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Product Strategy

Best type of contract for software development

Nisha Gopinath Menon
July 26, 2021

In most of today's software development projects, time to market makes all the difference. Driven by this, we have seen more and more tech leaders with an internal team turning to us to fill their development capacity gaps in the past two years. It is easy to get expectations and details mixed up. A solid software development contract is crucial to how the project is delivered and your experience working with the new team. Unless you know what to look for and include, contracts can miss the mark to account for all the expectations of the parties involved. This blog should help you avoid the common pitfalls when it comes to drafting software contracts.

The software development services agreement will define the compensation your partner is going to receive after completion of the contract and the way in which the project will be delivered. The contract has to determine not just responsibility in case of any dispute but also your and your partner's actions. Basically, the contract defines the what, the when, the how, and, particularly, the how much.

How to draft a win-win contract with vendors?

When it comes to outsourcing software development, there are specific things that you should agree with your vendor.

Define your success metrics.

What would deem the project a success for you? What are the various milestones you want met? Now, these milestones don't have to be precise, but it has to be measurable. It helps to read up on how to write a software requirements specification document. Vague language in contracts leaves too much room for arguments and misunderstandings. One side can be sure they met the target, while the other feels they fell short of the goal. Concise, clear requirement drafting will set the base for a healthy partnership. You will even notice fewer hold-ups and more progress towards the target.

Tools and Processes

A critical step to any project is having a clear plan for what tools and processes will be used under the contract for software development. Processes must also be established for how change controls are written up, how quality checks are made, and how code deployments are handled. Crucial to a solid relationship amongst all parties of the contract is a clear plan on how to proceed with changes, bugs, and management expectations. A list of the source code repositories, the development tools being used, schedules, bug tracking software, and project management styles all have to be established. A few of these might not have been too clear during the initial talks, so it's critical to have both parties agree and understand all elements of the project. To establish the tools being used, the contract may include who the responsible party is. To increase efficiency, we use the same tools across a project.

Privacy Policy

It's strongly encouraged to establish a privacy policy. The privacy of the eventual end-user, the customer, and the development firm are all important. No one wants their personal information sold, leaked, or stolen. When creating your contract, make sure to pin down what privacy policies have to be adhered to. Sensitive data and private customer data being shared with competitors can lead to legal ramifications as often proprietary data sets are involved in projects.

Types of software development contracts

Before signing the contract, while reading up on the pros and cons of Fixed Bid vs. Time and Material Contract, know that no contract can account for all the surprises a software project can bring up. So make sure you're signing the contract with a team you share business ideologies with and a team with experience in your industry.

Time and materials

T&M is the most commonly used agreement type in software development contract types. You are agreeing to pay for the hours the vendor spends developing your project when you sign a T&M contract. Meaning the hourly rate times the no. of hours times. Now when signing a time and materials contract, there are certain things you have to take into account. In this deal, you agree to pay more if the project drags on for longer than expected. You can control the development progress, of course, especially when your vendor is working with an Agile methodology. You will get demos of the completed features with Agile once every two weeks. This helps estimate the remaining time fairly well and stay on top of the project deadlines.

The T&M approach will ensure that the vendor isn't rushed to complete the project within a particular time, so the quality of development will be high and the number of bugs less. Besides, it's easier to kick off a time and materials contract, as it demands less preliminary planning and preparation. But be prepared to make changes as you go.

Fixed bid

Along with the fixed price that is to be paid, these contracts define the scope that should be delivered. The fixed bid agreement is best suited when working with vendors for smaller tasks. On freelance platforms, the fixed bids are the preferred contract type. On freelance platforms, customers can easily post the price they are prepared to pay and the tasks to be done. You can use this approach when drafting a contract with an outsourcing partner too. For instance, for the test task that you want your vendor to complete, you can sign a fixed bid contract. Typically, test tasks require building a specific component or feature, and so it should be relatively easy to budget and plan it.

A fixed bid contract might not work quite so well with a bigger budget. This kind of contract is not well suited when it comes to making changes. Prepare yourself to work on extremely detailed planning to take care of each little thing in your project when you go with a fixed bid agreement. Chances are, you will take a lot longer to begin the project while drafting and planning a fixed bid contract. Moreover, outsourcing partners can even choose to work with less effective tools or procedures to stay within the budget.

Drafting a comprehensive outsourcing contract will demand significant time and money. Consulting with a lawyer is a good idea before signing the contract with the prospective outsourcing partner. Especially if you're outsourcing critical, big, ongoing projects that can present risks to your customers' IP or data, it becomes even more important to involve a legal consultant.

In your software development contract, remember to include a privacy policy, cost structure, intellectual property ownership, success metrics, tools and process, warranties, and pricing. Also, be sure to ensure that the contract offers clarity around responsibilities, deliverables, and expectations – taking extra care to cover all questions, requirements, and potential gray areas so that nothing falls through the cracks. CognitiveClouds gives you access to experienced engineers to ensure quality results that align with your strategic goals. If you have any questions for us on a project you'd like to kick off or contracts, reach out to our team here.

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Nisha Gopinath Menon