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Arslan Tayliyev
Arslan Tayliyev

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Custom Software Development Contract: How to Sign Agreements with Vendors

Building trustworthy relationships between the vendor and client is a cornerstone of successful cooperation. But what is the essential part of it and how to set up all necessary regulations? To answer this question we need to explore what is a software development contract and what are main terms of it.

The contract is an official document that sets the rules and conditions between the customer and contractor. It helps to avoid any risks and matches the best results without any issues. Knowing software development contract standards will help you faster and with greater certainty choose the contract's content. With the right choice, you would sign it sooner, start the project on time. What concerns software development - a good contract would guarantee the high quality of the project and great experience of working with a professional dev team.

In this article, we are going to discuss the key points of a good contract, its structure, and the general formation.

Types of software development contracts

The major types of contracts include “Fixed bid”, “Time And Materials” and subscription contracts. Before you decide on the best type of contract, you should choose the best project methodology.

A project management methodology is a set of guiding principles and processes for managing a project. The right choice of methodology defines the further way of the work and communication. The main types of them are:

  • Waterfall project methodology that guarantees a full and clear vision of the final results, its price and deadlines. This type of methodology is a sequential approach that divides the process of project development into distinct phases. Every phase can begin only if the previous one has been completed. In between phases, all achievements are expected to be documented and signed off. All phases are passed through and completed only once, so all requirements should be prioritized and structured at the start to provide the information in developing the plans, timelines, budget, and resources. The main idea of this approach is plan compliance, so any changes after the project has started would modify the original plan and require a restart.

  • The agile project methodology is more “floating” and guarantees the general concept of the final product and approximate timeframe and budget. It is based on a teamwork approach that is centered on the deployment of a functional application with a focus on customer’s requirements. This type of project is formed on a time-boxed phase called a sprint with a defined duration of about two weeks. At the beginning of each sprint, a list of goals is prioritized on customer demands. At the end of it, the team and the customer review and evaluate the work with the plan for the next sprints.

To choose the best options, we need to understand what method of funding we are going to use and to evaluate the general idea of the project and the necessity to modify it during the developmental process.

Fixed Bid

Fixed bid software development contract provides a prior assessment of the budget, detailed planning of the application, and its further development. It fits the small projects and MVPs.

On the one hand, the vendor guarantees to finish the project at the set time and provides all agreed terms. But on the other hand, there are risks of an earlier performance of the contract that leads to the overpaid on the client’s side. There is also a possible variant of the breaking deadlines. In this case, it would lead the vendor to financial losses. To avoid these problems, there are several types of fixed bid contracts that can cover every issue:

  • Fixed Price Incentive Fee contract. Following this software development agreement, the customer pays a contractor defined by the contract amount, regardless of the actual cost. If the seller meets set performance criteria, he can earn an additional amount.

  • Firm-Fixed-Price contract. By signing this contract, the cost of the project is defined before the work starts and after that remains unchanged. This type of contract places the contractor with maximum risk and full liability for all costs and resulting profit or losses.

  • Fixed price with economic price adjustment contract. It is a fixed-price contract suitable for long-term projects. The contract is considered to protect both the buyer and seller from the hidden issues over which they have no control. This type provides a provision allowing for predefined adjustments to the final contract price according to changing conditions.

Time and Materials (T&M)

Time and Materials (T&M) model was created by vendors to reduce their risks and provide better development flexibility. It means that the customer pays for the factual working time spent on the program development. This contract is good for its transparency. It means that the whole process of the creation of the app is fully controlled by the client. Every needed change and feature can be added at any time.

What concerns the software development, this approach can involve the appearing of unintended bugs because of the implying new features. To avoid this issue, clients should make a strong plan of the program and think about its functionality in advance.

Dedicated Team

Dedicated team contract provides a client with a software development team for long time cooperation. These specialists are chosen according to the demands of the client for their experience and skillsets. This custom software development agreement has a very simple pricing model. It is based on a set regular payment based on the number of developers.

The main benefits of this type of contracts are:

  • full control over the development process;

  • direct communication with a team;

  • opportunity to modify or add anything at any time;

  • the team is stable and fully dedicated to only one project.

As a result, the client will manage the team by himself, and in the end, he’ll get a trusted partner that will help in building a stellar software solution.

How to choose the best business outsourcing model? It is important to understand what the actual needs of the project are, and according to them choose the right approach and implement it. Depending on the specs of the project, the client must decide what risks he is willing to reimburse to the outsourcing provider and for which part of the project the supplier will be responsible.

Key Points that Should be in Software Development Contract

After speaking about different types of software development services agreements, it is necessary to clarify the main points of it. In general, this document should spell out what the final product will look like, how it will work, and what the client can expect when using it. The main areas of the agreement are consisting of the following points:


It is one of the main issues that terminate the contracting process. Contractual liability means that one business agrees to pay for any losses or damages caused by another party. Parties should include different provisions on liability. Such aspects as intellectual property rights, conditions of the termination of the agreement, contractor’s indemnification obligations should be indicated in the contract and certified by the lawyer.

Scope of the Project

While writing a contract, try to avoid general and open clauses of scope specifications. A software development agreement should also describe the procedure of accepting changes to it. Any modifications in the scope of work can vary the buyer’s budget and the project timeline. It must be established that any alteration proposed by either party should be documented and verified by both sides.

Intellectual Rights

Software contracts must clearly define intellectual property rights. The customer has to state that he is the rightful and exclusive owner of all developments and all other works of authorship made by the contractor in the performance of this agreement. It would prevent the contractor from reusing his code by the same dev team for a possible competitor in the future. The contract should specify that the legal relationship shall be considered as the work made for hire and all the copyright belongs directly to the client.

Time, Cost & Processes

Depends on the type of the contract, time, cost, and processes should be individually agreed upon by both sides of the treaty. Mostly it depends on the type of software development contract. In general, deadlines can be changed according to the volume of work. They can be regulated by the contractor the same as the processes. As for the question of payment, it is generally accepted to provide a monthly payment but this question also can be regulated by the terms of the contract.

Acceptance testing

Acceptance testing is another important point that should be listed in the contract. As a rule, it is done on the side of the vendor, but the client can perform it on his own. The purpose of acceptance testing is to determine the preparedness of the product that is achieved by passing applying different test scenarios and cases. Usually, these tests are based on the requirements for the software specified in the contract. The main point is that the contract should contain information about the performer of the test, its deadlines, and the form of the test feedback.

Non-Disclosure Agreement

Protecting confidential information and trade secrets is a key issue of every project. And it is extremely important for technology companies. Non-disclosure agreement with the developer allows the customer to protect trade secrets. It should specify the information that is considered to be confidential and the responsibility for its divulging. Generally, the confidentiality agreements last for the period of the contract relevance, but it is also important to maintain them even after the contract completion.

Creating a software development contract is an essential aspect of future success in development and cooperation with the dev team. A customer has a choice to compose a contract on his own or turn to the outsourcing company. In both cases, it is important to consult with a lawyer and pay attention to every risky aspect.

What is Force Majeure? When Does It Apply?

We never know what is waiting for us next and the software development sphere is not an exception. The latest events that are happening now are the greatest example, that no one is immune to different kinds of force majeures. Even if the contract is perfect and seemingly the client is ready for everything, there is a slight possibility of unforeseen consequences.

In this case, the customer should make sure that he is applying different circumstances in his document. Any force majeures as floods, fires, earthquakes, as well as other events like wars and government orders should be predicted.

Today we have another predetermination like a quarantine. It means that most of the teams are working distantly and the impact of such performance could be quite different from what was expected.

If the contract includes such a part, the vendor and customer need to follow the rules set in it. Very often the first step is to notify the other party about the inability to perform and the cause. The party affected by the event proves that there are no alternative means of performing their obligations.

If the contract does not provide any force majeure clause, the party who invokes it may be found to be in breach of contract. In this case, the general rules of law are applying.


To sum up, it is worthy to mention that there is no type of contract that would satisfy all kinds of project, budget and requirement. It is important to consider all pros and cons of every type of document and choose the best option for you. Contract terms impact not only payment but also relationships between vendor and customer. For that reason, any contract that implies collaboration is the right way to achieve great results.

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