Signing a software development contract is the last stage when you choose outsourcing partner. 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 outsourcing software development agreement. Have you ever looked carefully at how much will it cost to have an ideal software development contract? There are undoubtedly dozens of common mistakes you need to avoid.
Therefore, to strike a win-win deal, we will give you a handy checklist for custom software development agreement. It will help you avoid mistakes in further cooperation with your future IT outsourcing vendor. In addition, we will discuss more about three main types of software development contract as well as key things you should include to get the contract right.
Before reading this checklist, keep in mind that any contract for software development is different for each type of company. It will be good to have a lawyer to tailor and structure the core areas such as fees, expenses, scope of services, and costs form time to time.
Table of contents
What is software development contract?
How big is the outsourcing industry?
According to Statista, in 2019, the global outsourcing market amounted to 92.5 billion U.S. dollars. The recent study also shows that the percentage of the total IT budget spent on outsourcing increased from 11.9% in 2017 to 12.7% in 2019.
As you can see, outsourcing services, especially in software development, become popular. Because it is an effective and efficient way to minimize costs, work with a global talent pool without hiring in-house developers.
Then, many companies, which are looking outsource software development, will need to apply due diligence throughout the vendor selection process. What things you will pay for? Which price rates will be set up?
Each project is different in many aspects. Some projects have as clear requirements. Developers just need to follow the development process in the most efficient way. While some are controlled by clients. Hence, project timeline and a detailed scope will help you outline the essential project requirements. It also allows all parties can build a common plan and a shared blueprint better.
Why software development agreement is important?
Whether you are freelance software developers or custom software development companies, you have to face many challenges and risks. How to deal with your partner? How to be sure the final product will be meet your request?
By signing a software development contract, you can protect your business from some downfalls. If not carefully doing it right, you can time-draining legal dispute. Don’t worry. The contract is your best protection against inevitable conflicts over things like:
- Intellectual property rights. Who keeps the software, and the code technology?
- Work phases. How do you determine how much work should be completed at each stage of the project?
- Payment. What payment terms are agreeable to both parties?
- Copyrighted material. Who owns the copyrighted material that goes into software development?
- Specifications. This is one of the most important parts of the contract. Well-written specifications lay out exactly what the finished product will be.
At AgileTech, business understanding comes first. When developing new website for our clients, we will outline the specific requirements like audience research, deadlines for particular areas, selection of a domain name, prototyping, UI/UX design, and many more. Then, the software development contract helps many clients ensure that the software developer and the client are on the same page about development services, timelines, and payments.
3 Most Popular Types Of Software Development Contract
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. So, firstly, you should be clear the special features of each types software development contracts!
Fixed 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
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 Mistakes In Outsourcing Software Development Agreement?
It’s usually a choice between Fixed price, Time & Materials and Dedicated Team kinds of software development contract. Yet, all types of outsourcing contracts have their risks and opportunities. Even with all things considered, we recommend you reading 10 key points that every software development contract should include!
1. Outline Development Specifications
Specifications are a key part of any software development contract. If you don’t clarify what the final product look like, how it will look or what customers expect, it’s hard for development team to build a product that meet your need.
Your contract should define:
- All the functions integrating in your product.
- Write down the details of project, be as specific as possible.
Moreover, the contract should describe the development services that you expect your partner to provide. It also shows the procedure of making changes to the scope. Ideally, we recommend to state any changes proposed by each party as following:
- How many times you can change request.
- A description of the change.
- What is a result if the change has on the project cost and time.
2. Project Timeline
Every good project should have a clearly defined plan. Specific calendar states the hourly rates, development phases, milestones and deadlines. Defining each stage also helps you and your client the project process is efficient or not. Just make sure all supplementary documents are signed by both parties.
There are many project management tools that help you to create an effective timeline such as Asana, Smartsheet, Trello, Monday, etc.
3. Payment Time
As we mention before, the three most common form of payment agreement are:
- Fixed-price means the price are paid an entire project. It can be helpful you know upfront what the project will cost. You can insist on how the project looks at the end and how long it takes to develop.
- In time and materials, you have to pay for the time spent and the cost of materials. Time and materials contract is easier to kick off. Because it requires less preparation and planning. Besides, the development team have time to maintain quality of project.
Your contract should detail a schedule of payments including:
- The date that each payment must be made.
- How payments will be made.
- Additional fees that may be charged.
4. 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.
5. Acceptance testing
In general, acceptance testing is done at the end of each development phase. If your partner has a specific QA process which should form part of the testing, you should document. The agreement should also note what the repercussions are if your client fails to test something you asked them to.
Therefore, you should notice:
- Who does the testing?
- How long does it take?
6. 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.
Make sure to include the following provisions in your contract:
- Define who owns the intellectual property. In case of software development projects, it should be owned by development team.
- Moral rights are the right of creators of copyrighted works generally recognized in civil law jurisdictions. With software, sometimes developers are not attributed to works. You should check with local laws to see if you need to make a statement about moral rights.
- The use of open-source software is often overlooked when drafting agreements. Not having something clearly written can make things hard for your client during audits or due-diligence checks.
7. 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.
8. 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?
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 [email protected] or via (+84) 936 281 059 for more information.