When your business commissions a supplier to develop bespoke software, it often represents a significant investment of time and resources. Custom software can deliver substantial operational and efficiency benefits, but the development process is not without risks.
Projects can face delays, cost overruns, or disputes, making it essential to have a robust contract in place from the outset. However, if bespoke software isn’t the right fit for your business, it’s crucial to be aware of the legal considerations involved in exploring alternative solutions, such as off-the-shelf software or hybrid approaches. To ensure alignment and reduce misunderstandings, consider reviewing our guide on software development contracts from the developer’s perspective.
This guide offers practical legal tips to help you navigate software development agreements, manage risks, and secure terms that protect your business. Unlike off-the-shelf solutions, bespoke software development requires tailored contracts to address key aspects such as deliverables, timelines, and intellectual property. We’ll explore how to approach these agreements, including selecting the right development methodology and incorporating terms that align with your project’s unique requirements.
Whether you’re investing in growth as an SME or undertaking a business-critical project as a larger organisation, this guide is designed to help you safeguard your investment. For tailored advice, our commercial technology solicitors are here to ensure your agreement is comprehensive and legally robust.
Contents:
What makes software development contracts unique?
Custom software development contracts are critical when you instruct a supplier to develop bespoke software tailored to your specific needs.
Unlike other less tailored IT contracts (such as licences for off-the-shelf software), you’ll need robust software development contracts to address detailed development terms and lay out key niche provisions – such as the deliverables and how the development process will work in practice. These contracts can often involve significant negotiation with developers, especially where the technology is business critical.
Choosing the right development approach for your project
Software projects are each unique, so contracts don’t follow a one-size-fits-all approach.
The development methodology (whether Waterfall or Agile, or a mix) will shape the agreement and what it needs to include.
- Waterfall typically follows a structured, step-by-step process. Each phase usually needs to end before the next begins.
- Agile takes a more flexible approach, where the overall scope and goals are set at the start, but the details evolve as the project progresses – meaning there’s more room to adjust priorities during development. Agile can come with more uncertainty and risks, making strong contractual protection all the more important.
Your agreement should make the development methodology clear to avoid misunderstandings about what, when, and how your software will be developed.
Some key differences include:
- Waterfall: Requires the supplier to deliver specific features by fixed dates, with binding acceptance criteria.
- Agile: Involves ongoing testing during sprints and relies on collaboration, requiring tailored drafting for the development process.
- Waterfall often uses formal change control processes, while Agile allows changes naturally within your product backlog.
- Agile projects may include roles like a ‘Product Owner’ or ‘Agile Coach’ and methodologies such as SCRUM or Kanban.
A mismatch between the methodology and contract can lead to misunderstandings and disputes. For example, an Agile project with a rigid Waterfall contract can result in significant issues. Ensuring your contract reflects the chosen methodology right from the start is critical.
Essential contract terms to protect your business
Your contract should explain how the project will work and define clear terms for deliverables, timelines, acceptance, and responsibilities.
Terms will differ based on the methodology, but here are some key considerations:
- Defining clear requirements: Your project’s scope must be clearly defined. A Waterfall contract will typically lay out a fixed set of requirements with agreed features and timelines upfront, leaving little room for change. Agile projects, on the other hand, are more fluid, starting with an initial roadmap or ‘user stories’ and evolving as development progresses. Hybrid approaches may combine elements of both. For Agile, early road mapping can help focus and prioritise features while allowing flexibility as the project unfolds.
- Payment terms: Understanding what you need to pay and when is critical, especially for high-value projects. Your contract should specify whether payments are based on fixed costs or time-and-materials, and if they are tied to the completion of milestones or sprints. Be careful with scope creep, as projects can easily exceed their original scope, potentially leading to unexpected costs.
- Setting acceptance criteria: It’s essential to test the software as it’s developed. Your contract should define what will be tested, when, and by whom. Waterfall projects often have predefined criteria agreed upfront, while Agile projects rely on ongoing testing and feedback throughout development. The contract should also cover what happens if the developer doesn’t meet the criteria—such as rights to retesting, refunds, or additional work. Waterfall usually offers clearer remedies, whereas Agile can make it harder to define defects or delays due to its flexible nature.
- Agreeing on dispute resolution: Disputes can arise in any software project. A clear resolution process can help resolve issues quickly. This is particularly important for Agile projects, where less-detailed requirements can lead to ambiguities, and fast-paced development cycles make swift dispute resolution critical.
- Termination rights: Your contract should give you clear termination rights, providing an exit route for specific events. It must also outline what happens to the software, including the transfer of source code and deliverables, in the event of early termination. Negotiating termination without cause can be challenging in Waterfall projects.
- IP rights: Intellectual property ownership is often a key negotiation point in custom software development. While you may assume paying for the development gives you automatic ownership, suppliers often prefer to grant you a licence, particularly when their software includes reusable components. If owning the IP is critical to your business operations or competitive advantage, ensure the contract reflects this and covers issues like open-source licences, the developer’s ‘background IP,’ and third-party code.
- Source code access: Source code is vital, especially for bespoke projects. If you’re concerned about the supplier’s ability to provide ongoing support, negotiate a software escrow agreement. This ensures you can access the source code under specific circumstances, such as supplier insolvency.
- Data protection compliance: If your software processes personal data, ensure the contract includes clauses that comply with data protection laws like UK GDPR. The exact terms will depend on whether you or the supplier acts as a data controller, processor, or both. Overlooking this could leave your business exposed to significant penalties.
Managing risks to keep your project on track
Every software project comes with risks. Addressing them in your contract can help protect your business.
Key risk management measures include:
- IP indemnities to compensate your business if the software infringes third-party rights.
- Supplier warranties, such as guaranteeing the software is free from defects.
- Remedies for delays or defects, particularly for Agile projects where delays can be harder to quantify.
- Cost control measures to manage unexpected charges.
- Reviewing limitation of liability clauses to ensure critical breaches, such as IP or data protection failures, are uncapped.
Carefully crafted clauses reduce risks and help your project succeed.
Negotiating supplier contracts effectively
Typically, a good developer will have its own standard development contracts or terms, which you’re likely to find land in your inbox for signature before you start a project. In many cases, you’ll start off with their terms rather than negotiate your own development contract from scratch.
When you’re reviewing a supplier’s legal terms (particularly reputable suppliers with strong bargaining power) you may find a practical approach is best to balance protecting your business from risk and helping get the deal done.
Some key strategies you can consider are the following:
- Focus on key clauses: Pay close attention to high-risk areas like deliverables, timelines, payments, IP rights, and supplier liability. These provisions are crucial to protecting your business, so avoid getting sidetracked by lower-risk issues.
- Review terms carefully: Take the time to review the supplier’s terms thoroughly, even if you’re in a rush or eager to proceed. Larger or high-value contracts often involve negotiation, so don’t hesitate to push for changes that better suit your needs.
- Plan ahead: Think about potential negotiation roadblocks and consider middle-ground solutions. For instance, if the supplier won’t transfer IP ownership, could an exclusive licence with additional protections work instead? Having fallback options can give you the flexibility to secure an agreement that works for both parties.
Software development agreements are often lengthy and complex, and even small oversights can have serious consequences. If you’re not confident reviewing or negotiating the contract, it’s worth seeking legal advice. Given the significant time and costs involved in these projects, working with an experienced commercial solicitor can ensure your contract is legally robust and tailored to your needs. Our commercial technology solicitors are always here to help.
Protect your project with the right legal framework
When commissioning custom software, a strong contract tailored to your project’s needs and development methodology is essential to manage risks and achieve success.
By addressing key contractual terms, aligning the agreement with your methodology, and managing risks effectively, you can set the foundation for a smooth-running project that delivers value to your business.
Our commercial technology legal experts can provide tailored advice on drafting or negotiating your software development agreements.
