As with all contracts, software development contracts must clearly define the rights and obligations of the parties. However, the complexity of software development and the frequent lack of detailed initial specifications requires additional care in drafting.
I. Payment Structure for Development Services
A software development contract is amenable to several different payment structures. For example, the contract may be designed such that the developer is paid by the hour. This is the simplest arrangement and allows for the parties to begin the development process without too much planning ahead. This, of course, can be a detriment in that it is difficult to predict how long the development process will take in the dynamic world of technology.
To help mitigate the unexpected, parties to software development contract may instead opt for a fixed budget structure. This arrangement may lessen uncertainty about the cost of development services, but it is difficult to implement unless the project specifications are laid out in great deal before the contract is executed.
Both parties to a software development contract should approach the contracting process with realistic expectations and above all, flexibility. It is not uncommon for developers to be working on novel concepts. In the event that a strict deadline is necessary, parties may agree to a fixed budget contract that provides additional compensation for early delivery of the product.
II. Special Considerations
The unique nature of software development necessitates the inclusion of special contractual terms. These contracts should specify the degree of control afforded to each party with respect to the product itself. Given the wide array of coding methods, a developer should know at the onset if the hiring party has specific methods in mind. If the development must be thoroughly documented to support future alterations to the source code, this should be specified in the contract. If the parties would rather specify the contours of the product as the development goes on, the project can be broken into phases, with full specifications being agreed upon after the design development phase.
Arguably the most important terms of a software development contract relate to intellectual property. Such terms confirm who owns the product once development is complete. One method is to assign the product’s copyrights to the customer as a “work for hire”. Parties may instead choose to merely grant the customer a license to the product. A license simply confers a right to use the product upon the customer. Unlike a transfer of copyrights, a customer cannot be said to “own” the product when it is granted a license but will rather be permitted to use the product for a specified purpose. Decision regarding intellectual property rights may significantly impact both parties’ business models, so it is important to clarify upfront whether all rights in the finished product are being granted to the customer or whether the developer intends to retain intellectual property rights to some or all of the code.
It is also important to define when the product can be deemed complete. Software must be tested thoroughly before this can occur. The parties should specify when and how testing will occur. Bug fixes and improvements often continue well beyond the beta phase, so it is important to demarcate where the original product development phase ends and support services start.
A customer may wish to hire a developer to oversee more than just the development process. In these cases, the parties can fashion their agreements as software development and maintenance contracts. These arrangements create long-term relationships between customers and developers wherein the developer is retained to respond to various issues that may arise post-development. Even if major issues don’t arise, there is a consistent need for software to be updated and minor bugs to be addressed. By planning ahead with this type of arrangement, customers can avoid large IT expenses down the road.
III. Conclusion
For some software development contracts, where the requirements are thoroughly specified in advance, a fixed price, scope, and timeline for deliverables can be incorporated directly into the initial contract. In other instances, where the requirements are uncertain or subject to user interface design and testing, development services must be performed on an hourly basis. It is important to ascertain upfront which specifications are fixed and which are variable. Above all, a software development contract should aim for clarity and fairness to both parties to ensure that their reasonable expectations are met.
About Author
Garrett Cusack graduated from the University of Maryland School of Law in 2019, where he served as an Editor of the Journal of Business & Technology Law.. Read more.
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