Software Development Agreements: 5 Key Areas to Consider

By Carla Murray, Partner and Head of Myerson Solicitor’s Commercial Team

A software development agreement is a contract between two parties where one (the developer) agrees to create a software application for another (the customer).

This agreement acts as a framework to clearly outline expectations, including intellectual property (IP) ownership, project scope, timelines, deliverables, acceptance criteria, payment structure and implementation process.

Whilst the specifics of development may vary depending on the project’s complexity, there are fundamental elements that should be addressed in every agreement.

 

5 Key Points to Consider for Software Development Agreements

 

The development methodology significantly influences how a software development agreement is structured. Two widely used methodologies are:

 

Waterfall

Traditional and sequential and suitable for projects with well-defined goals the Waterfall methodology requires a detailed initial project scope and specification and each phase must be completed before moving to the next.

Agreements using this methodology should detail:

• Roles and responsibilities of key personnel
• Specific deliverables at each stage
• Clear timelines and acceptance testing criteria for every phase

This approach leaves little room for flexibility once the project begins and emphasises structure and precision.

 

Agile

 

Agile allows for greater flexibility and collaboration and is a more modern and iterative approach. Instead of a rigid plan, Agile projects often start with initial workshops to determine high-priority features and a general roadmap.

As the project progresses adjustments are made, with regular feedback loops and ongoing collaboration. Agreements using Agile principles should provide for:

• A fluid development plan that evolves with changing priorities
• Regular review and feedback sessions to align expectations
• Flexibility to amend functionalities and timelines as required

This works best for projects where adaptability is key.

Charging Structure

 

The charging structure for a software development project depends on the chosen methodology and the level of detail in the project’s scope. Common structures include:

 

Fixed Cost

 

A fixed-cost structure is ideal for projects with a well-defined scope, typically those following the Waterfall methodology. This requires:

• A detailed scoping document outlining project requirements and timelines
• Provisions for managing out-of-scope work, including processes for requesting and approving changes
• Clarity on whether the fixed cost applies strictly to the original scope or allows for some flexibility in pricing

Customers often prefer fixed costs for predictability, but developers may require mechanisms to address unforeseen complexities. Clear parameters for cost adjustments should be agreed upon to avoid disputes.

 

Time and Materials

 

Under this structure, the customer pays based on the hours worked, making it suitable for Agile projects with evolving requirements. However, alongside offering flexibility, it can lead to cost uncertainty. Agreements should include:

• Defined budgets and delivery milestones to manage expenses
• Processes for reviewing and approving additional hours or changes to timelines

Regardless of the charging structure, a strong change control process is essential to manage unforeseen requirements, ensuring both parties can agree on adjustments to scope, cost and timelines.

 

Acceptance Testing

 

Acceptance testing provisions ensure the delivered software meets the agreed standards. Key considerations include:

• Scope of Testing: Clearly define what will be tested. Will it include individual modules, the complete software, or specific functionalities? If further developments impact existing features, will retesting be required?
• Testing Responsibilities: Specify who will conduct the testing and how it will be carried out. Consider whether tests will occur in a controlled test environment, a live environment, or using live data
• Failure and Rectification: Plan for scenarios where the software fails to meet the acceptance criteria. Address the below questions:
  • Will retesting be allowed, and at what cost?
  • How many attempts will the developer have to rectify issues, and within what timeframe?
  • Are there tolerances for minor deviations that still allow the software to pass testing?
  • Will any fees be refunded if the software consistently fails?
  • Are there circumstances where the software is automatically deemed accepted?

A well-structured acceptance testing process minimises conflicts and ensures a smoother handover.

 

Intellectual Property Rights

 

Ownership of intellectual property (IP) in the software must be explicitly outlined in the agreement.

 

Ownership of IP

Unless otherwise specified, the developer typically retains ownership of the IP. For customers to gain ownership, the agreement must include a formal assignment of rights. Customers often assume that payment equates to ownership, but this is not automatically the case.

 

Pre-Existing Software

Developers may use pre-existing code or software libraries to reduce costs. If so, customers should understand:

• The developer will retain ownership of this pre-existing code
• The customer may receive a license for use, often with limited exclusivity

 

Third-Party and Open-Source Software

 

The use of third-party or open-source components must be clarified. Developers and customers should agree on:

• Licensing terms for third-party software to ensure compliance
• Potential limitations imposed by open-source software, such as requirements for the entire software to be open-source

Understanding the implications of third-party and open-source components helps avoid legal or licensing issues later.

 

Confidentiality

 

Confidentiality is critical to protect sensitive information exchanged during the development process. Confidentiality Agreements should specify:

• Definition of Confidential Information: Outline what constitutes confidential information, such as software designs, trade secrets, and proprietary data.
• Obligations: Clearly state the obligations of both parties to maintain confidentiality, including restrictions on disclosure and use of information.
• Remedies: Specify the consequences of a breach, including potential damages or termination of the agreement.

If the developer is sharing proprietary methods or tools, mutual confidentiality obligations may also be required.

 

Other Areas

 

Additional considerations include:

• Termination Rights: Define the circumstances under which either party can terminate the agreement and the consequences of termination.
• Liability and Limitations: Clearly outline liability caps and any exclusions to protect both parties.
• Data Protection: Address compliance with data protection regulations if the developer will handle personal data.
• Dispute Resolution: Include mechanisms for resolving conflicts, such as mediation, arbitration, or litigation.

A well-drafted software development agreement is essential to ensure smooth collaboration and successful project outcomes. Addressing these key areas with precision can protect both parties’ interests, mitigate risks, and pave the way for a productive development journey.

For expert advice on drafting or negotiating your software development agreement, consult a qualified technology solicitor.