Custom Software Development Agreement Important Considerations

1 year ago
NogaTech IT Solutions LLC
Custom Software Development Agreement Important Considerations

Creating a software development agreement is a vital step to ensure the success of the cooperation between the software vendor and a client. It safeguards each of the parties and guarantees that the final product fulfils customers' needs.

For software development contracts to benefit both parties, the customers and software companies must know what areas should be added to the arrangements. Although every agreement will be unique in its particulars and nuances, they all share the same basic structure. We'll dive into the various types of software contracts and explain the sections you should include.


Different types of Software Development Contracts

All Software Development Agreements can be classified into two major categories: Fixed price, Time, and Materials. Each of them has its advantages and drawbacks, and the choice between them is contingent on the type of project.


Fixed price 

Fixed price contracts establish the price associated with software development before the development project begins. This means that the customer and a software company decide on a project's fixed cost', which will not change throughout the whole duration of development.

Software development companies employ fixed-price contracts when:

  • Receive specific requirements for the project (SRS) and also have prepared specifications for the product;
  • You will need to create the smallest or a brief-term project;
  • create a Minimum Viable Product (MVP).

In the case of fixed-price contracts, software development teams take some time before the start of the project to study and analyze the specifications for the product, calculate the cost of the project and duration, and then negotiate it with their clients.


Time and Materials

Time and Materials agreements (T&M) are more flexible than fixed price ones. They do not require establishing the project's requirements from the very beginning. They can instead alter with the development of the project and are generally determined by the project's scope and hours spent.

The customer can alter the application's specifications and modify the application's features, actively helping to develop the process. However, the costs can increase because of constant change, and it's crucial to monitor the project budget.

T&M contracts are employed in the following situations:

  • The project's requirements are constantly changing. Specifications;
  • The project's scope cannot be determined at the start of the project due to the absence of requirements.
  • lengthy and complex projects;
  • The development team employs the Agile method and aims to improve the product through each development iteration in response to feedback from the users.


Important Features of the Standard Software Development Contract

When a software vendor and the customer have decided on which partnership model they wish to implement, the following step would be to add the appropriate sections in the agreement to suit the interests of both parties best.


Services provided and Tech Stack

A description of the service offered by a software vendor is the fundamentals of software contracts. It is usually based on the specification of the product, which determines the scope of the project.

It's essential to look at the methods for handling deployments of code and quality checks and the implementation of any modifications. To ensure that the changes are made clear to both parties involved, Some companies include the changes on an application for change requests and a change request document that includes an explanation of the change, the impact it will have on the project, the cost, and the time.


Deadlines for Projects and Costs

The project section outlines the timeline for the project and the development expenses, which include the developer's hourly rate milestones and deadlines in development, as well as other aspects. So the software provider and the customer can better understand each other's development rights, payments rights, and obligations. It can also have the responsibilities of both parties in case they violate the development or payment schedules or plans.


Acceptance Criteria

This section outlines the parameters of a cooperative's effectiveness. The criteria for accepting work should be written in plain language to avoid confusion and disputes.

Before beginning an application development process for custom software, the software provider and a user must create acceptance criteria for the application based on the specifications for the system or the services offered.

In fixed-price agreements, a customer is awarded a Certificate Of Acceptance when the project is nearing an end. The certificate indicates that the application meets all contract requirements, and the software provider and the customer agree on an efficient project's completion. The developed application meets all of the standard specifications.

In the case of a Time and Materials contract, customers receive an annual report and an acknowledgment of the agreement that lists the tasks completed and hours spent on the assignments by their team.


Intellectual Property Rights

This section identifies who owns the software and is among the most crucial elements of the contract. It's crucial to clarify that the product is the sole property of the purchaser. This implies that the company developing software does not have the right to use, develop modifications, sell or rent, benefit, or any other use of the developed software. In this way, the created software's source code is the client's ownership.



This section is designed to protect companies that develop software and the customer from sharing sensitive data with any third party. The software provider and the client can decide what data is exposed and the penalties which will be incurred for disclosure. If a confidentiality agreement contains numerous details, it could be incorporated into a non-disclosure contract (NDA) and then attached to the specific software contracts.


Penalties and Dispute Resolution

The process of establishing the procedure for dispute resolution will help both parties avoid the huge expenses incurred through judicial systems. In this case, both a software company and the customer may opt to use mediation or arbitration.

The arbitration process will involve an arbitrator or panel who will reach an end-to-end decision after looking at the arguments from both sides. In mediation, two mediators and the two parties discuss their differences together.



The warranty section covers a range of contractual obligations related to the project and product that both a vendor and customer are required to fulfil. In the majority of cases, they relate to the software's functionality. 

If problems or errors in the software are discovered, the company is required to correct or replace the problem. Typically, the warranty runs for 90 days. However, some companies may extend it to 12 months after the date on which they accepted the warranty.


Bottom Line

Most companies contemplating creating their business software with IT outsourcing services face two significant issues in deciding on the right software provider and information to include when developing software agreements.

A well-thought-out and structured agreement can help software companies and their customers to protect their rights, reduce unanticipated expenses, and provide details on their obligations. While every software development project has its specific agreement,

noga author

Author: Manmohan

Manmohan is the author of NogaTech IT Solutions LLC blog content, Software Developer, Freelancer on Upwork. Manmohan created NogaTech Software Development Company and write its all technical blogs. He brings his decade of experience to his current role where he is dedicated to educating and inspiring the world how to become better technical writer and also offers development. You can find him on Linkdin @ Manmohan-Yadav.

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