Custom Software Development Contract: Key Things to Include

Creating a software application development agreement is an essential step for successful collaboration between a software provider and a customer. It protects the rights of both parties involved and ensures that the final product fully meets customers’ expectations.

For software development contracts to be mutually beneficial, customers and software providers should know what sections should be added to them. Although each contract will have its own nuances and specifics, all of them have some basic structure. In this article, we’ll look into the types of software contracts and explain which sections you need to include.

Types of Software Development Contracts

All the software development agreements can be divided into two main categories – Fix price and Time and Materials. Each has its strengths and limitations and the choice between the two depends on the project type.

Fixed Price

Fixed price contracts determine the cost of software development services before the development project starts. It means that a customer and a software provider agree on a project’s ‘fixed price’ which won’t change during the full cycle of project development.

Software development companies use fixed-price contracts when they:

• receive clear project requirements (SRS) and have the ready-made product specifications;
• need to develop a small or a short-term project;
• build a Minimum Viable Product (MVP).

When using fixed-price contracts, software development teams spend some time before the project launch to review and analyze product specifications, estimate the actual project price and duration and negotiate it with their customers.

Time and Materials

Time and materials contracts (T&M) are much more flexible than Fixed price ones. They don’t require establishing the project requirements at the very start. Instead, they can change along with the project and are usually based on the work scope and the number of hours spent.

A customer can change the requirements of the developed application and adjust its features, actively contributing to the development process. On the other hand, due to constant changes the spendings can grow, therefore it’s important to control the project budget.

T&M  contracts are used when:

• a project has frequently changing requirements;
• the project scope can’t be defined at its start due to lack of requirements;
• complex and long-term projects;
• the development team implements Agile methodology and wants to improve the product with every development iteration based on the end-user feedback.

Key Points of a Standard Software Development Contract

Once a software provider and a customer determine which cooperation model they want to use, the next step is to include the necessary sections into the agreement that would meet their interests best.

Services Provided and Tech Stack

The description of the services provided by a software vendor makes the basics of software contracts. It usually relies on the product specification which defines the project scope.

In this section, it’s also important to consider the processes of handling code deployments, quality checks, and implementation of any product changes. To ensure that the product changes are clear to both contract parties, some companies make them in a change request form, a document on modifications which includes the description of the change and the effect they’ll bring to the project, its cost, and time.

Project Deadlines and Costs

This project section defines the project timeline and the development costs, including the developers’ hourly rates, deadlines and milestones, development phases, and others. It also can include the responsibilities of the parties for deviating from the payment schedule or development plans. This way, a software provider and a customer can better understand each others’ development and payment rights and obligations.

Acceptance Criteria

This section defines the metrics of a cooperation’s success. The criteria for work acceptance should be written in simple language to avoid misunderstandings and disagreements.

Before starting a custom software development process, a software provider and a customer compose acceptance criteria for the requested app based on its system specifications or services provided.

In fixed-price contracts, a customer receives a Certificate of Acceptance as the project is coming to an end and the developed app ticks all the boxes of the preset requirements. This certificate signifies that the app meets all the contract requirements and the software vendor and the customer agree upon successful project completion.

In the case of a Time and Materials contract, a customer gets a monthly report and certificate of acceptance which includes actual tasks completed and time spent on those tasks by the team.

Intellectual Property Rights

This section defines the owner of the developed software and it is one of the most important parts of a contract. It’s essential to state here that the final product is the property of the customer. This way, the developed app’s source code becomes the customer’s property. It means that the software development company has no rights to use, develop, modify, sell, rent for benefit in any other way the developed software.

Confidentiality

This section protects a software development company and a customer from sharing their sensitive information with any third parties. The software vendor and the customer can specify which data should be considered sensitive and the penalties that will incur for its disclosure. If a confidentiality section includes many details, it can be developed into a non-disclosure agreement (NDA) and attached to the main custom software contract.

Dispute Resolution and Penalties

Establishing the procedures on dispute resolution can help both parties to avoid large expenditures caused by judicial proceedings. For this, a software vendor and a customer can opt for arbitration or mediation practices.

The arbitration will require a panel or a person who will come to a final conclusion after examining the claims of both parties. Whereas mediation will involve a mediator and the two parties discussing their disagreements together.

Warranties

The warranties section includes various product and project-related obligations that a vendor and a customer undertake to perform. In most cases, they are related to software functional performance. For example, if any glitches or malfunctions in the developed software appear, the vendor is obliged to fix or replace them. Usually, the warranty period lasts for 90 days, though some companies can prolong it up to 12 months since the date of acceptance.

Bottom Line

Most of the companies that are considering creating their own business software using IT outsourcing services typically encounter two main challenges: how to choose a software vendor and what to include in their software development contracts.

A well-structured and thought-out agreement helps software vendors and their customers protect their rights, avoid unexpected expenses, and elaborate on their responsibilities. Although each software development case requires its own contract, there are some basic sections that should be included in them. These sections include the type of custom software contract, services provided, project deadlines and costs, acceptance criteria, intellectual property rights, confidentiality terms, and dispute resolutions.