You may have an idea for custom software that will simplify complex business processes. However, the process to shape the idea and turn it into a scalable solution is lengthy and complex. While each phase of software development involves some amount of complexity, the software development contract is one such crucial aspect that needs to be emphasised even before the beginning of any of the phases.
A well-drafted custom software development agreement helps build trust and promotes transparency between the client and the development partner. However, you’ll probably be a bit cautious and overwhelmed when you hear contracts as there are legalities involved. As complex as it may sound, drawing up a contract shouldn’t be that hard to comprehend.
This is the reason we have outlined the essential components within a contract for custom software development and simplify it even further.
Diverse Types of Software Development Contracts
When you’re deciding on the custom software development processes, it’s essential to have clarity on the main idea of the project. Additionally, there multiple factors that guide this decision, such as the duration of the project, your budget, and the scope of what you’re trying to achieve. It also depends on other preferences, such as the project management model you choose and intellectual property rights.
Before any of the processes, it’s imperative to draw up custom software development contracts. This is the reason you must have a solid understanding of the types of software development contracts. Let’s get you up to speed with the types of software development contracts first, before delving deeper into its essential components.
Time and Material Contract
If you’re unsure about the functionalities you want to incorporate into your custom software and are open to ideas regarding the same, this is the agreement you should opt for.
Time and material agreement was initially adopted by software development service providers to minimize their risks and boost development flexibility. Hence, this type of agreement requires that you pay only for factual working time.
If transparency is crucial for you, then this is the ideal choice for you. This specific type of contract puts you in control of the development process. You can choose to include a new feature or expand the scope at any time.
This specific type provides the opportunity to be in constant contact with the design and development teams, prioritise the backlogs and monitor weekly progress. Simply put, if you can choose a time and material agreement if your project:
- Requires clarity on how your new tailored software will look and function
- Continues for at least one of two months
- Has flexibility when it comes to budget.
- Has changeable requirements if more advantageous options are advised
Before anything else, you need a project proposal from the custom software development company you’re partnering with or from in-house developers. This proposal will consist of estimated timelines, terms and conditions, risk assessment, mitigation plan, and client’s rights. Client’s rights may involve regular communication with the team, access to Jira or other project management tools, tracking hours and task prioritisation.
Here’s a little peek into the merits and demerits of time and material contracts.
Pros:
- Developers have more flexibility when it comes to timelines and don’t need to rush through the software development process.
- It involves open communication and more trust.
- You’re aware of what you’re paying for as you monitor the hours and check the demos.
Cons:
- The budget is fixed at the beginning and there’s no flexibility.
- You assume the set of risks for the success of the project.
Fixed Budget Contract
This type of agreement is often the perfect fit for projects that last up to two months and have a well-defined and clear scope. This means you have already sorted out all the terms and conditions, documentation and deadlines.
One remarkable thing about this type of contract is that you’ll have your software solution ready when you expect it. This way, there will be no surprises regarding the timelines.
The requirements of the project are provided at the very beginning, so there’s no scope for flexibility in this area. The requirements also include the technologies your software development partner will adopt. The utilisation of known tech stacks ensures that the deadlines will be met.
It’s recommended that you select the fixed budget method if your project:
- Have all the requirements documented thoroughly
- Has limited budget
- Comes with an exact deadline
Before you sign the fixed bid contract, you must review the proposal minutely. It contains the final price and duration. When you’re happy with the conditions of the proposal you can proceed with signing and starting the project. One this to remember here is that once the project scope is agreed upon, you can’t change it.
Pros:
- Everyone involved in the project is clear about what needs to be built.
- The development partner assumes all the risks and you’re safe knowing that the project will strictly follow the agreed budget.
- It ensures increased interactions even before the project starts.
Cons:
- Minimal flexibility for changing the project scope.
- If the communication goes wrong from the very beginning and the process isn’t outlined clearly, it can be a great risk.
Dedicated Team Contract
This kind of contract provides access to a product development team for long-term cooperation. The professionals are picked on the basis of your requirements for their specific expertise and skillset.
What’s more, this type of contract suits large-scale projects that last more than three-four months. If you need transparency and flexibility, a dedicated team will provide that to you.
Check the following pointers to understand if you should choose a dedicated team contract:
- Your project will go on for more than three-four months.
- You want to take part in the process and monitor the progress
- You’re flexible on the budget
A dedicated team model allows you to have complete access to the team’s work and project management software, prioritise tasks, plan sprints and take part in daily stand-ups.
Pros:
- Transparency and open communication with all professionals.
- Control over the software development process.
- Flexibility to change or include any new feature.
Cons:
- You’re responsible for the project’s success to an extent.
- You must dedicate time to check the project’s progress and sometimes even manage the team.
| Fixed Budget | Dedicated Team | Time and Material | |
| Payment | Paid before project commencement | Fixed payment for the team per month | Fixed hourly rate |
| Tech Stack | Predetermined | Situational | Situational |
| Project Scope | Predetermined | Estimated | Not set |
| Budget | Predefined | Gradual | Flexible |
Pivotal Components of Custom Software Development Contract
There are several major provisions that should be in every software development contract. This is irrespective of the type of contract that you decide on.
Project Scope and Service Description
The customised software development contract describes:
- The nature of services to be provided
- The time and place of service delivery
- The mechanism of personnel selection and approval
The primary services to be offered under a software development contract are di design, programming, quality assurance and testing. The contract may specify the expected deliverables (for instance, designs or software features). The specification may be written in a non-technical language.
The agreement also emphasises the scope of the project. Any software development contract always comprises the scope of the work. This aspect should be mentioned in fine detail. Without a well-defined scope of the work, general and open clauses result in vague conclusions that can’t be disputed or changed.
Any small change in the scope of work impacts the overall project timeline and budget. Hence, it must be clear that any adjustment offered by both concerned parties must be accurately verified and documented.
Deliverables and Acceptance Criteria
This part of the contract focuses on the success criteria for a project. To avoid confusion, it should be articulated in simple language.
Before starting with the process of developing tailored software solutions, the clients and development partners collaborate to identify the acceptance criteria. In fixed budget contracts, the client may receive a certificate of acceptance when the project is complete and the customised software products fulfil all predefined requirements.
In case of a time and material agreement, the client receives a monthly report and certificate of acceptance highlighting tasks done and time spent by the team on those tasks.
Pricing and Timeline
This portion highlights the payment terms of the agreement, based on its type. In a fixed budget contract, this section defines the lump-sum amount to be paid. The payment can be made upon achieving a defined milestone or depending on the timeline of the project.
In a time and material contract, this section mentions the hourly fee of the development partners. It also mentions the frequency of payment, which depends on the progress of the project.
It’s necessary for clients and service providers to agree on the timeline in advance. However, it’s still possible for the deadlines to change depending on the type of contract. In case of a fixed budget contract, the deadline cannot be flexible. But signing a time and material agreement allows you to adjust the time.
Intellectual Property Rights and Licensing
Even though software solutions are primarily secured by copyright laws, some elements of products must be protected by intellectual property rights. Copyright laws explain that collaboration is seen as a legal relationship and everything that belongs to the client.
In this section, the client states that they are the sole owners of all development outcomes and all other elements associated with the final products. Adding such clauses prevents the service provider from reusing the code for a competitor project in the future.
Non-disclosure Clause and Agreement
This section protects both your firm and the software development partner firm from the disclosure of sensitive details and trade secrets to the other parties. Your firm and the service provider can decide on which data is considered sensitive and what will be the consequences if it’s disclosed.
If a secrecy section contains extensive information, it can be expanded into a non-disclosure agreement and linked to the main custom software development contract.
Termination of Contract
The client and service provider must decide the type of software development contract and then draw up the terms of the contract. The term may not be specific, but it can be approximate, depending on the nature of the custom software required by the clients.
The termination, upon infringement of any clause, or whatever the condition for termination may be, must be specified in the contract.
Changes to the Contract
The agreement should address the process for modifying its terms and conditions Changes to the contract are required to be in writing for the convenience of both parties. Written changes should be introduced in the final clauses of the contract.
When the fixed price model is adopted, the changes in the scope and the subsequent changes in price and implementation schedule should be added in the Appendix amending the contract. Remember to mention the date when the changes are to take effect.
Wrapping It Up,
Software development contract is an important aspect that requires careful attention from both client and the service provider. To draft the contract efficiently, it’s essential to have a complete understanding of what it consists of and what each component of the contract means. This blog breaks down the multiple elements of custom software development contracts in detail.