What Should Be Included In a Service Contract?

So finally you have chosen a reliable web application development company or IT development services but that certainly doesn’t mean that the project will stay on track and meet expectations. Signing a software development contract is the first and foremost step taken in the right direction.

In simple words, a software development service contract mainly boils down to how money exchanges hands, this is what is assumed by most of you! Well, in reality, the contract drives behavior before, during, and after the project on both sides of the table. The following post emphasizes everything regarding a software development contract. Read away!

1. What is a Software Development Agreement?

Before writing the first line of the code software development contract is something that must be taken into consideration. After all, a software development agreement is the most crucial step that defines the way your project is to be delivered and what you and your partner are going to receive after the contract completion. In addition, this one, in particular, determines how are you and your partner’s action being conducted and who is more responsible in case of any dispute.

A software development contract is pretty much similar to any other development agreement made for any kind of service. Right from the inclusion of common sections such as the termination conditions, dispute resolution, governing law, such an agreement defines some specific aspects such as intellectual property rights, developer written notice, software malfunctions, developer’s duties, infringement claims, etc.

1.1 Why is a Software Development Agreement Important?

Often referred to as the Master Services Agreement (MSA), a software development agreement is crucial for both customer as well as the software developer aiming to develop, sell, transfer and maintain tailor-made software who sooner or later might end up integrating them into their platforms, products or even services.

More or less, if you come up with a well-drafted software development contract right from the start nothing can stop you from making the journey smooth. Now many of you keep on asking me does drafting a software development agreement requires one to understand all the details, techniques, and know-how of software development as a whole? Well, for the most part, it is a misnomer though, this has to be answered by looking at the nature of a business.

Moreover, a business irrespective of its type tends to run on traditional lines and needs software for basic functions or not so important tasks, knowledge of the technology behind the software is not mandatory. Whereas on the other hand, a software development service provider must have a thorough knowledge of the technology used, coding language, and other inforneedsmation for it can go a long way in conceiving a well-negotiated, well-drafted agreement. It also minimises the chances of future disputes.

1.2 Types of Software Development Contracts

Now software development contract cannot be applicable to every project. Fortunately, there are numerous types of software development contracts available. Choosing the right time contract assists you in helping both sides minimize risks and achieve proper results.

Certain clauses a software development undertaking must incorporate

  • Intellectual property rights – The software’s intellectual property emphasizes who owns the product. Is it the developer by whose skill the software is developed or the customer who pays for it? The solid clause of intellectual property rights does assist in avoiding any unwarranted claims by the developer in future.
  • Confidentiality – The confidentiality clause helps in determining what information should be kept confidential. This clause survives the agreement itself i.e., confidentiality must be maintained even after the contract achieves its purpose.
  • Maintenance – Software development is not just about making reasonable efforts one time. It also says that even after the product goes live, the customer may still require the support of the developer. Whether it’s for maintenance or for further improvements based on user experience. A legal document can go a long way in minimising possible disputes.

1.3 Time and Materials Contract

This software development contract in particular is well-suited for projects especially the ones where the amount of work, as well as time, cannot be determined in prior. Moreover, here is one situation where the project is split into separate tasks. All the software development assignments are found well executed in short periods. Time and materials contract are pretty commonly used since they are pretty much different. Now let us figure out how is this development contract beneficial.

  • Easy and less complicated way especially when you have just entered the software development realm
  • Offers Scalability and Flexibility even though the budget remains the same
  • With the increase in communication, there are minimum trust issues
  • Better chance of achieving your desired result due to constant communication
  • Ability to keep track of progress on the software development project
  • Reasonable timeline, allowing the developer to focus on quality instead of rushing to complete the job

The only drawback of such a software development contract is businesses have less control over the budget since time and materials aren’t determined prior. This also means that shifting deadlines, making it harder to know exactly when the product will be complete.

1.4 Fixed Price Contracts

The fixed budget contract means estimating the price of a certain amount of work. Now, this has no connection with the actual cost of implementation. In addition, fixed-price contracts offer financial incentives especially for achieving specific project goals.

  • Fixed-price incentive fee contract (FDIF) – A customer pays a contractor regardless of the actual costs. If individual performance criteria are met, the customer pays a premium that both the parties agree upon in the contract.
  • Fixed-Price Contract – As the name implies, the cost and scope of work are determined right before the work starts and after that cannot be changed.

This model should be used only when:

  • The requirements are very well known, clear and fixed,
  • The product definition is stable,
  • The technology is understood,
  • There are no ambiguous requirements,
  • Ample resources with required expertise are available freely,
  • The project is short.

1.5 Dedicated Team

A dedicated team model is a great option especially when businesses are aiming to conduct a long-term project. Most of the outstaffing agencies or outsourcing companies choose this model due to its flexibility.

Having an agile dedicated team means the client has to quickly build a custom mobile app and integrate it with the existing ecosystem seamlessly. Also, by allocating a dedicating team The same experts would work on the product; the absence of lineup changes means increased efficiency. For a more detailed example, check our case study of ERP system implementation.

It’s time to consider what are the key points to include in a software development contract.

2. Key Points to Include in a Software Development Contract – Get in Touch with Software Developer

Now that we have sorted out the possible contract types and their strengths and weaknesses, you should already have an idea of the one that suits both you and your vendor best.

2.1 Scope of Work

Scope of work, as the name implies is such an aspect of what the expectations are for both the parties (software developer as well as business). So it is very crucial to determine specifics of what to incorporate in the job and what not to.

2.2 Project Time & Cost

With the help of this section, you will be able to fix according to the time and cost required to accomplish the project. In simple words, it describes the contract model you have selected. State the hourly rates, development phases, milestones and their deadlines.

Here it is very crucial to provide the responsibility for delays by both parties. Here you might refer to annexes to the contract, such as payment schedules or development plans.

2.3 Intellectual Property Rights

Now many times we have come across people who tend to express concerns regarding ownership of the source code. Well, that’s the reason why intellectual property is and must be mentioned in your software development undertaking. Development services based contract must explicitly provide for the client’s ownership of any intellectual property created during contract execution.

In case of a delay in payment, most of the time suppliers tend to reserve the right to reuse any intellectual property that remains unpaid. It is possible to wave off the re-use right when the client is ready to pay the full amount.

2.4 Acceptance Testing

Now, this aspect is such a concern that it doesn’t matter whether the testing is being conducted from your end or from the side of your development services provider, acceptance testing is done at each end of the development phase.

In the context of acceptance testing, the contract should state:

  • Who does the testing?
  • How long does the testing take?
  • The way test results are shown (the best way is to notify the other side in writing about the acceptance)?

Last but certainly not least, we have the transfer of copyright ownership. The aspect is meant to establish who will own the intellectual property rights to the software. This is often one of the most hotly contested issues between developer and client, and can easily become a deal-breaker.

Software developers in general tend to own the copyright to software unless the developer is the client’s permanent employee or in case, the software turns out to be a larger part of the work. In order to own the copyright, the client must have an agreement transferring ownership from the developer to the client.

There are many ownership options available, ranging from sole ownership by the client to ownership by the developer with the client’s merely having a license to use the software. And there are many alternatives between these two extremes. It depends on the amount of money the developer is paid.

3. Conclusion

We hope we were able to help you better understand what a Software Development Contract is and why it is so important. However, always read the template and modify it to fit your needs.

Itesh Sharma

Itesh Sharma is core member of Sales Department at TatvaSoft. He has got more than 6 years of experience in handling the task related to Customer Management and Project Management. Apart from his profession he also has keen interest in sharing the insight on different methodologies of software development.


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