Outsourcing Contracts for Software Development

No matter which shore you choose, anytime you engage an outsourcing company, you’ll need the right contract in place before committing to anything that’s legally binding.

Done right, outsourcing contracts provide a detailed outline of everything expected from the service–from payments, protections, and penalties to milestones, deliverables, and a set of KPIs that measure project success.

In this segment, we’ll look at different contract options and what elements should be present before you sign anything.

Contract Types

Software development outsourcing contracts should always provide clarity around what type of payment arrangement you’re working with. The contract type you choose should align with the size, scope, and objectives of your project, as well as the outsourcing model (or shore) you plan on using.

Here’s a quick overview of some of the more common contract types:

  • Time & Materials. Time & materials contracts represent a type of arrangement where the client pays the vendor for time worked and materials used. Time & materials contracts are typically used for short-term projects where the scope of work is hard to define early on.

    In this situation, the vendor and client agree on an hourly rate, and the vendor bills for the time and resources used to complete the project. This model presents some risks to the client as it offers little control over how many hours they pay for–though it also prevents clients from rushing through projects to hit deadlines or avoid investing more hours into a project that they won’t be getting paid for.

  • Fixed Price. With fixed price contracts, clients and suppliers agree on a fixed rate that covers the entire project. Here, the risk falls primarily on to the supplier–as any additional costs, be it time or resources–are the vendor’s responsibility.

    This type of contract works best for projects where the scope of work, materials, and time are already clearly defined by the client in advance. If the client can put together detailed documentation and present a realistic estimate of project requirements, it’s a great way to ensure that the project stays on budget.

    Without detailed documentation, developers may not receive adequate compensation for their time. As a result, they may rush through the project or turn in an incomplete final product.

  • Monthly Retainer. Monthly retainer contracts are similar to fixed-price contracts in the sense that they allow clients to pay a predictable rate for work. Only in this case, clients typically engage suppliers on an ongoing basis, much like remote employees or long-term freelancers.

    Retainer contracts make the most sense for companies looking to work with a dedicated development team. This team may focus on client work for a certain amount of hours each month; this could be an ongoing project or span multiple projects.

    In many cases, a flat monthly rate is more cost-effective and can help you avoid costs associated with projects that go beyond the expected time-frame and offers increased availability of your outsourced team.

  • Target Cost. Target cost contracts are typically used for projects where the scope of work is uncertain and costs–including hourly rates–cannot be accurately estimated. This type of contract presents the most risk to the client as they’ll be responsible for reimbursing the total cost of the project after the work has been completed.

    In most cases, you’ll probably want to avoid this type of arrangement. However, there are a handful of instances where target cost contracts make sense–think R&D-type projects where it’s not possible to estimate costs. Here, the outsourcing company may have some reservations about offering a definitive quote, as it may end up costing them more than the project is worth.

Pricing and Payment Schedule

Beyond providing information detailing the type of payment arrangement you’ve worked out with the vendor, your contract should also provide clarity around the following:

  • Duration of contract. How long do you expect this arrangement to last? What are the start and end dates for this project? If it’s an ongoing monthly retainer, will the contract automatically renew after six months, a year? Will it renew monthly until you decide to cancel?
  • Cancelations. Speaking of cancelations, your contract should clearly define the requirements for cancelation. Are you required to give notice? Will you have to pay a penalty if you decide to terminate this agreement?
  • Payment schedule. When are payments due? Will you receive a Net 30 or Net 60 invoice when work has been completed? Alternatively, is payment due upon receipt of deliverables? Are there any incentives in place for early payment? For monthly retainers, will you pay for multiple months at once? Can you set up a recurring monthly autopay?

Service-level Agreements

Service-level agreements (SLAs) outline the level of service you expect from an outsourced vendor, including the metrics used to measure the success of your initiative, as well as how you’ll move forward when things haven’t gone according to plan.

While every SLA is different, here’s a basic overview of what to include in an outsourcing contract:

  • An outline of who does what. SLAs should clearly explain the responsibilities of all members of both in-house and external teams. Who owns the project or specific project tasks? Who reports to whom? What is the scope of work for each role?
  • Deliverables and milestones. Here, you’ll explain key milestones, outlining which deliverables are expected at each stage. Additionally, this section should include due dates, meetings, and detailed requirements that define how work is presented and shared.
  • Reporting system and KPIs. This portion of the software service agreement contract should include details for how the reporting system works–what tools are used, what data is included in the report, who is responsible for monitoring and analyzing this information, how will it be used to make decisions? Additionally, you’ll want to include KPIs that measure things like technical quality, security, impact on business, defect rates, availability, or anything else that ties the project to specific business goals.
  • Working arrangement. How will teams work together? What expectations do you have around communication flow? What tools will you use? What’s an acceptable turnaround time for e.g., receiving a response?
  • Penalties and remedies for resolving issues. How will you handle situations where the agreed-upon requirements have not been achieved? Will the vendor provide rework in certain instances? What happens in the event of a data breach?
  • Escalation procedures. How should outsourced teams report issues? Who should they contact if something goes wrong? Who should they ask for help if they have a question or need to establish clarity around specific requirements?


Finally, the last section we’ll take a look at is protection.

  • Confidentiality. It’s critical that you include anything that isn’t protected by the IP laws in the country you’re outsourcing to, as well as any IP that doesn’t qualify for US protections. Unfortunately, while the US has fairly strict IP protections, many applications are ineligible for patents or copyright protections.

    With that in mind, protect yourself by creating a comprehensive non-disclosure agreement for software outsourcing projects to restrict information sharing and a non-compete agreement that prevents vendors from using proprietary information for competitive purposes.

  • Data protections. Confidentiality also extends beyond protecting your organization from theft or unauthorized use of company property. Ensure that your outsourcing contract agreement explicitly outlines procedures for handling sensitive information about your consumers and maintaining compliance with regulations like GDPR, CCPA, or HIPAA.
  • Returning proprietary assets. Include language describing measures for returning materials containing proprietary information including company IP, algorithms, trade secrets, and valuable insights generated by your organization.
  • Protection clauses. Outsourcing contracts should also include any additional clauses that protect your company’s digital assets and what happens in the event a vendor violates the NDA, non-compete agreement, or other contract terms. This includes defining guidelines around arbitration, contract termination, and other types of legal recourse.

Final Thoughts

Putting together a comprehensive outsourcing contract requires significant time and financial investments. Plus, it doesn’t necessarily guarantee that you’ll achieve the desired outcome.

With that in mind, it’s a good idea to consult with a lawyer before making things official with a prospective provider. This is particularly crucial if you’re outsourcing large, ongoing projects that could present risks to your customers’ data or IP.

You’ll also want to ensure that your contract offers clarity around expectations, responsibilities, and deliverables–taking extra care to cover all potential gray areas, questions, and requirements so that nothing falls through the cracks.

Tiempo Development provides clients with access to top developers who use mature Agile practices to ensure quality outcomes that align with strategic goals. Our Mexico-based teams speak English, work in US time zones, and follow the same IP laws as those working in the states. Contact us today to learn more.