Software Contract Negotiations: Best Practices and Tips for 2020

Marcin Małaszuk
10 March 2020 · 6 min read

An effective software contract is just the first step toward software development cooperation — but it's extremely important. In fact, it could be the most important part of the process...

Failing to understand a contract or not complying with the contract's terms can have a considerable impact on your business and even result in litigation. Here are some best practices for dealing with software contracts in 2020.

What Exactly Is a Software Contract, Anyway?

A software contract — often called a custom-software development agreement or software license — is a legally-binding arrangement between the owner of a software product and you, the buyer. The contract enables you to use a piece of software legally.

Many businesses, regardless of their size, have several contracts with software owners and they often maintain these through a contract management application. This makes it easy to see which contracts are about to expire, which need to be renewed, and so on. You don't need to do this, though.

A software contract will usually consist of a non-exclusive license that lets you operate on the software in your commercial organization. The contract will include all of the provisions of the agreement between you and the owner. These contracts can be lengthy, wordy, and full of jargon, so you need to be able to decipher them!

Often, a copy of the source code of the software is kept with an escrow agent and released to the customer (you) if the owner fails to comply with the terms of the contract. Nowadays, many programs contain special code that allows the software owner to disable the software if you fail to comply with the terms of the contract. This basically means you can't work on the application anymore if you breach the terms of the contract!

What to Do When You Receive a Software Contract

This all depends on the scope of your business and what you plan on using the software for. If the application is essential to your business operations, you might want an attorney who specializes in commercial law to look over the contract and negotiate with the software owner. Other times, you might be happy enough to read over the contract yourself and contact the software owner if there is anything you want to change or add.

It is important that you read every software contract, from start to finish. Although these aren't the most exciting documents in the world, software agreements stipulate what you can do (and what you can't do) with all the essential digital tools that you use in your business.

Follow the tips on this list and you will be able to negotiate the terms of your contracts, check for hidden charges, seek the right advice, and truly understand what a software owner expects from you.
Follow the tips on this list and you will be able to negotiate the terms of your contracts, check for hidden charges, seek the right advice, and truly understand what a software owner expects from you.

What Type of Information Is Included in a Software Contract?

This depends on the type of software you are using. Most IT contracts will include some of the following information:

  • Cost: The cost of the software to use over a period of time. You may use the Software as a Service (SaaS), where you have a license for the program on a subscription basis.
  • Specifics: The specifics of whom can use the software and where. There might be geographical limitations on the software you are using, for example. Or the software owner might limit the number of users/stations the program can be installed on.
  • Intellectual Property: This is important information about who owns the software and what you need to know about copyrights, trademarks, etc.
  • Data Protection: This is important information about what the software owner can do with the data you input into the software. For example, whether the owner can share data with third parties.
  • Termination: Whether the owner can terminate the agreement because you fail to comply with the terms. A good software contract will outline the termination process in full.
  • Information About IT Sourcing

Think About Costs

Cost is usually the biggest deciding factor when choosing new software for your business. Sometimes, the software might seem like a good deal and provide you with a return on your investment. However, software owners might forget to tell you about hidden fees and other charges which could impact your bottom line.

This is why it's so important to read through any software contract. You can find out if there are any hidden fees for terminating the contract early, for example.

Read also: How Much Does Software Development Cost?

Don't Hesitate to Get Legal Advice If You Need It

We touched on this earlier, but it's always a good idea to seek out legal advice if you don't understand a software contract. These documents can be wordy and span several dozen pages, which makes it difficult to understand all the conditions. The technical language can make it very easy to overlook the contract's most important terms.

A contract attorney might require an initial investment, but hiring one of these professionals could prove beneficial in the long run. Breaking the terms and conditions of your software agreement could result in litigation, so it's always wise to consult with a legal professional in the first instance.

Don't Be Scared to Negotiate

Many business owners don't like negotiating with their software owners, but doing so could provide you with a heap of benefits. If there's something you don't like in your contract — such as a hidden cost, for example — don't just put up with it. Instead, talk to your software owner and come to a new arrangement.

Software contract negotiation is all about taking into account both parties — you and the software owner. Talking over your contracts could benefit you in the long run.

"Managing a negotiation is like conducting an orchestra; there are many moving parts, and they all need to move in harmony to get the best results," says Computer Weekly. "Make sure to lay down some rules for the supplier, allocate sufficient time for the process, and ensure that there are no information leaks."

Make Sure Your Staff Understand Your Contracts

Just because you understand the terms of your software agreements, it doesn't mean your staff will. This is why it's essential that you talk to them about the scope of the contract and how it will impact the business as a whole.

If one of the terms of your agreement is to limit the number of people who use a particular program, for example, make sure your staff understands this. Remember, failing to comply with the terms of your contract could result in expensive legal action, so train your staff properly.

But, before you do any of that, make sure you understand the contract yourself! If you don't, ask the software owner for clarification:

"It’s amazing how often tech contracts fail to say what the technology is supposed to do. It’s amazing too how many contracts do explain the technology’s function but in terms so vague that they’re useless," says Capterra.

Your Software Contract Might Change

Don't think that your software contract is the last time you'll hear from a software development company or software house. Contracts can change over the years, and you'll likely need to review the terms and conditions associated with your contract in a year or two.

When software companies make organizational changes or add features to their programs, they often update their terms and conditions, and you will be asked to sign a new contract. If you have several pieces of software, it might seem like you're constantly reading contracts, but it's important that you read through documents properly every single time. Even the smallest change to a document could have a significant impact on how you use the software in your business.

Take Your Time

You don't need to fill in and return a contract straight away. You should take your time and think about what's being asked of your business. If there's something that doesn't feel right, negotiate with the software owner. Then, when you're ready, sign the document.

Don't feel pressured into signing anything. Sometimes, you might need to consult with suppliers, investors, or external service providers about the terms of your contract, and this can take time.

"Negotiating software contracts is as much an art as it is a science. Of course, you need to have enough time to prepare and get all the facts right," says Computer Weekly. "But you also need to manage people, both from your own organization as well as external suppliers."


Software agreements don't have to be complicated. Follow the tips on this list and you will be able to negotiate the terms of your contracts, check for hidden charges, seek the right advice, and truly understand what a software owner expects from you.

If you’ve had any doubts about signing a software development contract, we hope this has been helpful. We’d also love to talk to you more about software development outsourcing and its aspects. Let’s contact!

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