Outsourcing Challenges Part 4: Software Development Contract Warning Flags

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.

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