When it comes to software development contracts, there are a few different types you can use. Depending on the project, one type might be more appropriate than another. We’ll discuss the most common types of software development contracts: time and materials, fixed bid, fixed budget, capped budget with accelerated bonus and dedicated team. We will then list their key elements.

Types of Software Development Contracts

The time and materials contract is the most flexible type of contract. It’s best suited for short-term projects or when the requirements are still unclear. With this type of contract, the developer is paid for the time they spend working on the project and the materials used.

The fixed bid contract is best suited for longer projects where the requirements are well-defined. In this type of contract, the developer agrees to complete the project for a set price. This protects the customer from cost overruns while also providing some assurance to the developer that they will be fairly compensated for their work.

The fixed budget contract is similar to the fixed bid contract, but it’s used when the customer knows how much they want to spend on the project. This type of contract helps to avoid cost overruns by ensuring both the developer and customer are aware of the budget constraints.

The capped budget with accelerated bonus contract is similar to the fixed budget contract, but it offers more flexibility for the customer. With this type of contract, if the customer goes over their budget, they will have to pay a penalty. However, if they stay under their budget, they get a bonus from the developer. This type of contract is ideal for customers who aren’t sure how much their project will cost.

A dedicated team is a business model for long-term cooperation in contract software development. The vendor chooses candidates based on your specifications and assists you in determining the team structure and individuals with whom you will collaborate. The team works only on your project, occasionally in collaboration with your in-house teams.

When you employ a dedicated team, you’ll almost certainly have to pay each member’s salary as well as the vendor’s charge. You may also agree on a certain weekly or monthly budget. Among the three forms of software service contracts, the contract for a dedicated team is frequently the most flexible.

There are also hybrid contracts, which combine elements of different contract types. For example, a hybrid contract may include a fixed bid for a certain portion of the project, with a time and materials contract for the remainder. This allows the customer and developer to have some flexibility while still having some structure and predictability in terms of costs.

Another type of software development contract is the outcome-based contract, where the developer is paid based on the success of the project. This can be based on metrics such as user adoption or revenue generated. This type of contract aligns the interests of the developer with the success of the project, as they are more motivated to deliver a high-quality product that meets the needs of the customer.

Overall, it’s important for both the customer and the developer to carefully consider the type of contract that best fits the needs of the project. Each type of contract has its own advantages and disadvantages, and it’s important to choose the one that aligns with the goals and expectations of both parties.

Key Elements

Once you’ve chosen a type of software development contract, there are some key points you’ll need to include in your agreement.

Services Description and Project Scope

The services description should outline the specific services the developer will be providing. It should also list what is not included in the project and any assumptions that have been made. This will help avoid any misunderstandings later on.

The project scope should describe the specific goals and objectives of the project. It should also list any limitations, such as the amount of time or money that has been allocated for the project.

Define mechanisms for change of scope.

The developer will provide [list specific services], as described in the attached project proposal. These services will be completed to the best of the developer’s ability and in accordance with industry standards.

This project scope includes the following goals and objectives: [list specific goals and objectives]. The developer will work to achieve these objectives within the allocated [amount of time/budget] for the project.

Any changes to the scope of the project must be agreed upon by both parties in writing before proceeding. Any additional work outside of the scope of the project will be considered an add-on and will be subject to separate negotiation.

Project Time and Cost

The project time and cost should be outlined in detail in the contract. This should include both how much time will be spent on the project as well as what the developer will be paid for their services. You may specify the budget and development phases here, along with milestones and dates. Consider the likelihood of delays that you and your development provider are liable for (such as payment delays, slow communication, or development delays).

The project is expected to take [amount of time] and will be completed in [number] development phases, with milestones and deadlines as outlined in the attached project plan. The developer will provide regular updates on the progress of the project and will notify the client of any potential delays as soon as possible.

The developer will be paid [amount] for their services, to be paid in [number] installments at the completion of each development phase. The payment schedule will be as follows:

• [amount] upon signing of the contract
• [amount] upon completion of development phase 1
• [amount] upon completion of development phase 2
• [amount] upon completion of development phase 3
• [amount] upon final delivery and acceptance of the project

In the event of delays caused by [client/developer], the project timeline and payment schedule may be adjusted accordingly. Any delays caused by circumstances outside of the control of [client/developer] will be addressed on a case-by-case basis.

The client will be responsible for any additional expenses incurred as a result of changes to the scope of the project or unforeseen circumstances. These expenses must be approved in writing by the client before proceeding.

The developer will not be responsible for any expenses incurred by the client that are not specifically outlined in this contract.

Acceptance Testing and Delivery

The contract should specify who is responsible for conducting acceptance testing and when it needs to be completed by. It should also state who will be responsible for delivering the finished product and any associated costs.

Indicate if the acceptance testing will be performed by you or by your vendor. Acceptance testing is often performed at the conclusion of each development step; hence, this section may also apply to the comprehensive project plan.

In the context of acceptance testing, the contract should state:

• Who does the testing?
• How long will the testing take?
• How the test findings are conveyed (the best way is to notify the other side in writing about the acceptance)

[Client/Developer] will be responsible for conducting acceptance testing upon completion of each development phase. Acceptance testing will be completed within [amount of time] of the development phase being completed.

The finished product will be delivered to the client via [method of delivery] on the agreed upon delivery date. Any associated costs for delivery will be the responsibility of [client/developer].

Warranties and Liabilities

The warranties and liabilities section should list who is responsible for any damages that may occur as a result of the project. It should also specify what type of insurance coverage the developer has.

The developer warrants that the services provided under this contract will be performed in a professional and timely manner, in accordance with industry standards. The developer will be responsible for any damages caused by their negligence or lack of due care in performing their duties.

The client warrants that they have the right to enter into this contract and to use any materials provided as part of the project. The client will be responsible for any damages caused by their negligence or lack of due care in fulfilling their obligations under this contract.

The developer will carry [type of insurance coverage] to protect against any unforeseen circumstances. In the event that a claim is made against the developer, the client will cooperate fully in the defense of such claim.

In the event of a breach of this contract by either party, the non-breaching party will be entitled to seek damages. However, the total liability of either party will be limited to the amount paid by the client to the developer under this contract.

This contract is not intended to exclude or limit either party’s liability for death or personal injury resulting from negligence.

Intellectual Property Ownership

The intellectual property ownership section should outline who owns the rights to any copyrighted material or software that is developed as part of the project. In most cases, the client will own these rights unless otherwise specified in the contract.

Work Product. Work product of Developer which is delivered and paid for under this Agreement shall become the property of Client only upon payment of Developer’s fees in full. Upon receipt of payment in full, Developer shall irrevocably transfer and assign to Client all right, title and interest in and to the Developer work product, including all worldwide patent rights (including patent applications and disclosures), copyright rights, mask work rights, trade secret rights, know-how, and any and all other intellectual property or proprietary rights (collectively, “Intellectual Property Rights”) therein.  At Client’s request and expense, during and after the term of this Agreement, Developer will assist and cooperate with Client in all respects, and will execute documents, and will take such further acts reasonably requested by Client to enable Client to acquire, transfer, maintain, perfect and enforce its Intellectual Property Rights and other legal protections for the Developer work product. 

Pre-Existing Intellectual Property. Notwithstanding any provision of this Agreement to the contrary, any routines, methodologies, processes, libraries, tools or technologies created, adapted or used by Developer in its business generally, including all associated intellectual property rights (collectively, the “Development Tools”), shall be and remain the sole property of Developer, and Customer shall have no interest in or claim to the Development Tools, except as necessary to exercise its rights in the Products. In addition, notwithstanding any provision of this Agreement to the contrary, Developer shall be free to use any ideas, concepts, or know-how developed or acquired by Developer during the performance of this Agreement to the extent obtained and retained by Developer’s personnel as impression and general learning.

Use of Open-Source Software

If open-source software is being used as part of the project, then the contract should specify which licenses are being used and who is responsible for complying with them. The contract should also state whether or not modifications to this software can be made without approval from the client.

When designing software applications, most software developers will employ open source libraries. Their customer may request a complete list of the libraries utilized throughout the application’s development. The customer must be certain that the developer has met the standards for utilizing that piece of open-source software.

The developer will be using the following open-source software as part of this project: [list software and licenses]. The client has the right to request a list of all open-source software used in the project at any time.

Modifications to this open-source software will not be made without the written consent of the client.

Access to Source Code

If access to source code is required, then it should be specified in the contract. The contract should also state whether or not this code can be shared with other developers or if it is confidential information that can only be accessed by authorized personnel.

The client will have access to the source code for the project upon completion, provided that the client has fully paid all fees and costs associated with the project. The source code will be made available to the client in a format that is easily accessible and readable.

The client will be granted a non-exclusive, non-transferable license to use the source code for their own internal business purposes. The client may not sell, distribute, or transfer the source code to any third party without the written consent of the developer.

The client agrees to maintain the confidentiality of the source code and to use reasonable security measures to protect it from unauthorized access or disclosure. The client will not reverse engineer, decompile, or disassemble the source code or use it for any purpose other than as intended.

The developer retains all rights, title, and interest in and to the source code, including any modifications or improvements made by the developer during the course of the project. The developer will be free to use and incorporate any such modifications or improvements into their own products or services.

The client acknowledges that the source code is the valuable intellectual property of the developer and agrees to take reasonable steps to protect it. Any breach of this provision by the client will result in immediate termination of the license and may subject the client to damages and legal action.

Privacy and Confidentiality

The privacy and confidentiality section should list who is allowed to see confidential information that is shared between the client and developer. It should also state how long this information will be kept confidential and what will happen if it is no longer needed.

The privacy and confidentiality section of this contract is designed to protect the sensitive information shared between the client and developer during the course of the project. The following provisions outline the responsibilities of both parties in regards to this information:

• Both the client and developer agree to keep all confidential information shared during the project strictly confidential and not to disclose it to any third parties without the written consent of the other party.
• The client and developer will each take reasonable measures to protect the confidentiality of this information, including but not limited to password protection, secure storage, and access control.
• The client and developer will only share confidential information with authorized personnel who are directly involved in the project and who have signed a confidentiality agreement.
• In the event that the client or developer is required by law to disclose any confidential information, they will promptly notify the other party and will cooperate in any efforts to protect the confidentiality of this information.
• Confidential information will be kept for a period of [length of time] after the completion of the project. After this time, the client and developer may destroy or delete any confidential information in their possession, unless otherwise agreed upon in writing.

Termination

The contract should specify the conditions under which either party can terminate the agreement. It should also state what will happen to any unfinished work and how any outstanding payments will be handled.

Either party may terminate this agreement at any time by providing [amount of time] written notice. In the event of termination, the following will apply:

• Any unfinished work will be the responsibility of [client/developer] and must be completed within a reasonable timeframe.
• Any outstanding payments must be made in accordance with the payment schedule outlined in the contract.
• Both parties must maintain confidentiality of any confidential information shared during the course of the project.
• Intellectual property ownership rights will be determined in accordance with the terms outlined in the contract.
• Any materials or equipment provided by [client/developer] must be returned in good condition.
• Any costs associated with the termination of the project, including but not limited to legal fees, will be the responsibility of [client/developer].

This termination clause will not affect any rights or obligations that have already been incurred by either party.

Frequently Asked Questions

1. Can I use a standard software development contract template? While it is possible to use a standard software development contract template, it is generally recommended to have an attorney review and customize the contract to fit the specific needs and goals of your project. This will help to ensure that the contract adequately protects your interests and addresses any potential issues that may arise.
2. Who is typically responsible for maintaining and updating the software after it is developed? The maintenance and updating of the software after it is developed is typically the responsibility of the software developer, unless otherwise specified in the contract. It is important to clearly define the terms of maintenance and updates in the contract to avoid any misunderstandings or disputes in the future.
3. How do I ensure that my intellectual property rights are protected in a software development contract? It is important to include provisions in the software development contract that clearly outline who will own the intellectual property rights to the software and any associated materials. You may also want to consider including provisions for how the software can be used and any restrictions on its distribution.
4. How do I handle changes to the scope of the project in a software development contract? It is common for the scope of a software development project to change during the course of the project. To handle changes to the scope of the project, you can include provisions in the contract for how changes will be communicated and implemented. This may include specifying a process for requesting and approving changes, as well as any additional costs that may be incurred as a result of the changes.
5. How do I handle disputes that may arise in a software development contract? To handle disputes that may arise during the course of a software development project, you can include provisions in the contract for how disputes will be resolved. This may include specifying a process for mediation or arbitration, or requiring the parties to engage in good faith negotiations to resolve the dispute. It is also a must to include a clause that specifies the governing law for the contract, which will determine where and how any disputes are interpreted and resolved.

6. What should I consider when negotiating a software development contract? When negotiating a software development contract, it is important to clearly define the scope of the project and the deliverables that will be provided. You should also consider the payment terms, timeline for completion, and any warranties or indemnification provisions. It is also a good idea to discuss any potential risks or issues that may arise during the course of the project and how they will be addressed.
7. How do I handle delays or missed deadlines in a software development contract? To handle delays or missed deadlines in a software development contract, you can include provisions that specify the consequences for such delays. This may include requiring the software developer to pay fines or damages, or allowing the client to terminate the contract if the delays are significant. It is also a good idea to include provisions for how any delays will be addressed, such as by extending the timeline for completion or adjusting the scope of the project.
8. How do I ensure that the software developed meets my requirements and expectations? To ensure that the software developed meets your requirements and expectations, it is important to clearly define the scope of the project and the deliverables that will be provided in the contract. You should also include provisions for testing and acceptance of the software, as well as any warranties or guarantees provided by the software developer. It is also a good idea to include provisions for how any issues or defects will be addressed.
9. How do I handle termination of a software development contract? To handle the termination of a software development contract, you can include provisions in the contract that specify the circumstances under which the contract can be terminated. This may include provisions for termination for cause, such as if the software developer fails to meet the terms of the contract or if the client is frustrated with the progress of the project. It is also a good idea to include provisions for how any disputes related to the termination of the contract will be resolved.
10. Can I include a non-compete clause in a software development contract? A non-compete clause is a provision in a contract that prohibits the software developer from competing with the client for a certain period of time after the completion of the project. Non-compete clauses can be included in software development contracts, but they may be subject to certain legal restrictions and may be illegal in certain states, such as California. It is important to carefully consider the terms of a non-compete clause and have it reviewed by an attorney to ensure that it is enforceable and does not violate any laws.

11. How do I handle proprietary information in a software development contract? To handle proprietary information in a software development contract, you can include provisions that specify how the software developer should handle and store the information, as well as any consequences for failing to maintain the confidentiality of the information. You may also want to consider including a non-disclosure agreement (NDA) to further protect the confidentiality of the proprietary information.
12. Can I include a termination for convenience clause in a software development contract? A termination for convenience clause is a provision in a contract that allows either party to terminate the contract without cause by providing a certain amount of notice. This type of clause can be included in a software development contract, but it is important to carefully consider the terms of the clause and have it reviewed by an attorney to ensure that it is fair and reasonable. Some things to consider when including a termination for convenience clause in a software development contract include:

• The amount of notice that must be provided to terminate the contract. This should be reasonable and take into account the amount of time and resources that have been invested in the project.
• Any consequences for terminating the contract early, such as the payment of damages or fines. These should be reasonable and proportionate to the amount of work that has been completed.

• Any provisions for the transfer of ownership or intellectual property rights in the event of termination. These should be clearly defined to avoid any disputes.
• Any provisions for the return or destruction of proprietary information or materials in the event of termination. These should be clearly defined to protect the confidentiality of the information.

13. How do I handle ownership of the software developed in a software development contract? To handle ownership of the software developed in a software development contract, you can include provisions that specify who will own the intellectual property rights to the software and any associated materials. You may also want to consider including provisions for how the software can be used and any restrictions on its distribution.
14. Can I include a requirement for exclusivity in a software development contract? A requirement for exclusivity is a provision in a contract that prohibits the software developer from working on any other projects while they are working on the project specified in the contract. This type of provision can be included in a software development contract, but it is important to carefully consider the terms of the exclusivity requirement and have it reviewed by an attorney to ensure that it is fair and reasonable. It is also important to note that an exclusivity requirement may potentially turn into an illegal non-compete clause depending on the specific terms and circumstances.
15. Can I include a provision for liquidated damages in a software development contract? A provision for liquidated damages is a clause in a contract that specifies a predetermined amount of damages that will be paid in the event of a breach of the contract. This type of provision can be included in a software development contract, but it is important to carefully consider the terms of the liquidated damages clause and have it reviewed by an attorney to ensure that it is fair and reasonable. The amount of damages specified in the clause should be proportional to the harm that may be suffered as a result of the breach.
16. How do I handle data privacy and security in a software development contract? To handle data privacy and security in a software development contract, you can include provisions that specify the software developer’s responsibilities in regards to protecting sensitive data. This may include provisions for how the data will be stored and transmitted, as well as any security measures that the software developer is required to implement. It is also a good idea to include provisions for what will happen to the data in the event that the contract is terminated or the project is completed.
17. Can I include a provision for indemnification in a software development contract? A provision for indemnification is a clause in a contract that requires one party to compensate the other party for any losses or damages that may be incurred as a result of a breach of the contract. This type of provision can be included in a software development contract.
18. How do I handle changes to the timeline for completion in a software development contract? To handle changes to the timeline for completion in a software development contract, you can include provisions that specify the process for requesting and approving any changes to the timeline. This may include provisions for how any additional costs that may be incurred as a result of the changes will be handled. It is also a good idea to include provisions for how any delays or missed deadlines will be addressed.

20. How do I handle proprietary software in a software development contract? To handle proprietary software in a software development contract, you can include provisions that specify the terms of use and any restrictions on the distribution of the software. You may also want to consider including provisions for how the proprietary software will be maintained and updated, as well as any warranties or guarantees provided by the software developer. It is also a good idea to include provisions for how any issues or defects with the proprietary software will be addressed.
21. How do I handle the use of open source software in a software development contract? To handle the use of open source software in a software development contract, you can include provisions that specify how the open source software can be used and any requirements or restrictions that apply. This may include provisions for attribution or the release of any modifications made to the open source software. It is also important to ensure that the use of any open source software does not violate the terms of the license for the software and does not infringe on any intellectual property rights.