Software Development Contract: What Every Beginner Needs to Know
This guide will help you understand the meaning of a software development contract, the different types you can choose, and what to include in your agreement.
In today’s fast-paced world of technology, a robust software development contract will come in handy to help you avoid a mix-up in expectations and details. Knowing what to include and look for in a legal contract will protect you adequately and ensure you don’t miss the mark.
What is a Software Development Contract?
It is a legal document that dictates how the software development vendor will provide its services to the client prior to starting a project. The document binds both sides to perform specified obligations within the agreed period.
Types of Software Development Contracts
There are four types of software development contracts in the United States and worldwide. When choosing one, be sure to consider the scope and size of your project, budget, time, and the level of the client’s involvement. Each of them comes with its advantages and disadvantages. Let’s take a glimpse into these different contracts.
Fixed Bid
A fixed bid defines the project’s scope and the price that the client is willing to pay. Mostly found on freelance platforms, these contracts are made for small tasks.
Advantages
- Easy to use and budget for small tasks
- Beneficial for test tasks that need specific component or features
Disadvantages
- Unsuitable for a larger task or code because it inhibits changes
- Requires a lot of detailed planning to ensure you've not left out anything
- Need more time to prepare
- Developers may use less effective methods and tools, especially if the budget is tight
Fixed Budget
In a fixed budget for software development, you agree with the developer that the software to be made has a targeted budget. Therefore, exceeding the budget may lead to issues.
Advantages:
- a fixed cost contract allows the development of a project under a tight budget
- enhances consistent communication
- boosts close collaboration between you and your developer
- allows for risk-sharing between the client and vendor
- focuses on delivering your company objectives and ensures core features are delivered
Disadvantages:
- A fixed cost contract is not suitable for large projects that may need high amounts of funding
- Needs a lot of trust and hard work, which can be hard to achieve if it is the first time for the parties to work together
- In the beginning, the client party may be disappointed, even though the developer may modify the product to achieve the objectives as it progresses.
Capped Budget with Accelerated Bonus
These legal contracts are similar to the fixed budget type, but the client provides an incentive for faster delivery.
Advantages:
- Encourages the vendor to deliver under strict deadlines
- Motivates the developer to perform efficiently
Disadvantages:
- A dishonest software developer may sacrifice quality as they rush to complete quickly unless the client monitors them closely
We build custom software with modern solutions in mind for any business and sizes!
We build custom software with modern solutions in mind for any business and sizes!
Time & Materials
Time and Materials contract is where you agree to pay the development company as per the number of hours they worked.
Advantages:
- It's straightforward
- Its flexibility allows you to alter, add and remove features without increasing your budget
- Its costs are transparent, leading to better communication and greater trust
- The time and materials model allows you to monitor the project more closely
Disadvantages:
- Less control over the costs
- Any shift in requirement may result in a shift of deadlines, making it hard to know the completion date.
- Changes' request may also alter the initial budget and make it difficult to estimate the final cost.
- Since the customer needs to be involved closely, it requires more effort.
The Importance of a Software Development Contract
In case of an issue during software development, a written contract may help you avoid burning your fingers. This crucial safety net can save both the IT company and the customer from:
- Fraudulent activities
- Conflicts over things like ownership, work duration, intellectual property, billing information, and copyrighted material
- Work stress, time wastage, and loss of business trust
- Unnecessary legal and lawsuits
Main Points of a Software Development Contract
The following are some of the most important things included in most water-tight contracts.
Services
This section is one of the most crucial parts of every contract. It describes all the software development services that a client expects to receive from the vendor. It usually specifies the project’s scope and how to handle any request for changes.
The contract should:
- specify the project's scope to be delivered
- state that either party requesting for a change should put their proposal in writing
- provide the procedure of making changes to the project scope
- state that any change proposal should describe in writing the changes and their effects on the cost and duration
Time & Billing
Fees and time tend to be the leading hang-ups in most project plans for software development. So be clear by setting the cost ranges for the developer, quality assurance, and project manager.
Write down any cost to avoid ambiguity and help all the parties allocate resources well. Additionally, be sure to set up the billing process in advance. The following are some of the things to answer:
- Where, when, and how will the billing occur?
- What are the hourly rates, milestones, and development phases?
- Does the project need a deposit before work commences?
- Any partial charges as the project progresses?
- Are there penalties for missing a payment schedule?
We build custom software with modern solutions in mind for any business and sizes!
We build custom software with modern solutions in mind for any business and sizes!
Tools & Processes
Your software product’s complexity and nature may force the developers to employ various tools, designs, and development processes.
The contract needs to lay down standard provisions, such as:
- The timeline for the software development
- The client's involvement in the whole process
- How costs and other terms may change in case of variations in product specifications
Acceptance Testing
Upon which side will the acceptance testing be done, client’s or developer’s side? Since this testing mostly occurs after completing each development phase, the contract may have to include a detailed project plan in this provision.
The contract agreement will include things such as:
- the side performing the testing
- testing's duration
- requirements that each test must pass for the project to be accepted
- how the results will be communicated
- whether the inspection will be part of the formal software acceptance process
Documentation & Intellectual Property
Under the US copyright law, the product’s author is legally the owner of his work. Thus, the developer needs to either provide intellectual rights to the client or grant a license to them. Therefore, the specification to be provided here include:
- The ownership of the software's copyright, source code, and intellectual property rights
- Any license needed for each module or elements of the software
- If the software has an open-source part and the licenses for that part
- Whether the customer needs an end-user license
- The charging model of any licensing
- The right to use and modify the software's code
- Any inclusion or exclusion from the license
- The ownership of whatever stage that is complete if the contract is terminated
Warranties
It is necessary for the software development agreement to describe the indemnities and warranties terms in the event of a mishap. The client needs to know the compensations for any damage or loss from the product in certain circumstances.
They include:
- Specific warranties when it comes to security, stability, and performance of the software developed
- Guarantees that there will be no infringement of a third party intellectual property
- Indemnities for the engineer to perform any settlement and IP dispute with a user
Privacy Policy
It is a description of the confidentiality of the developer, customer, and end-user. The loss of personal information through theft, leaking, and selling can be detrimental to the parties involved.
When crafting the contract, define the privacy policies that will protect the proprietary data, private client data, and other sensitive data from getting into the hands of competitors and fraudsters.
In most cases, the private policies survive the contract itself, i.e., they should be maintained even after the contract has ended.
The software development contract may also describe:
- Consultancy
- Maintenance and Support
- Software Integration
- Disputes Resolution
- Governing Law
- Termination
Conclusion
With a solid software development contract, you can rest assured that you’ll not get the short end of the stick if the project fails. It shields you from any unmet obligation related to confidentiality, services, billing, time, testing, and other crucial elements of a project.
Since a software development and design contract is a legal agreement, we recommend that you engage a lawyer’s services to help you create and interpret one. Alternatively, a reputable software developer should assist you in crafting it and delivering everything.
If you’re looking for a software developer that meets all the obligations in every contract and adheres to the law, consider Laneways Software & Digital. We will first understand your business’ ins and outs and select the best type of development agreement. Call us now for more information!
Jerome Rault
Partner with a software development team one that's passionate about creating success
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