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
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.
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:
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.
Various methodologies are adopted for software development, each with its own principles, practices, and approaches. Here are some common methodologies:
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.
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.
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:
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.
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.
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:
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:
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.
A 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:
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:
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:
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:
An insurance block is an important component of a Software Development Agreement as it can help protect both Parties in unforeseen circumstances.
Read more on building intellectual property clauses.
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.
"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.