9 “Conspiracy” Clauses in Software Contracts
The cost to develop proprietary information technology can be astronomical, but players who want to stay in the game have to pay for custom software development. If you’re hiring an outside contractor to develop your custom software, there are 9 clauses in custom software development contracts that you must take extremely seriously or risk losing a lot of money, time, and even your most valuable information.
Why believe in us? We’ve been in the custom software business since 1999. We’ve seen bad and worse. In our early days, on we made some horrible mistakes that almost put us out of business. We also saw small and medium sized businesses getting robbed by unscrupulous custom software companies.
It’s simpler than you think to shell out a lot of cash for custom software and NOT get what you expected. Custom software is an “intangible.” And beyond that, it’s not a Pepsi – it’s not same in every gas station.
I am hoping that this article will serve small businesses like yours that are looking to buy custom software, and give you a significant edge on legal side. We’ve put together some tips about what to watch out for and have a sample CS contract that will cover 95% of the protection you need. The remaining 5% is open for business specific material and other options and conditions that you would like to include.
Your only actual protection against spending huge amounts on bad custom software is to understand these “conspiracy” clauses before you seal the deal. Here are some nuts and bolts to give you the edge when it comes to entering into software contracts.
Clause 1 – Specification/Spec Document
Make sure the spec document is extremely detailed. The fewer the specs, the more room for error and interpretation. When designing custom software, the last thing you want is for someone who knows nothing about your business or your customers making judgment calls about gray areas. Read it multiple times. Study it carefully. Sleep on it. Then read it again. Programmers will follow this like a Bible.
Clause 2 – Delivery Schedule
The delivery schedule should list the exact delivery date for each deliverable or software release. This is how you find out along the way whether or not your programmers are on schedule. You wouldn’t believe how many businesses fork out cash each pay period only to find that the programmer is only halfway finished on the date the project was supposed to be finished.
Clause 3 – Payment Schedule
A payment schedule sets forth the amount and time of the developer’s compensation. Push the risk to the back of the project. Let’s assume that a project’s development project is 6 months. Your payment schedule may look something like this:
- month #1 you owe – 10%
- month #2 – 20%
- month #3 – 30%
- month #4 – 40%
- month #5 – 50%
- month #6 – 100%
This will do two things for you. First, you can cancel early with minimal loss if you can tell right away that the project is going sour. Also it will motivate programmers to have a larger payoff at the project’s completion.
Clause 4 – Delays
Offer the developers a bonus based on a success condition. It doesn’t need to be a huge bonus; just some stake attached to the success. If the developer completes the work according to the timeline set forth in development plan, you might agree to pay a bonus of $500. If the developer finishes the work and is late between 1 and 60 days, the bonus is lost. If developer is late for more than 60 days, give yourself the right to subtract 5% percent from the total amount for each month of delay caused by the developer.
Clause 5 – Maintenance
Established pricing for the support later on. Programmers know that you will need support for the software after completion of the initial project. Getting support prices in writing before hand means that they won’t be able to bargain with an exorbitant rate at a time when you have limited options.
Clause 6 – Indemnification/Code Ownership
All of the code, algorithms, documentation, derivatives—everything, should be 100% yours upon completion of the project. Some developers will underbid, expecting to later create a product or resell the same software to your competitors.
Clause 7 – Warranty
Get an agreement from the developers in writing that you will receive 6-12 months of defect and bug fixes for free.
Clause 8 – Confidentiality
Confidentiality is extremely important. Over the course of the project, your software developers will find out intricate details about the exact inter workings of your company such as your employee’s names, your procedures, your forms, how you get your customers, who your partners are, and access to all of your pricing information. Make sure they can not become a competitor or disclose that info.
Clause 9 – Mediation/Arbitration
Make sure that any court proceedings are in your state. You don’t want the extra cost of travel in case something goes really bad.