Contract Tips: In Software Outsourcing Agreements

All company sizes, any business can potentially benefit from outsourcing talent. Instead of taking an in-house approach for a team of developers, outsourcing top talent and management skills can save enormously in the software development budget.

It’s a win-win, you will have more time to focus on your core business strategy. And you will hire a dedicated team of skillful engineers to carry on the heavy work of development and launching software products. 

Keep in mind that any contract for software development is different for each type of company. It will be good to have a lawyer to tailor and structure the core areas such as fees, expenses, the scope of services, and costs from time to time.

Why software development agreement is important?

By signing a software development contract, you can protect your business from some downfalls. If not carefully doing it right, you can time-draining legal dispute. Don’t worry. The contract is your best protection against inevitable conflicts over things like:

 

  • Specifications. This is one of the most important elements of the contract. A well-written scope of work (requirement specifications) defines out exactly what the finished product will be like.
  • Payment. What payment terms are agreeable to both parties and when.
  • Work phases. Determine how much work needs to be completed at each stage of the project.
  • Intellectual property rights. Ver important, who owns the software, source code and technology.
  • Copyrighted material. Who owns the copyrighted material that goes into software development.

 

At Towa Software, we have more than 20 years of business experience. When developing a new project for our clients, we will outline the specific requirements like audience research, deadlines for particular areas, prototyping, UI/UX design, coding, testing, DevOps, and many other activities that are needed. The software development contract helps many clients ensure that the software outsourcing company and the client are on the same page, clearly stating development services, timelines, payments and more.

What you should take into consideration when hiring an Outsourcing company?

Watch for contract loopholes in an IT outsourcing contract. There are dozens of common mistakes you can make.

Before the master contract is signed, ready carefully.

Let’s learn what to watch in contract loopholes in software outsourcing, from personal experience. 

Most Popular Types Of Outsourcing Contracts

First, you should be clear about what types of software development contracts are available.

When outsourcing a development team, it is hard to have full control over the work process. Before the project begins, the most important thing you can do is to clarify all the requirements of the contract in detail, most importante is the scope of work.

What costs are involved? Is there any hidden cost? What price rates will be agreed upon? 

Let’s find out the features of each contract for outsourcing services, most commonly used.

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Fixed Price Contract

A fixed-price contract determines the price of a certain scope of work, regardless of the actual time of end-to-end implementation. Moreover, this type of IT outsourcing model can provide financial incentives for achieving specific project milestones and reach goals.

  • A good option for short-term projects
  • Client and Outsourcing provider agree on a ‘fixed price’ for the service
  • The price is estimated by outsourcing company based on the well-defined scope of work (requirements)
  • The downside is little or non-flexibility under this type of contract for adding or changing the scope of work

Time & Materials Contract

Different from the fixed price project, the T&M model does not need a detailed estimate of all the features and requirements. The client pay for the hours spent on the development of a determined scope of work. Ideal for long-term collaboration: 

  • The Client pays the outsourcing company for work time and used materials monthly.
  • In contrast, to Fix price, T&M allows a great level of flexibility in development, to change requirements, and to allocate resources according to business needs. 
  • Ideal for long-term cooperation.

Dedicated Team Contract

This software development contract model will fit better for all kinds of development tasks. A dedicated team will only focus and work with your software project to achieve results and become a high-performer team in little time.

At Towa Software, we have been proving this model of contract for some time now and believe it is the best way to consolidate an outstanding team, with top talent, dedicated only to your product.

  • More for a long-term project with flexibility and potential to scale
  • The whole team is in one place or remote, same time zones and cost savings
  • The team is managed by senior experts and specialists to guarantee results
  • Highly motivated team members quickly react to any issues and changes
  • The whole team is dedicated to your success

Now that we have discussed in general terms the most used models of contracting with a Software firm, it is time to bring some light to the most common mistakes people suffer when hiring a team of engineers, watch for these loopholes.

How To Avoid Contract Loopholes In Software Outsourcing?

It’s usually the client’s choice to select between Fixed price, Time & Materials, and Dedicated Team for hiring a software development company.

All types of outsourcing models have their risks and opportunities. Even with all things being considered, we strongly recommend watching for these key points to reduce the risk of contract loopholes.

Define Development Specifications

Specifications are the main part of any software development contract. If you don’t clarify what the final product looks like, how it will look, or what customers expect, it’s hard for the development team to build a product that meets your need.

 

Your contract should clearly define:

  • All the functions integrating with your product.
  • Write down the details of the project, be as specific as possible.

 

Also, the contract should describe the development services that you expect your partner to provide. It also shows the procedure of making changes to the scope. Ideally, we recommend stating any changes proposed by each party as following:

  • How many times you can change a request.
  • A description of the change.
  • What is the result of the change has on the project cost and time.

Project Timeline

Every project should have a defined plan. The project should state the hourly rates, development phases, milestones, and deadlines. Defining each stage also helps you and your software provider. Just make sure all supplementary documents are signed by both parties.

 

There are project management tools that help you to manage an effective timeline such as Asana, Smartsheet, Trello, Monday, there are many tools for tracking these activities.

Payment Time

As we mentioned before, the most common forms of payment agreement are:

  • Fixed-price means the price is paid for an entire project. It can be helpful for you to know upfront what the project will cost. This type is less flexible for changes but gives more certainty on how long it will take to develop.
  • In Time and Materials, you have to pay for the time spent and the cost of materials. Time and materials contract is easier to kick off. Because it requires less preparation and planning. Besides, the development team has more flexibility to maintain the high quality of the project.

 

Your contract should detail a schedule of payments including:

  • The date that each payment must be made.
  • How payments will be made.
  • Additional fees that may be incurred.

 

Planning payments ahead of time is always a better practice, know your cash flows and payment due dates in advance.

Cost Estimate 

Cost savings is arguably the major reason to outsource services and staffing. However, one of the common contract loopholes in IT outsourcing is also about the cost.

It’s easy to fall into the temptation of selecting the least expensive providers to save money. Unfortunately, sometimes the lowest bid comes with poor quality.

Nobody wants to provide a negative experience for a customer. So you and your software outsourcing provider should be made clear what are the communication channels, deadlines for payments, and if there is flexibility.

To avoid mistakes in your contract, you have to set all the rules for payment and service.

User Acceptance Testing

In general, acceptance testing is done at the end of each development phase or Sprint. If your provider has a specific QA process that should form part of the testing, it should be documented. The agreement should also note the time assigned for testing, fixing bugs, and warranty time after launch for proving support for any defects or incidents. 

 

For Testing, you should note the following

  • Who does the testing?
  • How long does it take?
  • What is the warranty for bug fixing?

Measure KPIs

Your outsourcing contract should specify the key performance indicators of the project. When the contract clauses are misaligned with the business objectives, problems arise

 

You should consider SLA, service hours, and service elements, human resources as well as technical resources required. This allows you to prevent contract clauses and have a flexible approach to describing the service.

Duration of Contract

When you signed an outsourcing contract, it means the provider is the right one at that moment. However, things can change with time and business strategy. Maybe, you wish to transfer an outsourced service to another vendor or bring it back in-house development. Contract loopholes relating to exit management should be clear, but they are often ignored. 

 

Therefore, from the establishment of the contract, the exit option must be integrated. What are the elements that will be transferred back to the customer? What are the knowledge transfers that will be provided in case of not outsourcing anymore? When and why could you decided to end the services provided must be stated in the contract. 

Security on Top

Many of the most commonly outsourced processes require the transfer of data. Therefore, it can carry significant contract loopholes with data protection.

First of all, to ensure data protection, there are questions that should be asked:

  • Are the outsourcing company’s services compliant with good data protection?
  • What are the security measures in place to prevent abuse of data?

Outsourcing agreements should cover key data protection issues. Then, the provider has to compliant with the legislation.

The contract needs to cover the extraction and removal of your data.

It’s also highly recommended you take advantage of how the transfer back to your systems can be made securely.

Conclusion

 

When starting outsourcing with a new outsourcing partner, many companies tend to sign the contract without having the resources to manage the agreement. As an Owner, CEO, CIO, or CTO you should know how to follow up on a detailed outsourcing contract. But we highly suggest that you write a simple contract through a clear and structured model of cooperation. Both client and software outsourcing providers should consider including timeline, the scope of work, payment terms, data security, clarify service description, ending clause, and notice periods.

 

Towa Software has over 20 years of experience to guarantee the quality of every line of code, we are proud of our products and services delivered. We recommend starting small and build trust with your provider before scaling. 

 

We have expert Project Managers and Innovation Consultants along with top talented teams who have delivered awesome products to customers in U.S.A, Canada, Mexico, London, and Australia.

 

As a leading software development outsourcing company in the USA and Mexico, we have extensive experience in many fields including fintech, banking, payments gateways, e-commerce, retail, marketplaces, health care, Omnichannel, and many more.

 

You can contact us at support@towasoftware.com or give us a call via (+1) 210-787-4525 for more information.

 

You can Book a 15-min call call with one of our Customer Success Managers for a conversation.

AboutMSc. Adrian Lopez
I'm an entrepreneur, my passion is in building awesome teams and matching them with great projects primarily in the fintech and e-commerce sectors, my focus is on business development with an outstanding customer support mindset. I love working with startups, bringing value to the firm early but also working with scale corporate companies helping them evolve in their digital journeys.

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