Software development can be full of pitfalls, especially if you start your cooperation with a new vendor.

You have to go through various phases, including an assessment of your future partner, an in-depth
analysis of the portfolio, and some negotiations as well. Signing a contract is the last stage in the vendor
selection process. To strike a win-win deal and make sure there is no issue unsettled, you should
elaborate a detailed contract that describes all the services a business partner provides, the rights and
obligations of the parties, as well as information about reciprocal actions in case of any dispute.
What Is a Software Development Agreement?
A software development or service contract is a service agreement between you and your software
development partner about mutual expectations and responsibilities.
To protect your company from setbacks, a decent contract should contain information about the
intellectual property rights, project milestones, payment terms, acceptable to both parties, owners of
the copyrighted materials, and detailed specifications of your future product.
The Main Types of Software Development Contracts
There are many types of software development agreements, but we will focus on the basic ones.

Time and Materials Contracts (T&M)

This is one of the most widely used contract types. It means that you pay for the number of hours a
software engineer works on your project. In this case, the emphasis is on high-quality development
rather than specific deadlines.
Pros Cons

Changes in task prioritization and the

introduction of new features may stretch your
One of the most straightforward types of budget. Besides, due to these conditions, it’s
contracts. hard to foresee the final budget.

T&M agreements offer you the necessary Deadlines can be shifted. Therefore, the time-
 Pros Cons

flexibility. During the process, you can change

priorities, add, or delete any features of your
future digital product. to-market is increased.

Constant communication with a vendor To be effective, constant involvement is

throughout the process allows you to achieve needed. This leads to great tangible and
the envisioned results. intangible efforts.

You have extensive control over the

development process at any stage.

Fixed bid
This contact should contain two mandatory elements: the scope of a project and the fixed price for the
tasks. In short, you pay for the outcome, not for someone’s time.
Pros Cons

The requirements cannot be changed easily, so there is not

It is easier to set a fixed budget. enough flexibility.

Usually, a provider of software development Software engineers may choose cheaper and less effective tools to
services is responsible for the budget overrun. stay within a budget. Consequently, it leads to poor product quality

All deadlines are strictly enforced.

All the details are mentioned in a contract, so

constant monitoring is not necessary.

Fixed budget
In this contract, the project budget is stipulated before development begins, but the amount of work
can vary. The main goal of the developers is to create as much as possible within the set budget.
Pros Cons

The requirements cannot be changed easily, so there is not

It is easier to set a fixed budget. enough flexibility.

Usually, a provider of software development Software engineers may choose cheaper and less effective tools to
services is responsible for the budget overrun. stay within a budget. Consequently, it leads to poor product quality

All deadlines are strictly enforced.

All the details are mentioned in a contract, so

constant monitoring is not necessary.
 It is suitable for projects with a limited budget. It is not suitable for large projects.
The fixed budget contract allows you to prioritize the necessary functionality of the product and
postpone the implementation of additional features indefinitely or abandon them.
Capped budget with accelerated bonus
This contract specifies the budget in advance but provides some bonuses for a development team if it
finishes the project ahead of schedule.
Pros Cons

A vendor can sacrifice development quality for the

It is great for projects with strict deadlines. sake of time.

This contract gives devs increased motivation to work as

productively as possible.

Key Points of a Basic Software Development Contract

Software development agreements require excellent flexibility. Any agreement should strike a balance
between flexibility and detailed clauses to be as risk-free as possible. A solid contract must contain key
elements, which we will discuss below.

Description of the services and the project scope

The main provisions of the contract are a list of what the supplier has to do. Precise project
specifications are developed, and they must be attached to the contract. The agreement itself includes a
list of specific functions, maintenance services, number of revisions allowed, processes and tools
needed, software used, source code repositories, changes needed, the impact of changes on the project
cost and timeline, as well as a description of the process for making changes to the project.

 Project time and cost

Depending on its type, the contract specifies either a fixed development cost and its deadlines, or the
parties are given the flexibility to decide on the timing and cost of development. Be sure to specify the
stages of development, the budget for each stage, as well as the time frame for them. Besides, always
include the possibility of setbacks (payment delays or, for example, development lags) and the parties’
responsibility for them. We recommend creating additional annexes to the contract (payment schedules
and development schedules), which must be signed by both parties.

 Acceptance testing and delivery

This type of testing allows you to check whether the product satisfies your demands and specifications.
Testing takes place at the end of every development cycle and can be done either on the client side or
the vendor side. The following information must be included in the contract:
  The party that conducts the testing.
 Duration of testing.
 The method of transmission of test results and possible reasons for failure.
 Process for making changes after failed acceptance and allowable time limits.
 Intellectual property rights
This clause is an indispensable part of any agreement. This section should clearly define the client
company’s ownership of the source code, copyrights, patents, design, and trade secrets. Here are
some key elements that should be taken into consideration:

 The source code must belong to the customer. This ownership allows you to use or alter the
code in any way you wish.

 If the contract is terminated, you, as the customer, immediately receive all the code that was
completed before the termination.

 All materials created during development must be destroyed.

 Keep in mind that if open source tools have been used, they will be publicly available.

Privacy and confidentiality

This section of the agreement is critical, especially if the project contains the personal data of clients or
commercial secrets. Be sure to indicate what information is confidential and define the responsibility for
its disclosure. Also, you must specify that confidentiality must be maintained after the contract is
completed