Guide to Software Development Agreements
A software development agreement (SDA) plays a crucial role in any software development lifecycle. They define your project’s structure and scope, clearly laying out any legal obligations, whether you’re creating a new app for a client or commissioning a web-based solution for your own company.
It’s essential to outline all key components, tasks and responsibilities in the contract, otherwise you could end up with unclear responsibilities or even run into legal disputes.
Our guide to software development agreements lays out what to include, helping you create a productive and fair deal that works for you as the customer and the software development agency.
Leverage I-Finity’s 25+ years of expertise in custom software development to have your software solution designed, developed and tested successfully.
What is a Software Development Agreement?
A custom software development agreement (SDA) is a legally binding document outlining the terms and conditions for creating a bespoke software solution. It’s vital to craft an agreement that accommodates both the customer and the development agency , whether you’re creating a SaaS product, API integration, or designing a website with custom functionality.
The agreement can help clarify:
- Scope of the work: Defines what the solution will do, its key features, and functionality.
- Timeline: Specifies the project schedule, including milestones and deadlines.
- Deliverables: Outlines what will be produced, for example, technical documentation, testing, and the finished product with its functionality.
- Payment terms: Details of how and when the customer will pay for the services and application delivered.
- Intellectual Property (IP rights): Determines who owns the Intellectual Property, the business logic and any other copyright related to the solution.
- Confidentiality: Protects sensitive information shared between the customer and development agency.
- Warranty and liability: Specifies how issues will be addressed after the digital product is delivered and outlines any limitations on liability, like what the development agency is responsible for, and how long they have to complete the work.
- Maintenance and support: Defines the level of ongoing support and maintenance the development agency will provide throughout the process and after the launch.
How SDAs Are Structured
The project management methodology used – typically Waterfall or Agile – will often influence the structure of your software development agreement.
Waterfall Schedule
This is a more traditional approach - sometimes called a waterfall agreement - involves outlining a detailed scope at the outset. The work is divided into distinct stages, each of which must be completed before the next can begin.
This method is highly structured and identifies the responsibilities of key individuals, expected deliverables, timelines, acceptance tests and success criteria. It offers clarity and predictability, making it highly suitable for projects with well-defined needs.
Agile approach
Agile working is more flexible and iterative. A high-level scope is built but does not capture detailed elements. This approach allows for iterative feedback to be taken during development along with placing early versions with end users for ongoing testing.
The Agile approach calls for regular check-ins to ensure both parties are aligned, progress is tracked, and continuous improvement is allowed. Ideal for those wanting to use the product without it being finished, you can start gaining some early benefits.
Charging Structures
The charging structure will largely depend on the type of contract used:
Fixed cost SDAs
A fixed-cost deal means the price is determined at the beginning of the process and remains unchanged. This model might call for a comprehensive scoping document – including the expected results, timelines, and detailed specifications – and adheres to the waterfall method. Parties will also need to make additional arrangements for out-of-scope work. This approach can also work for Agile, where the time estimated on scope items can be used to re-prioritise and/or rescope items in favour of early user feedback.
Time and materials
A time and materials arrangement charges the customer based on the actual hours worked. Commonly used in Agile frameworks, it allows flexibility and ongoing adaptation and is suitable when project needs are expected to evolve during development. Often a model that is used once a software solution has been created and/or is in use for ongoing development enhancements.
Choosing the right approach
Each method and pricing structure has its advantages and trade-offs. To decide the most suitable option, consider the size, complexity, and predictability of your solution and assess whether a rigid or flexible approach is the most suitable to support your business needs. Which better supports your goals?
What to Include in a Software Development Contract
When drafting your legal framework, it’s important to include the following:
- Intellectual property (IP) rights
Decide and document who owns the intellectual property. This could include source code and algorithms, business logic and workflows, or data structures and custom datasets. You should also establish whether, at any point, ownership transfers to the customer, remains with the development agency, or is shared, and state this clearly in the agreement. - Licensing
If the project uses third-party libraries or platforms, they should be listed explicitly in the deal. Specify their licensing terms, and explain how these terms affect ownership, control, and redistribution. - Data Protection
Clarify where data will be stored – whether it’s in the UK, EU, or another international jurisdiction. This has implications for data protection law compliance such as GDPR and others, so it’s important to define what constitutes confidential information, clarify who can access it and what happens to the data once the process ends. - Payment Terms
Outline the pricing model – whether it’s fixed cost or time and materials – along with payment instalments, milestones, assets, and terms for additional work. Read more about software development costs. - Scope of work & changes
It’s essential to agree on who will be responsible for each part of the work and how changes to the original plan will be handled if the workload evolves. Be specific about what’s needed at each stage, such as testing, sign-off procedures, and final handover items. - Warranties and indemnities
Set clear expectations around the quality and performance of the product. Define how any bugs, errors, or defects will be fixed – and importantly, outline what’s not covered under the warranty to avoid surprises later. Also, include details on each party’s liability limits, agreed indemnities, and insurance. This means that responsibilities are understood, and risks are fairly managed. - Termination
Even the best-laid plans can change. A clear termination clause ensures both parties know what to expect if the project needs to end early. Lay out how, and in what circumstances, the project can be terminated. Outline the specific scenarios where either party can end the contract – such as project delays, repeatedly missed deadlines, or failure to meet expectations. Allow for a graceful exit on either side. Unforeseen events like bereavement and illness can create a shift in business priorities. Just ensure you know what happens on the project, including who retains the rights to completed work. - Dispute Resolution
Disputes can occur sometimes despite everyone's best efforts, and it’s vital to prepare for this. The deal must define clear and fair resolution procedures that avoid costly legal action. It’s important to accommodate both parties in this, to avoid delivery delays and unnecessary spending.
Optional (but recommended) clauses
- Security
Specify measures for protecting sensitive information, user access controls, and security system compliance requirements. This includes UK government-backed certification schemes like Cyber Essentials Plus. - Support services
Cover the level of ongoing support, maintenance, and upgrades that the developer will provide. Define what is covered – such as bugs, tech support, or feature enhancements.
When to Hire a Contract Lawyer
In some cases, it may be necessary to hire a lawyer to ensure a smooth process and secure a legally sound and binding agreement. We recommend using a lawyer in the following situations:
- Complex projects: For large-scale projects with heavy investment and innovative ideas, we would recommend a solicitor. This can secure and clarify your IP ownership and give you a better understanding of any legal terminology in the contract.
- When you have in-house lawyers: It makes sense to have your proposed solution agreement reviewed by an in-house solicitor if you have one.
Streamline Your Software Development Contract with I-Finity
A software development agreement is a strategic and smart way to define your project specification, create timelines and build a solid foundation for collaboration with your chosen development agency – and nobody knows the ins and outs better than a digital solutions agency.
Start your software development with I-Finity today – be assured we protect both parties with the right contract in place.
