Successful Software Contracts


Software Selection is only the first step.

Installing, supporting and possibly customizing the application may cost more than the software itself, and it is also where expensive mistakes happen.

Protections included in written contracts are a necessary evil that should be given your detailed attention and even though you may have done this before, it is helpful to review the overall process again. There are many publications devoted to the subject of software contracts and this paper just scratches the surface. While you may consider getting outside assistance, as a decision maker, you should also gain this knowledge yourself.

The Goal

The first step in the negotiating process is to understand what’s important to you no matter which vendor or application is chosen

  • What are the key protections and services you must have?
  • What kind of guarantees will you need?
  • What intellectual capital do you want to keep?

These are areas that should be explored in advance of your vendor selection and you may even decide to include it in the RFP to ensure that each vendor knows the importance ahead of time.

Note – Spend some time understanding the vendor’s key interests too. This will help build the relationship and you will find out what their “must haves” are and if any of them are in conflict with yours.


 

The 5 Contracts

There are up to five contracts that should be completed as a part of any software procurement; License Agreement, Software Maintenance Agreement, Support Services Agreement, Professional Agreement, and Hosting Agreement.

The software vendor may have an interest in simplifying or combining items; however this can dilute the protections you need in each one. Each contract has discrete components and you should insist that they be separate.


 

The License

The License Agreement can be as simple as a bill of sale. It states that you bought the product and/or own the license to use it and it will likely contain restrictions on the number of users and where and how it can be installed.

However, the License Agreement may also become the Master Agreement that all the other contracts refer back to, so it’s worth the extra time to get the details right. The most important point here is to understand the differences and costs between the license for the application and the ongoing maintenance and support of it.


 

Maintenance

The Software Maintenance Agreement is put in place to insure that regular updates and fixes (sometimes called patches) are included in the service provided after the sale; there is usually an additional fee involved for this.

Make sure to review items such as how often patches occur, how they are tested, and what is the schedule for release. Document how long the application will continue to receive these updates and ask about any planned future enhancements to the current functionality.

Include everything in the agreement.


 

Support

Support Agreement content can sometimes be included in the Maintenance Agreement but if it is, make sure the service level indices are spelled out for each.

Customer Support is about the vendor’s responsiveness to your needs and it should clearly articulate your expectations and any potential penalties to the vendor for failure to meet them.

Committed hours of operation and guaranteed response times can mean very little if your only recourse is to threaten default of the contract. If your software project includes customization work, it should have a separate Statement of Work to include deliverables, costs, and timelines for completion.

Hourly rates may be negotiated in the Support Agreement, but additional work might be better considered on its own.


 

Professional Agreement

A Professional Agreement (sometimes called a Business Associate Agreement) is to protect both party’s privacy and intellectual property.

Many of the clauses contained in it may also be in the Master Agreement; however, it is recommended to have the detail in both as the Professional Agreement may outlive all the other documents.


Hosting Agreement

If you decide to elect a hosted option over on-site installation (a reasonable choice given improved bandwidth and other efficiencies), be sure to have a comprehensive Hosting Agreement.

This agreement can be with your application vendor or a third party hosting provider, but the level of detail should be the same. Data Center Hosting Agreements are complex and will have issues relating to security, cyber-liability and disaster recovery just to name a few.

It may be wise to delegate this to knowledgeable technology staff with higher level professional skills and consider an experienced consultant to assist.


 

Take Control

It is a truth that whichever party writes the contract, it will be slanted in their favor.

Because the purchasing party usually lacks the skill and time to do it, the process is started with the vendor’s “boiler plate” contract. Some vendors may even insist on using their own contract and that may be a good sign to start looking somewhere else.

It’s important that you write the initial language because the structure of it and even small changes can impact you down the road. There are many templates that can get you started or an experienced professional can save you a lot of time.


 

Get Help

Software contracts should always be reviewed by an attorney with specific training in the area that the software is to be used.

This can be expensive, especially if you ask them to create them. They probably have not been involved up to this point so a consultant can be very valuable in helping you construct the initial documents and negotiating with the vendor for how changes will occur.

Software vendors have more experience in this area than you; arm yourself by taking the time needed, and strongly consider finding someone with software contract expertise to ensure that you are in the best position possible.


 

Be Meticulous

Everything is negotiable…until the contract is signed.

It is much harder, if not impossible, to change or add anything to the agreements once they are completed. Make sure you understand every clause and that every item that you discussed is included before you sign.

Assume that if it isn’t written down, you aren’t going to get it (unless you’re willing to pay more for it later).


 

Recourse

Remedies are the most important thing to include in all of these agreements and they are often overlooked, or worse, negotiated away.

Suppose you find that your vendor is not honoring the response times agreed to. If there is nothing in the contract that states the vendor will have a penalty or that you will receive a credit, your only recourse might be to find them in default.

Ending the contract is usually not a viable choice, so you end up stuck with very limited options.

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