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Software Development Contract

Outsourcing Challenges Part 4: Software Development Contract Warning Flags

Accelerating projects beyond the abilities and expertise of internal teams, cutting the cost of IT services and increasing operational efficiency - your business can reap substantial benefits while outsourcing your software development.

In the previous articles of the Outsourcing Challenges series, we've covered the best practices of hiring an effective offshore software development team. You can also find out how to choose an optimal team composition and transfer your knowledge to the new team for a smooth start and trouble-free project delivery. Check out the links below.

However, to ensure your outsourcing project is a success, you need to set the things up correctly from the very start of the cooperation. Failing to notice red flags in your software development contract can put your organisation in a bind. The main takeaway is that you need to make sure your software development agreement correctly defines two critical aspects:

  1. Project governance. Who is responsible for project management? In other words, who is going to overseeing the project in terms of scheduling and delivery timeframe?
  2. Scope of work. The services and the deliverables your vendor is going to provide.

If your contract doesn't provide clear answers to these questions, you risk being charged a substantial amount in additional fees with no legal recourse.

Three types of software development contracts

A software development contract consists of legal documents that contain specific details of what your organization is expecting from a vendor. Types of arrangements can vary depending on the engagement model you choose for your project. These models typically fall within three types:

  1. Dedicated engineering team contract
    This cooperation model is ideal for long-term projects that have a more ambiguous scope in which a hired team acts as an extension of your organization.
  2. Time and material contract
    These widespread contracts are frequently used for work on a specific project limited in time with a loosely defined scope. With this type of cooperation model, you maintain full control over the project and only pay for the amount of work done.
  3. Product development model with a fixed-price contract
    As the name implies, a vendor will return a specific service or deliverable for a particular price. Fixed-price contracts are best for small-to-medium projects with the predefined scope of work in which your organization prefers to maintain minimal control over the development process.
How to Succeed at Outsourcing Software Development
outsourcing software development

Software development contract red flags you need to watch

As a first step, potential vendors shall undergo the due diligence process to ensure the selected company has the skillset and integrity necessary to become enduring and trusted partner, says Andrii Volos, Legal Counsel at ELEKS.

Red flags may pop up when the agreement isn't specific enough or when it lacks transparency. Here's the extended list of the potential issues you need to be aware of:

  • The scope of the fixed price project is not clearly defined
    A correct contract is very specific from the beginning as to what services are going to be provided and what work is to be done. If in fixed-price involvements any of this information is loosely defined, you're looking at a big red flag.
  • Client's and vendor's responsibilities are defined vaguely
    The project should have necessary oversight to keep both costs and scheduling managed. Good services contract shall clearly identify the specific obligations of each party.
  • The arrangement doesn't specify quality expectations
    A contract without a service level agreement or warranty for software quality expectations is a red flag.
  • No acceptance criteria predefined
    Whet project scope is clearly defined, the contract shall contain the procedure to ensure that deliverables comply with the agreed specification. Final payment (usually something like 20 percent) is often linked to the successful acceptance.
  • Personnel skillset issues
    Vendor shall be contractually required to assign to the project only specialists with relevant experience and necessary skillset.
  • Cost and payment terms are loosely defined
    Unless the contract establishes explicitly the work being done and what you are going to pay for it, you may end up with an incomplete product or get stuck with overage charges for uncovered work. The contract also needs to establish an invoice and payment policy.
  • There's no indemnification
    Professional service contracts shall at least include the clause protecting the Client from claims that may arise if the vendor infringes the copyright of a third party.
  • There's no liability cap
    Unless the contract clearly states each side's liability throughout the project, both your organization and the vendor run the risk of paying the entire bill when a project result is unsatisfactory.
  • There's no transfer or handover process
    The contract needs to be clear about how ownership of the project will move after completion or in the event of a contract dissolution.
  • It doesn't set notice periods
    The contract should be clear on how much advance notice the vendor needs to give concerning any changes to or the demise of the project.
  • Code ownership is not defined
    It's a huge red flag when the contract doesn't state that your business owns the code or the deliverables. Without establishing ownership, you can lose control of your software if the vendor exits.
  • The contract doesn't legally protect you
    The software development agreement should cover data security and confidentiality with non-disclosure agreements when necessary. The document also needs to include a non-solicitation cause so the vendor can't poach your employees after a job. The agreement should set international jurisdiction, dispute resolution.

The experts at ELEKS can help you deliver your most complex software requirements. Contact us today to learn more.

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