A QUICK SUMMARY – FOR THE BUSY ONES
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In the business world, any issue left to chance is a potential risk. Sometimes this risk can be beneficial, such as when investing in innovation and looking for new growth opportunities outside the box. But there are situations where there is no room for risk, and what you need is a solid foundation for long-term and trustworthy cooperation. And such a foundation is a software development contract.
A software development contract is an agreement between a client and a software house that defines the terms of cooperation and project execution. It includes such elements as completion time, cost, the scope of work, warranty, confidentiality rules, and performance metrics. It’s the most important document in the partnership between you and the vendor, as it determines whether your expectations will be met and you will get what you pay for.
A well-written software development contract is your shield against loss as it ensures transparency and predictability of business. It's a guarantee that you'll get the expected result within a certain timeframe, you'll know the cost of implementation, and you'll retain ownership of the created product. It also provides a reference point regulating how to behave if something goes wrong and minimizes the risk.
A software development agreement is also crucial from the vendor’s point of view. A clearly defined scope allows it to compose the most suitable team, create an effective work plan and optimize the implementation time.
Building a secure software development contract is often based on the arrangements made after creating RFP and receiving a proposal from a chosen company, but you can also prepare the contract in advance.
The first decision you need to make when defining a software development contract is the form of billing. For single projects, there are two basic models: fixed price and time and materials. We will now analyze which one to choose in a specific situation.
With the fixed-price model, the project's cost is determined in advance based on a precisely defined scope. Before the work starts, you carefully plan the requirements and expectations for the project, while the software company prepares a quote. This model gives you greater budget predictability and avoids surprises in the form of additional costs. In addition, your involvement in the project is high only at the beginning, and in later stages, you can leave most of the project management in the hands of the software company. Sounds perfect, right? Unfortunately, this solution also has its dark side.
Software or application development is a dynamic process. Sometimes new opportunities and ideas arise in the course of work or you require modification or further development. The final project is often very different from the initial scope because companies have to react to changing market standards, customer expectations, and competitor actions. The fixed-price model requires you to carefully plan your goals at the outset, depriving you of flexibility and the possibility of modification in the later stages of development.
The fixed-priced model is ideal for MVPs or small and relatively short projects that can be carefully planned at the outset. It’s also a popular choice for companies with very limited budgets.
In the time and material model, project pricing is based on the number of hours worked and resources used. This way you get more control over the shape of the project and can modify the scope according to the needs and changes. The advantage of this form of billing is that you are more responsive to market changes and can get the highest quality by choosing the best solutions at a given time. This model is also more optimal from the perspective of the work of the software house itself because it’s consistent with agile methodology.
The time and material contract also helps develop a partnership between the two parties because, as a client, you’re more present in the development process. By attending meetings and providing regular feedback, you can be an active part of the creation of your product, better understand it and decide at each stage of the work.
The biggest disadvantage of this solution is that the price is less predictable, but this doesn’t mean that until the project is completed you have no idea how much it will cost. The company will prepare a preliminary price estimation for you before the work begins and will keep you informed of the cost regularly.
Time and materials billing is recommended for large and long projects that require significant reactivity and flexibility. It will also be more convenient for those who do not have a clearly defined scope and want to build their product in an agile manner. It is the best choice for companies that want to have more control over the workflow and want to actively participate in the development process.
As you can see, each of the settlement models has its strengths and weaknesses. When choosing a contract type, therefore, the question is not "Which option is better?" but "Which option fits my project best?".
As we mentioned, software development is a dynamic process, but many elements concerning it can be predicted. Arrangements for the course of cooperation and procedures should be defined from the very beginning, which avoids misunderstandings and ambiguities, and guarantees security for both parties. Here are the most important elements that a well-designed software development contract should contain.
The most fundamental element of the contract is to specify what exactly you expect from your vendor and what work needs to be done by the development team. This section includes application features, the number of patch sessions, MVP requirements, reports, staff training, documentation content, expectations, etc.
The scope is the basis for estimating the time and cost of the project and assigning the right specialists to the team, so the more accurate it is at the beginning, the more accurately you can plan the development process. At this point, you should also determine what materials the software house needs from you to work most efficiently, including prior documentation, source code, and access to internal servers.
This section of the software development agreement depends on the previously selected billing model (fixed price vs. time and materials). In the first case, time and cost are predefined at the beginning of the project. In the second, they will be variable depending on your needs and changing scope, but already at this stage, the development company can make a preliminary estimate of cost and completion time. At this point, you should also set the terms for accepting additional costs and variable turnaround time, for example, each change is agreed upon during weekly meetings and confirmed via email by both parties.
Dividing work into milestones helps monitor progress, control compliance with the schedule and provide regular feedback. Defining milestones in the software development contract helps structure the work and verify compliance with the scope. Accepting project stages when each milestone is reached also allows you to make adjustments on the fly and keep the project on track.
This part of the contract should include detailed conditions for making payments. An important element is the payment schedule and breakdown into parts, e.g. payment after each milestone completed. In the case of the time and materials model, the contract should also include information about developer rates, payments for technologies used, licenses to tools, or cooperation with third-party vendors.
Effective collaboration between a software company and a client requires certain frameworks and processes, which are worth establishing at the outset. In the software development agreement define the elements of your ongoing business relationship including frequency of meetings, e.g. weekly statuses, time for approval and revisions, summary email after each meeting, frequency of reports, etc.
This section establishes who will own the intellectual property rights to the software, including source code, design, patents, or trademarks. The transfer of copyright is crucial for further product development and collaboration with others if you decide to terminate the contract, so make sure you are the legal owner of your product.
Note: If a contractor doesn't want to guarantee you IP rights, including source code, that's a red flag. It may be better to check top custom software development companies that are trustworthy and have a proven track record of successful projects.
Privacy and confidentiality are the core elements of the software development contract because the vendor will have access to many of your company's sensitive data. Make sure the agreement governs the safeguarding of confidential information after the collaboration ends, for example, the company agrees to destroy all project materials and hand over access. This section also includes terms for protecting your customers' personal data, revenue information, and trade secrets.
Completion of the project is one of the most sensitive points of cooperation, so it requires a precise definition of the conditions of acceptance, that is, in what situation you consider the product to meet your requirements. Such a provision guarantees that you will receive a satisfactory result of cooperation, in turn, for the software company is a safeguard against endless amendments that block the work. There is no room for doubt at this stage, so define exactly what assumptions must be met for the project to be accepted. Also, define the time needed to test the product to verify that all functionality works as expected and name, who will be responsible for testing: your internal team, a group of clients, or an external consulting firm.
It's normal that some bugs or shortcomings of a product appear over time, during use, for example, in a period of heavy website traffic. It is therefore important that your software development agreement regulates the warranty process if something won’t work as it should.
The release of the software to production environments does not necessarily mean the end of the cooperation. Many digital products require maintenance in the form of ongoing monitoring and support. The contract should clearly define the scope of activities you expect from the software company once your product is ready to use.
Everyone wants business partnerships to run smoothly and seamlessly. Unfortunately, sometimes the reality is different, so even before the cooperation begins it’s smart to regulate the terms of its termination. Just in case. This provision is a safeguard for you in case you’re not satisfied with the results of the cooperation, the vendor significantly exceeds deadlines or delivers a poor quality product. Remember, however, that the contract works both ways – if you don't make payments on time or don't comply with the contract, the software company can also terminate your cooperation.
Project development needs to be nimble and reactive to market needs, but at the same time, it should be part of a larger, well-thought-out company strategy. When planning the scope of work, settle it in the broader context of your plans for the coming years. For example, if you plan to expand into new markets, the product should be ready to add foreign languages and currencies. If you estimate the number of users at 10,000 per month, you should have the ability to easily increase resources in case the number exceeds 50,000, for example, through cloud solutions. Investment in the project is most cost-effective as part of a broader strategy, so keep your business scalability in mind when planning.
You can't anticipate unpredictable situations... but that doesn't mean you can't prepare for them! Risk management is one of the most important practices during project collaboration. It allows you to react quickly in case of a crisis such as employee turnover, resource bottlenecks, and other factors that can cause project delays.
Conflicts and disagreements are part of business nature and happen even between the most professional companies. Disputes can arise for a variety of reasons, such as disagreements over project scope, delays in delivery, poor quality of work, or breach of contract. The dispute resolution procedure should be clearly defined in the project contract so both parties can avoid costly and time-consuming legal disputes. Here are some examples of dispute-resolution procedures:
Mediation – a process in which a neutral third party, the mediator, helps the companies involved in the dispute to reach a mutually acceptable solution.
Arbitration – a more formal process in which a neutral third party, the arbitrator, hears arguments from both sides and makes a binding decision. The decision of the arbitrator is usually final and cannot be appealed.
Litigation – a process of resolving disputes through the court system that may be necessary if mediation or arbitration is not enough.
One of the biggest roadblocks slowing down the project collaboration process is the lack of a competent product owner on the client side. An experienced software company has the resources and team to deliver the product, meet the scope and advise on the best solution, but the final decision always belongs to the client. Make sure the product owner at your company can decide on project development and ensure a quick internal approval process to avoid decision-making bottlenecks.
If you plan to entrust your project to a software company, preparing a good contract will be one of the first challenges in your cooperation. Many people want to get to work right away to see the results as soon as possible, but you can be sure that the time spent on precisely writing the contract will pay off. A software development contract is a guarantee of safe, smooth, and satisfying cooperation that will protect you from misunderstandings and crises.
When preparing the agreement, make sure it includes key elements such as scope, billing model, terms of copyright transfer, termination, and confidentiality terms. Before preparing the agreement, create effective internal structures, including a product team that will be responsible for decision-making, feedback, and approval. With the document prepared in this way, you will achieve your goals better and faster, and one-time project cooperation can turn into a long and fruitful business relationship.
Every year, Brainhub helps 750,000+ founders, leaders and software engineers make smart tech decisions. We earn that trust by openly sharing our insights based on practical software engineering experience.
Software development enthusiast with 6 years of professional experience in the tech industry.
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