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

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:

Disadvantages:

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:

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!

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:

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:

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:

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!