Key Aspects, Types and Sample of Contract for Outsourcing Software Development

Hiring an outsourcing software development team? Make sure you haveвш a good outsourced software development contract. A written agreement helps you communicate what work is being done and how much it will cost. The contract should be clear, unambiguous, mutually beneficial, and contain penalties for breaches. We at ProCoders have drawn up hundreds of contracts already, and in this article, we gathered all the important points to stick to while you deal with contracts for outsourcing software development. Let’s get started! 

How does a Software Development Outsourcing Agreement Protect Your Project?

An outsourced software development agreement is an essential tool to use when you engage a team to develop your software. The agreement should protect your project and enable you to control the process, handle risks, and establish expectations with a development service provider.

1. Intellectual Property Protection

A contract should clearly state that the outsourcer will not use or disclose any of their client’s confidential information, including trade secrets and source code. It should also clarify that the client owns all rights to the work done by the outsourcer on their behalf. 

At ProCoders, we sign an NDA with the client immediately when we are just starting to discuss the project scope. Therefore, not only our software developers but all company members will not disclose your information about the project.

2. Dispute Resolution Help

An outsourced software development agreement helps with dispute resolution between the client and developer efficiently if problems arise during development. An established process for resolving disputes can save time and money while ensuring that all parties are treated fairly during disagreements.

3. Costs Control

Programming can be expensive. An effective outsourced software development contract can help prevent unexpected expenses by including clear milestones and deliverables that must be met before payment is issued and by setting clear financial penalties for missed deadlines or substandard craft.

If you’re unsure what exactly should be done for your project, ProCoders can offer you to make a Discovery Phase first and then sign a contract (more about this later). 

4. Quality Control

Outsourcing agreements ensure that all aspects of developers’ work meet your standards and expectations. You can specify exactly what level of quality you expect from your vendor and what kind of testing will be done before release.

5. Ensures reliable communication

If you’re working with an offshore software development outsourcing company, you may want to consider having an agreement that includes guidelines on how often to communicate with them. This will help ensure that everyone is on the same page and that there are no misunderstandings about how often you expect communication from them (i.e., daily updates), how often they expect communication from you, and whether there are any circumstances under which these rules may change (such as emergencies).

For example, at ProCoders, we always respond to your questions within 30 minutes during working hours. If you’re located in the United States (and we’re based in Central Europe), we can organize our schedule to match the day or night shift at your office. This way, your team and ours are always working on your project.

Types of Software Development Outsourcing Contracts

No matter if you are looking for software programming outsourcing services or some other type of offshore development. Before gathering quotes, it is always advisable to understand the types of outsourced software development contracts offered clearly. This section also includes outsourcing software development pros and cons for each agreement model.

Fixed Price

In the fixed price model, you agree to pay a set amount for the entire project. The contractor commits to delivering a high-quality product within a specific timeframe for this price. No additional payment will be made if any delays occur in delivering each milestone or if any additional work needs to be done after the completion of that milestone. In this way, the client is protected from unforeseen costs that may arise during development. 

Fixed price is suitable for small projects where the scope of work is clearly defined. You can also use a Fixed Price when you know exactly what you need and clearly understand how much it will cost. If you’re working on a large project, it’s best to choose a different way of work, like a Time&Materials contract. 

In ProCoders, we have small Fixed Price projects – usually up to $15,000-$20,000. On such small projects, you can see the whole development process. It is essential to understand that this is impossible on a big-scale project as the scope of work can’t be predicted.

Pros

• Little to no risk for unexpected changes in budget, timeframe, or expectations
• You won’t have to worry about unexpected costs 
• The set price attached to each deliverable helps you plan better

Cons

• You can’t change the scope of work once work has started without renegotiating the outsourcing software development agreement or paying more money. 
• You may also be locked into unrealistic deadlines that may compromise project quality.

Time and Materials (T&M)

The T&M contract allows you to control costs by specifying how many number of hours each task should take and how much you will pay for each hour worked. You also get complete visibility into how much money is being spent on your project at any time. Because there isn’t an upfront cost associated with using this type of contract, it can allow you to get started quickly.

Time&Materials is an option for small projects that can be scheduled in advance. It’s also great for starting a project without extensive planning or scheduling.

For Time&Material contracts, ProCoders have a special Reaction period. If you want to give us a task (for example, to develop a landing page) on a Time&Material basis, then our team will begin to study your task within two working days and will start to do it within a week, as our specialists are usually busy on big-scale projects.

Pros

• Flexibility: you can adjust the scope of work as needed to complete the project
• You can start working with the outsourcer immediately. No long-term commitment or any other obligations are required
• You don’t have to pay for unused hours or days

Cons

• It can become difficult to ensure clarity if there are no fixed deliverables
• It could lead to overspending or underbudgeting

Dedicated Development Team

Some companies want their dedicated team to work on their projects full-time instead of hiring contractors who may not be available when they need them most due to other commitments or other clients’ priorities taking precedence over yours. Dedicated teams often have a full-time or part-time project manager and a Quality Assurance engineer. 

Pros

• Dedicated teams can provide more stability for your business.
• Full-time attention from developers on your project. Check the sample of contract for outsourcing software development below.
• Access to dedicated resources for your project

Cons

• It’s hard to assemble an excellent dedicated development team unless you have access to a service like the ProCoders model
• Dedicated development teams are usually more expensive. However, ProCoders uses the outstaffing model to keep costs affordable.

How to Profit from T&M Contracts with the Right Software Development Outsourcing Contracts?

Define the scope up-front and estimate how much it will cost to complete

One of the biggest problems with a T&M outsourcing software development agreement is that they don’t define what needs to be done or how long it will take. This means you don’t know how much it will cost until you start working on the project.

However, some services may be helpful for it. For example, ProCoders have created the discovery phase service, which we have already mentioned above, for this purpose.

Put a cap on costs

Building a software development outsourcing contract template can help you budget accurately and keep track of your spending throughout the project’s life cycle without fear of going over budget or incurring unexpected expenses.

Create Milestones Throughout the Project

To ensure your project is on track, set milestones throughout its development. This way, you can see your progress at every development stage and stay within budget.

Know Your Needs Before You Start a Project

Before you start a project, make sure to understand your needs and the expectations of the outsourced company. This way, you will know how much time and money it takes for them to complete your project successfully.

Explore the Outstaffing Option

The outstaffing option gives you control over your budget and allows the outsourced software development company more flexibility in staffing levels — both are crucial factors regarding T&M contracts.

10 Key Aspects of Software Development Outsourcing Contract

When initiating an outsourced software engineering relationship, you must be careful with the language in your outsourcing software development agreement. Partnerships can often be successful when much cooperation and hard work are involved. But when stakes are high, and deadlines are given, failing to create a contract that lays out version control, promotion of new features, licensing rights, and other items can lead to expensive litigation or a damaged relationship. To prevent mistakes, you should thoroughly study the next points that must be included in the contract.

Scope of Work

It should include what you expect from your vendor and any specific features or functionality they will be responsible for delivering. The scope should also include how much time and resources are required for the project.

Project Completion Specifications

A software development outsourcing contract should specify exactly when the project needs to be completed, including any critical dates such as launch dates or regulatory deadlines. This helps both parties manage expectations and avoid disputes in case of delays or other issues with the project delivery schedule.

Payment Terms

Ideally, payments should only be made after the delivery of each milestone or upon completion of the entire project. Some companies pay a portion before delivery (to cover initial expenses). In contrast, others prefer paying once they are satisfied with the result and know that it meets all requirements.

Nondisclosure

The NDA in a software development contract ensures that confidential information cannot be given to the contractor for use in any other project. However, at the same time, ProCoders specify in the contract that our developers can use open-source solutions to speed up development — provided that the client is aware of this and consents beforehand. 

Intellectual Property Rights

Our clients often express concerns about a company’s ability to protect its intellectual property rights before signing a contract. However, the nondisclosure agreement clearly states that all work performed belongs to the client only. Usually, companies grant the developers working for them a non-exclusive, irrevocable license to use IP while working on their project during the term of this agreement.

Acceptance Testing

This section mentions what tasks should be done before the final testing, who performs acceptance testing, and at what stage of development testing should begin. It also mentions how long acceptance testing should take and what should be done if there are any issues with the final deliverables. However, it should be noted that some outsourcing companies do not include a clause in their contracts regarding testing.

In the case of ProCoders, we provide the QA team during the work on the project, that’s why the ongoing testing is already included in our services. 

Liabilities and Warranties

The contract template for software development outsourcing should clearly state who is responsible for what, including what happens if a dispute arises. This can be done through warranties and liability clauses that specify what happens if something doesn’t work as planned or if it causes damage to property or personal injury.

Notice Periods

When signing an outsourcing contract, pay attention to the notice period clause. For example, clients who wish to cancel their contract with a developer should give notice at least 30 days before their next payment is due.

Confidentiality and Data Protection

Data protection agreements specify how confidential data will be stored and handled during development processes, ensuring that data is protected from unauthorized access or theft throughout the software product lifecycle management (SPLM).

Jurisdiction and Applicable Law

The contracting parties may agree on the jurisdiction of their contract. If they do not, then the outsourcing software development agreement will be governed by the law of the country where the contractor is based. Both parties should agree on the applicable international laws and statutes if the contractor is based offshore. 

Types of contracts in ProCoders

ProCoders offers three types of contracts: for the Discovery Phase, Staff Augmentation, and Dedicated Team services. All our contracts combine the following points: 

• what services we provide; 
• how we provide them and in which terms;
• a confirmation that the delivered service matches what we promise;
• payment in the agreed currency and a provision for redress if there is a dispute; 
• fines (fines are not specified in the contract but are determined separately for the client). 

However, the contracts are different for every service. Let’s take a closer look.

Discovery Phase

The Discovery Phase service provides a study, analysis, and estimation of what should be done and how much time it will take to work on the client’s project before signing a contract for the dedicated team for the project development. 

The process at ProCoders is the following: firstly, the client provides us with all their materials. Then, we study the information in detail and discover what business problem we should solve. After that, we do all the analysis and research. Finally, we provide a client with the result and precise estimations of our findings. 

The discovery contract states the exact numbers of what ProCoders are expected to do: a precise number of frames, an exact number of designs, an exact number of screens in prototypes, etc. 

Suppose the client wants to integrate something into the application. In that case, we have the API testing phase, documentation study, etc. In this case, the discovery phase results will include:

• a report from the architect on the study of the discovery documentation, in which our architect tells which data we can get, whether a particular API suits, etc.;
• architecture design software/cloud architecture design. In this case, we gather the architecture block scheme and show which services, databases, integrations, etc., are used. 

Staff Augmentation

When working with ProCoders on Staff Augmentation, we provide you with one of our developers who can help you throughout your working day and is fully managed by you. We include a trial period in our contract (1-2 months) so that if you determine that a developer is not suitable for you, we will replace them with a more competent specialist.

Also, in the ProCoders contract, we include fines. For example, if a client wants to start working with our developer directly, they get a fine, as they take away our developer from the company they work for at that moment. At the same time, for such situations not to appear, our developers sign a contract that they cannot start working directly with the client. 

As for other costs, the next ones are included:

• business trips. If a business trip is planned, the client pays for it. 
• deposits. ProCoders also take a deposit that a client pays at the beginning of cooperation, which closes out the last month of their contract with us. It is done in terms of compensation for any work performed after their warranty expires.

Dedicated team

ProCoders can provide a Dedicated Team service for your project. Usually, we specify in this contract the next points:

• team’s schedule
• who works in the team
• the skill set needed
• how many hours per week and month they would work on the project
• when employees can take days off, and how we inform them about this (we include holidays and specify them)
• who pays for holidays, days off, work on the weekends, overtime, and vacation

When ProCoders talk about high-quality outstaffing, we mean that we provide you with an engineer who has passed all our technical interviews, and their knowledge would match the technologies you use.

We can also provide you with only one new developer for your team. If a developer is not suitable, then we will change him. Usually, ProCoders do a replacement in 5-7 working days. If suddenly a new developer does not meet the expectations, we can offer a Trial period if a client has doubts.

Finally, clients must inform us 30 days in advance if they want to terminate the contract. 

Generally, the contract terms are the same as in the Staff augmentation contract. The difference is only in the teamwork: a dedicated team makes decisions for their client on their own (what we do, what we contribute, what we can’t contribute, etc.), while the Staff Augmentation service supposes that a client manages a team provided by ProCoders on their own.

Sample of Contract for Outsourcing Software Development from ProCoders

At ProCoders, we use the outstaffing model to keep the costs of outsourcing low for our clients, in fact, by up to 40 percent in certain instances. Our process is effective because we are dedicated to entering into valuable agreements with our clients looking to assemble a vibrant offshore development team, including contract staffing services. See the following sample of contract for outsourcing software development for an idea of how we conduct our processes according to our software development outsourcing guide.

Developer’s Duties

In our software development outsourcing contract sample, the developer will, during the term of this software development outsourcing agreement:

• Design, develop, and test the project to meet the specifications provided by the client.
• Make reasonable efforts to complete all milestones within their designated timeframe.
• Notify clients in advance of any planned absences that may affect their timely delivery of work products, including but not limited to planned vacations, family leave, medical emergencies, or religious observances.
• Meet with the client regularly (e.g., weekly) to discuss progress toward completion dates and other issues related to this agreement.

Compensation

• The client agrees to pay the contractor for services rendered following the terms and conditions. 
• The contractor agrees to perform services professionally and consistently with generally accepted industry standards. 
• The client shall pay for all services the contractor provides according to an agreement and shall reimburse the contractor for all expenses incurred by the contractor in connection with performing such services. 
• The client will pay the contractor within 30 days after receipt of the invoice unless agreed upon by both parties. 
• If payment is not received within 30 days, an interest charge of 1% per month or the highest amount permitted by law, whichever is less, shall be added to any past-due balance until paid in full. 

Acceptance and Rejection

In the sample contract for outsourcing software development:

• The client must test the developed software for bugs and defects before the final version release. 
• The client agrees that if they find any defect or bug in the delivered product, they inform us within 24 hours after receiving it. 
• If they find any defect or bug after this period, we won’t be liable for any loss or damages caused by such an issue;
• The client agrees that if they accept our product without finding any issues, we will not be liable for any loss or damages caused in the future.
• If the client wants to terminate a contract or a developer wants to quit, they must give at least 30 days’ notice. In the latter case, we will find a replacement during this time.

Conclusion

• If you are planning to hire a team, you need a good software development outsourcing contract template. The contract should be clear, unambiguous, mutually beneficial, and contain penalties for breaches. 
• A dedicated development team may be required if your organization has a specific project in mind for which you need a specialist team that can devote all its time and resources to your business.
• At ProCoders, our process is effective because we are dedicated to entering into a valuable outsourced software development agreement with our clients looking to assemble a vibrant offshore team.