Software Development Agreements

In this article, we have a look at some of the important aspects that must be kept in mind when drafting a Software Development Agreement


What is a Software Development Agreement?

A Software Development Agreement is a legal contract that provides the terms and conditions between a customer and a software developer when creating a new software product.


It is important to have this agreement in place to ensure that both parties clearly understand their roles, responsibilities, and the services to be provided.


The agreement typically includes details on the project's scope, timelines, payment terms, intellectual property ownership, warranties, confidentiality etc.


Having a Software Development Agreement can help prevent misunderstandings and disputes that may arise during the project. It provides a clear path forward for both Parties and helps ensure that the project is completed successfully and to the satisfaction of both the customer and the developer.

What are the different types of Software Development Agreements?

There are several types of software development agreements, each with its own set of terms and conditions. However, here are some common types of software development agreements:


  1. Time and Materials Agreement: This type of agreement is based on an hourly or daily rate, and the client is charged for the time spent on the project, along with any materials or expenses incurred.
  2. Fixed-Price Agreement: In a fixed-price agreement, the development firm agrees to complete the project for a specific price, regardless of the time or resources required.


For larger projects, it is common to have both Statements of Work, which are mainly time and materials-based, and Statements of Work, which are fixed-priced.


Ultimately, the specific type of software development agreement best suited for a particular project will depend on the nature of the project, the client's goals, and the development firm's capabilities.

What are the main Software Development methodologies?

Various methodologies are adopted for software development, each with its own principles, practices, and approaches. Here are some common methodologies:


  1. Waterfall Model: This is a linear sequential approach to software development, where each phase of the development process is completed before moving on to the next one. It is a highly structured methodology for projects with well-defined requirements and a fixed budget.
  2. Agile Methodology: Agile is an iterative software development approach emphasising collaboration, flexibility, and constant feedback. It involves breaking down the project into smaller tasks and delivering them in short sprints, with each sprint building on the previous one.


The specific methodology best suited for a particular project will depend on the nature of the project, the customer's goals, and the development team's capabilities.

Agreement blocks

Building blocks of a Master Software Development Agreement

Transaction blocks


The typical Software Development engagement will be a work-for-hire engagement in which the Developer provides certain software development services to the Customer.


The scope of engagement can be A-Z. For example, the Developer must design, develop, create, test, deliver, install, configure, integrate, customise, and otherwise provide and make fully operational Software.


Alternatively, the Developer must integrate Software XYZ with Software DEF.


The "engagement block" creates the primary engagement. The details of what needs to be done are then added to the Schedule - Services.

Service standards

When you, as a Customer, engage a Developer, you want to be certain the Developer will do a good job.


You also want to be sure the Developer will work efficiently, especially when you engage the Developer on a time and materials basis.


Therefore, the "services standards" block is core to the engagement.


A way to further "strengthen" the Customer's rights is to provide that the Developer will perform the services following Good Industry Practices.


What constitutes "Good Industry Practice" is often a defined term. Here's an example -

Good Industry Practice means the exercise of that degree of skill, diligence, and operating practice which would ordinarily be expected from a skilled and experienced person engaged in the same or a similar business.


Hand-in-hand with the "services standards" block is the Schedule - Personnel. This schedule will often detail the minimum qualifications of the personnel engaged with the project. 


The purpose of the "Documentation block" is to create an obligation on the Developer to ensure good and proper Documentation is delivered with the Software. 


Software Documentation plays an important role in Software Development and details how the Software works (or, more importantly, how the Software is supposed to work).


Once a project is complete, the Developer must deliver, together with the Software, Documentation, which provides a comprehensive and detailed record of a Software's design, functionality, and operation.


The Documentation must align with the agreed Specifications, and the Developer is generally required to warrant that the delivered Software performs per the Documentation.


In addition, this Documentation serves as a reference for software developers, testers, and end-users throughout the software development lifecycle.


Here are some specific purposes of Software Documentation:

  1. Facilitate software development: Documentation helps software developers to understand the codebase and make changes, bug fixes or add new features effectively.
  2. Enable maintenance and support: Documentation provides clear instructions on how to maintain and support the Software after deployment.
  3. Promote collaboration: Documentation enables efficient communication and collaboration among team members, stakeholders, and end-users, facilitating a smoother development process.
  4. Enhance the Software's usability: Documentation provides guidance and instructions on how to use the Software, which can improve its usability and make it more accessible to end-users.
  5. Ensure compliance: Documentation is often required to meet regulatory and compliance standards in industries such as healthcare, finance, and government.


Overall, software documentation is essential for ensuring that Software is well-designed, well-maintained, and meets the needs of all stakeholders involved in its development, deployment, and use.


Third-party materials

If you have been involved with Software Development before, You will know there are various resources, libraries, and APIs available than can significantly speed up the Software Development process.


However, these resources, libraries, and APIs may be a two-edged sword. Firstly, there may be cost implications for the Customer. Secondly, and more importantly, there may be licence restrictions when using these Third-Party Materials (for example, you cannot use an API for commercial purposes).


Imagine spending months developing Software on top of an API to realise that the licence terms of the API do not allow you to sell your Software in the open market. That's money down the drain and why Third Party Materials must be addressed within your Software Development Agreement.


It is important to define Third-Party Materials clearly. Here is an example - 


Third-Party Materials means any materials and information, including documents, data, know-how, ideas, methodologies, specifications, Software, content, and technology, in any form or media in which any person other than the Customer or Developer owns any Intellectual Property Right, but specifically excluding Open Source Components.


If Third-Party Materials are allowed, ensure that the Developer will be required to secure, at its sole cost and expense, all necessary rights for You, the Customer, to use perpetually and throughout the world Approved Third-Party Materials.

Open-source components

The purpose of the "open-source components" block is to regulate various aspects surrounding using open-source components as part of the Software. 


There is a general misconception that open-source is "free" and "we can use it as we like". Although this is true to some extent, adopting this attitude can have disastrous consequences down the line.


From a Customer's perspective, it is wise to provide that only approved open-source components may be used as part of the Software.


While open-source components can offer many advantages, there are also valid reasons not to use them in a software development project. Some of these reasons include:


  1. License compatibility issues: Different open-source projects have different licenses, which may not be compatible with each other or with the intended licensing of your Software. Incompatibilities can lead to legal and intellectual property issues.
  2. Lack of support and documentation: Open source projects vary greatly in terms of the level of support and documentation they provide. Some projects may have limited or outdated documentation, making it harder to understand and implement the components.
  3. Security concerns: Open source components can have vulnerabilities that expose your Software to potential security risks. Ensuring the security of open-source components may require additional time and resources.
  4. Limited control and customization: While open-source projects can be modified, you may not have complete control over the development or direction of the project. This can make it difficult to customize or adapt the component to fit your specific needs.
  5. Maintenance burden: Open source components may not be maintained or updated regularly. If a project becomes abandoned or moves in a direction that no longer suits your needs, you may need to take on the responsibility of maintaining or forking the project yourself.
  6. Quality and stability: The quality and stability of open-source components can vary greatly. Some projects may have high-quality code and robust development processes, while others might be less mature or have a smaller community, leading to less reliable code and potential issues.
  7. Integration challenges: Integrating open-source components with your existing Software or other third-party components can be challenging, as compatibility issues may arise, requiring additional development work.
  8. Potential performance issues: Some open source components may not be optimized for performance, potentially leading to slower response times or higher resource usage than desired.
  9. Legal liability: If an open source component infringes on a third party's intellectual property, you might be held legally liable for damages, depending on the specific circumstances and the terms of the open source license.
  10. Reputation and branding: Using open-source components can sometimes lead to a perception that your Software is less polished or professional, especially if the open-source project has a negative reputation or if it is not well-maintained.


When deciding whether to use open-source components in your software development project, it's essential to carefully weigh these potential downsides against the benefits and consider your project's specific needs and goals.


A "subcontracting" block details the conditions and limitations of subcontracting work to a third party. 


The key components of a subcontracting clause typically include:


  1. Permission: The subcontracting clause should state whether or not subcontracting is allowed and under what conditions it is permissible.
  2. Notification: The subcontracting clause should specify whether the prime contractor is required to notify the client or the other party to the contract of any subcontracting arrangements and if so, when and how.
  3. Approval: The subcontracting clause should specify whether the client or the other party to the contract needs to approve any subcontracting arrangements and, if so, the criteria for approval.
  4. Subcontractor qualifications: The subcontracting clause should specify the qualifications required for a subcontractor to perform the work, including the skills, experience, certifications, and licenses needed.
  5. Liability: The subcontracting clause should specify the liability of the prime contractor and the subcontractor in case of any breaches, damages, or delays.
  6. Confidentiality: The subcontracting clause should specify the confidentiality requirements for the subcontractor, including protecting any proprietary or sensitive information.


Financial stability

On a big software development project, especially when dealing with a newly formed dev house, you want to avoid being caught with your pants down if the dev house cannot pay their devs.


On the flip side, if the Customer's financial position deteriorates, the Developer would want to be able to "walk away" from the contract as soon as possible to ensure resources are not used where the Developer will likely not be paid.


financial stability block, therefore, assists with "a way out" if a Party's financial position goes south.


The key components of a financial stability block include:


  1. Reviews: A Party's right to review the other Party's books to asses their financial position.
  2. Termination right: If the financial position deteriorates, the Party's right to terminate the Agreement.
  3. Confidentiality: Provisions that stipulate that any information provided as part of the financial stability assessment should be subject to confidentiality provisions.


An audit rights block gives the Customer the right to audit the Developer's compliance with the Agreement.


Think about a situation where you, the Customer, are paying the Customer on a time and materials basis. You want to ensure the Developer only charges you for the actual work done and that full, accurate and detailed timesheets are available for inspection.


 The key components of an audit rights clause typically include the following:


  1. Scope of the Audit: This section defines the types of records the auditing party is entitled to examine.
  2. Notice and Timing: This section stipulates the procedures for initiating an audit and the timeframes for completing it.
  3. Confidentiality: This section addresses the information disclosed during the audit. It may require the auditor to keep the information confidential and limit the use of the information to the purpose of the audit.
  4. Cost and Expenses: This section addresses the costs and expenses associated with the audit. It may specify who will bear the costs and whether the auditing party will be responsible for any costs incurred by the other Party.


An outsourced development team can become quite entrenched in a business. A situation where outsourced development teams become core to the operations of a business may have positives but may also hold some risks.


On the one hand, an outsourced development team can develop a unique understanding of the business; however, the business may also become particularly reliant on the dev team.


From a financial perspective, the hourly rates can go through the roof, but the output may not necessarily align with the increased rates of the outsourced development team.


A benchmarking clause can be useful in the above situation.


In general, including a benchmarking clause in a software development agreement can help the Parties set clear expectations, identify areas for improvement, and ensure that the Software remains competitive and meets industry standards.


However, the specifics of the benchmarking clause should be carefully negotiated and drafted to ensure that it is fair and reasonable to both Parties and provide a clear framework for the benchmarking process.


Key components forming part of a benchmarking block include:


  1. Definition of benchmarking: This section defines the benchmarking process and outlines the specific metrics that will be used to evaluate performance. It may also include a reference to industry standards and best practices that will be used for comparison.
  2. Data collection and reporting: This section establishes the procedures for collecting and reporting data in the benchmarking process. It may specify the frequency of data collection, the methods for data collection, and the format for reporting the data.
  3. Confidentiality: This section addresses the information disclosed during the benchmarking process. It may require the parties to keep the information confidential and limit the use of the information to the purpose of benchmarking.
  4. Scope and limitations: This section outlines the scope and limitations of the benchmarking clause. It may clarify which business areas will be subject to benchmarking and which areas will be excluded.
  5. Consequences of benchmarking: This section may outline the consequences of benchmarking, such as the requirement to implement improvements or to pay penalties if performance falls below industry standards.


An insurance block in a software development agreement provides the insurance requirements for the Parties. The key components of an insurance block in a software development agreement typically include the following:


  1. Types of insurance: This section specifies the types of insurance required for the software development project, such as general liability insurance, professional liability insurance, and cyber liability insurance.
  2. Coverage limits: This section specifies the minimum coverage limits the Parties must maintain for each type of insurance. It may also specify the minimum required duration of the insurance coverage.
  3. Additional insured: This section specifies whether one party requires the other party to name it as an additional insured on their insurance policies. It may also specify any specific requirements for the additional insured coverage.
  4. Proof of insurance: This section specifies the procedures for providing proof of insurance, such as certificates of insurance or endorsements, and the timeframe for providing such proof.
  5. Claims handling: This section specifies the procedures for reporting and handling insurance claims, including each party's obligations to cooperate with the insurance company in the event of a claim.
  6. Waivers and releases: This section specifies any waivers or releases of liability that the Parties agree to as part of the insurance clause. For example, the Parties may agree to waive their rights to sue each other for any claims covered by insurance.


An insurance block is an important component of a Software Development Agreement as it can help protect both Parties in unforeseen circumstances. 

Core legal provisions blocks

Boilerplate blocks



Master Software Development Agreement vs. "standard" Software Development Agreement

A Master Software Development Agreement is a framework agreement that goes hand-in-hand with Statements of Work (SoW).


The Master Software Development Agreement contains general terms and conditions applicable to the transactions. On the other hand, the SoW contains more specific information relating to the Software that must be developed. For example, the technical and functional specifications, timeframes, fees etc.


A Master Software Development Agreement allows for a more agile process where various "sprints" are undertaken to complete a project. Each "sprint" with its respective milestones and dates are agreed and documented as separate SoWs.


With a "standard" Software Development Agreement, the specifications of the project is fixed at the signing of the Agreement or agreed during a "consultation phase" preceding the start of the project.  

What is the difference between Source Code and Object Code?

"Source Code" is the code that a developer writes to program an application/website. This code is "human readable" and this is the code that you want to protect.


"Object Code" is "machine-readable". In other words, it is numeric code made of binary numbers such as 0s and 1s and is understood by a machine. 


For a more detailed explanation on Source Code vs. Object Code, have a look at this article

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