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Contract Loopholes: How To Avoid Mistake In Software Outsourcing?

By March 16, 2020August 3rd, 2020No Comments

No matter what company size it is, any business can potentially benefit from outsourcing. Rather than taking on in-house developers, outsourcing can save your software development budget. Thus, you will have more time and advantage to focus on your core business strategy. However, many businesses choose a partner too quickly, making contract loopholes in an IT outsourcing contract.

how to avoid contract loopholes in software outsourcing agiletechFor instance, have you ever looked carefully at how much will it cost to have an ideal contract? There are undoubtedly dozens of common mistakes you can make. Before the contract is signed, we would like to share with you 4 biggest sneaky clauses to watch for. Let’s know how to avoid contract loopholes in software outsourcing! 

3 Most Popular Types Of Outsourcing Contracts

But first, if you want to avoid contract loopholes, you should be clear what types of software development contracts need to know. When outsourcing with a development team, it is hard to have full control over the work process. Before the project is launched,  the most important thing is to clarify all the requirements of the contract. What things you will pay for? Which price rates will be set up? So it’s time to find out the special features of each contract for outsourcing services!

3 types of outsourcing contract agiletechFixed Price Contract

A fixed-price contract determines the price of a certain amount of work, regardless of the actual cost of implementation. Moreover, this type of IT outsourcing model can provide financial incentives for achieving specific project goals.

  • Perfect solution for short-term projects
  • Consumer and vendor agree on a steady ‘fixed price’ for the service
  • The price is estimated by outsourcing company based on the well-defined scopes
  • However,  there is little flexibility under this contract

Read also: 8 Ways To Save Software Development Budget In IT Outsourcing

Time & Materials Contract

Unlike the fixed bid project, the T&M model does not require an advanced calculation of all the details. Customers pay for the hours spent on the development of pre-specified functional.

  • Ideal for long-term cooperation
  • The customer pays the outsourcing partner for work time and used materials
  • On the other hand, it allows a great level of flexibility in development

Dedicated Team Contract

This software development contract will engage in any kind of task. And, the dedicated team only concern with your software project to achieve and perform intermediate results. At AgileTech, we have been experiencing such an outsourcing model many times and know how to handle the situation.

  • Usually used for long-term projects with changeable conditions and scale
  • The whole team is in one place, no delays to begin, no misunderstanding and cost savings
  • Being highly motivated, offshore developers quickly react to any issues and changes

How To Avoid Contract Loopholes In Software Outsourcing?

It’s usually a choice between Fixed price, Time & Materials and Dedicated Team kinds of software development contracts. Yet, all types of outsourcing contracts have their risks and opportunities. Even with all things considered, we recommend you reading 4 key points to prevent contract loopholes!

Read also: Software Outsourcing Company: How To Choose The Right Size For Startup?

Estimate Overall Cost

Cost savings is arguably the major reason to outsource. However, one of the common contract loopholes in IT outsourcing is also around cost. It’s easy to fall into the trap of picking the least expensive bid in order to save the biggest buck. Unfortunately, this sometimes brings in poor quality and materials.

No one wants to create a negative experience for your customers. Hence, you and your vendor should be clear about the consequences outlined in contracts for missing payments. To avoid mistakes in your contract, you have to set strict deadlines for invoice payment.

Put Enough Emphasis On Security

Many of the most commonly outsourced processes require the transfer of data. Therefore, it can carry significant contract loopholes with data protection. First of all, to ensure data protection, there are questions should be asked:

  • Are the outsourcing company’s services compliant with good data protection?
  • What are the security measures in place to prevent abuse of data?

Outsourcing agreements should cover key data protection issues. Then, the provider has to compliant with the legislation. The contract needs to cover the extraction, removal, and erasure of the personal data. It’s also highly recommended you take advantage of how the transfer back to your systems can be made in a secure manner.

Present KPIs As Precise As Possible

Next, which contract loopholes you should avoid? Your outsourcing contract should specify the key performance indicators or any payments of the project. When the contract clauses are misaligned with the objectives, problems will occur.

In circumstances, it must be seen about the technical scope, service hours and service elements. For instance, you could have a server asset (technical scope) on web development (services element) on a 24/24h and 7/7d basis (service hours). This allows you to prevent contract clauses and have a flexible approach describing the service.

Define Duration

When you signed an outsourcing contract, it means the provider is the right one at that moment. However, things can change with time and business strategy. Maybe, you wish to transfer an outsourced service to another vendor or bring it back in-house development. Contract loopholes relating to exit management should be clear, but they are all too often ignored. It is equally important with the costs involved in the contract.

Therefore, from the establishment of the contract, the exit must be integrated. What are the elements that will be transferred back to the customer? What are the knowledge transfers that will be provided in case of not outsourcing anymore?

Read also: How To Outsource Software Development? Complete Guide For Outsourcing!


When starting outsourcing with a new partner, many companies tend to sign the contract without having resources to manage the agreement. As a CTO, you should follow up on a very detailed outsourcing contract. What should you do instead? So as to avoid contract loopholes, we highly recommend that you write a simple contract through a clear and structured model of cooperation. Both client and vendor should consider IT outsourcing including payment terms, data security, clarify service description and notice periods.

By providing multiple needs and services, AgileTech is here to ensure your technology project as a successful element of your omnichannel strategy. We have expert Project Managers along with excellent teams who have delivered the best products to customers in more than 10 countries, namely the U.S, U.K, Germany, France, and Singapore.

As a leading mobile development company in Vietnam, we have huge experiences in many fields including e-commerce, car-sharing platform, health care, Livestream and many more. Our dedicated software development team is ready for your custom requirements. You can contact us at or via (+84) 936 281 059 for more information.

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