

Although this model leaves enough scope of realigning your priorities for your project, it comes with a major disadvantage – the cost of developing a software. Realigning the scope of the project and rounds of iterations mean the final cost of the solution will be beyond your presumptions.

However, working with a trusted partner building exceptional software would guarantee a preliminary estimate from the scope of work. This way you will be prepared for the amount that you’ll have to shell out eventually.

For What Kind of Projects is the T&M Model Recommended?

This model will work best for relatively lengthy software projects that need to be developed with agile methodologies and require flexibility of scope. CTOs who prefer being more involved in the development process and have wider control over project workflows tend to choose this model.

While Fixed Cost and Time & Material models of billing are more popular, businesses with top-tier growth also tend to gravitate towards a third mode of billing – the dedicated development team model.

Dedicated Development Teams

A lot of CTOs prefer the dedicated teams model for lengthy projects that stretch up to three months or more and even for ongoing partnerships. In fact, at Radixweb, we have a ratio of 97% return clients who keep returning to us for enhancing their digital systems – most of whom prefer to work with our dedicated teams as an extension of their in-house teams.

Advantages of Hiring a Dedicated Team:

The best part about this model is that a team of seasoned experts exclusively work full-time on your project. There won’t be an instance of their unavailability while on your schedule or a situation where they prioritize another client’s project over yours. Most trusted software partners allot their own Project Managers for such dedicated teams along with QA experts. Another important reason to opt for dedicated teams is that you get to save extra on costs by choosing your developers according to skill sets and seniority as per the requirements of your project.

When Should You Consider a Dedicated Development Team Model?

If you have a substantial project with a requirement of diversely skilled developers, and especially if you lack such expertise in your in-house, it is always wiser to hire a dedicated team of developers from a trusted software partner. Other than a wide pool of resources, most service providers allow you to scale up and down the count of developers on your team as per your needs.

So, if you do not wish to spend on recruitment costs or additional organizational expenses that you usually have to carry for in-house resources, this model is your best bet.

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Key Aspects of Custom Software Development Outsourcing Contracts

Designing an outsourcing contract for developing software is a dynamic process. However, there are a few essential elements that you must include in your agreement template. Let’s discuss those:

The Scope of Work:

It's important to be clear about what you expect from your project. You should define the roles and responsibilities of everyone involved, list the required features and applications, and outline support and maintenance agreements. You should also specify details about tools, methodologies, and technologies, as well as procedures, revision, and feedback integration. Additionally, you should mention project management methodologies and clauses about source code repositories. Finally, make sure the scope of work clearly states the project's objective and the expected deliverables.

Cost and Time Frame:

This is all about the contract model by which you intend to pay for the software development services. Once your project scope is in place, you need to set a timeline for your project’s completion and accordingly the cost. At this stage, you need to lay down the phases of development and its incremental milestones.

Your contract for software building should specify the responsibilities of both parties involved in the project. It's also crucial to mention whether partial payments will be made at different milestone points. Payment schedules should be clearly outlined in the contract to ensure that both parties are in agreement.

Intellectual Property Rights (IPR):

Another very significant element of the contract is the legal protection of the solution developed. This is directly linked to the ownership of the source code for the solution developed. This ownership is directly linked to digital property rights, patents, rights to implement features, modules, and patterns.

Plenty of service providers reserve IPR until receiving the final payment, i.e. they hold back the source code of the solution. So, software development payment terms and IPR are pretty much linked, and you’ll need to mutually agree if a designator (project manager) from your organization can be made the owner of source code. The terms of this legal protection are also crucial for protecting your trade secrets.

Delivery and Acceptance Testing:

Acceptance testing is the timeframe in which you can access and test your software to see if it meets your requirements. You need to clearly define the metrics for a successful acceptance testing to facilitate seamless software delivery. It is also important that you specify the probable reasons for solution rejection, procedure for feedback integration and corrections after a failed acceptance along with the duration for it.

Defining Warranty:

One of the core goals of building a solution is its functionality until a specific period of time. Generally speaking, a software warranty lasts from a couple of months to a year, within which if a solution malfunctions, the service provider remains liable to resolve the problems. You cannot expect a lifetime warranty of such products though because every technology tends to get redundant after a period of time.

A statement of warranty is important to ensure all bottlenecks within your specified software development time estimation are resolved by your development partner and you don’t end up shelling out from your pocket.

Confidentiality Regulations:

Data is the king for modern businesses and while developing a software solution, you are divulging your data resources to your development partner. However, through a suitable contract, you must protect your sensitive data – revenue information, trade secrets and most importantly, your client’s personal details.

The best of service providers will always agree to sign an NDA right at the discussion stage when you reveal your digital plan to them. Additionally, you must define the terms how your service providers will hand over the access of sensitive data after the completion of your project.

Billing:

This can prove to be one of the most important safeguards if you are planning not to go ahead with a fixed cost model. Your software service provider needs to clearly state the developer rates, service fees, pricing ranges, etc., in the contract. In this clause, you would also need to fix a payment schedule to avoid penalties related to payment delays.

You may consider the following billing processes:

• Billing on completion
• Billing of on-going services
• Progress billing
• Milestone billing
• Pro-rated billing

Termination Clauses:

There might arise situations wherein you or your service partner might arrive at a decision to terminate the project contract. It is always wise to prepare clauses for unpleasant situations. Thus, your contract must include conditions and the process for terminating a software maintenance agreement. Specify notice periods, penalties and liabilities to secure all ends.

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Go Through This Checklist to Ensure That a Software Development Contract is Enforceable

The aim of any software-build project is to ultimately design a mutually beneficial relationship between both the stakeholders – the client and the service provider. While drafting a non-disclosure agreement, you must follow a humanitarian approach that the collaboration proves to be a win-win for both parties.

• Limit the consequences of liabilities for both parties to prevent legal repercussions and financial drain on both ends.
• Have a solid dispute resolution mechanism as a roadmap to resolve conflicts between both the stakeholders.
• Have a protective shield in the form of written communication that clearly states the responsibilities of both, penalizes the defaulter and safeguards the other party from losses.
• Specify compliances and governing laws that rule your jurisdiction to avoid legal disputes .
• Integrate escrow agreements for source codes to make them available in cases of non-performance or legal disputes.
• Include the terms for cyber and professional liability insurances to protect against unnecessary liabilities.
• Enforce severability clauses which guarantee that if some provisions of the contract are unenforceable, the others would still be considered valid.

These conditions would ensure you and your software partner complete the project in harmony or in the worst case, at least terminate the contract at amicable grounds without major losses.

Final ThoughtsAlthough the primary concern for every client is finding the right software partner, a lot of CTO’s worry about fulfilment of their projects when it comes to outsourcing them. That’s where a software developer agreement comes to play. Such a development contract is way too different from an industrial agreement.When opting for a software development service, it is advisable that both the stakeholders of the project agree mutually on all terms, which will lead to their own legal protection in their own rights down the line.Having a trusted partner is essential for the success of any software project and Radixweb has been serving more than 3000 clients over the past 25 years with due dignity, fulfilling every clause of service level agreement. So, if you want a partner that duly fulfils its development duties and takes you to the edge of growth, contact Radixweb’s certified developers.