Closing an IT-contract: 6 tips
Nowadays, almost every company enters into IT contracts on a regular basis. Think of licenses for the use of certain software, contracts for the development of a custom application or for the development of a web shop. A company is often highly dependent on the functioning of the software, app or web shop, while the development or license often involves significant costs.
This makes it crucial to carefully review the content of the contracts being signed. What exactly needs to be delivered, at what point, and at what price? And what about security, possible disruptions, and software maintenance? In this blog, Valerie Lipman provides six tips for closing an IT contract.
Tip 1: Make sure it is clear what requirements the software must meet
First and foremost, it’s essential to clearly document what will be delivered. While this may seem obvious, it’s not always straightforward in IT contracts. For example, what functionalities should the software have?
Standard vs. custom software
In contracts involving standard software, this can be clearly defined in advance. However, it’s often different for contracts dealing with custom software. It’s not always clear in advance what is possible and which functionalities can or cannot be developed. In such situations, agile methods are often used, where different sprints determine how the software will look.
In this way, the actual possibilities only become clear after the agreement has been concluded and development has started. Still, certain minimum requirements can be established in advance.
Additionally, it’s important to agree on interim evaluations so that timely adjustments can be made if the development seems to be heading in the wrong direction.
IT contracts usually impose an obligation of effort rather than an obligation of result on the IT supplier. This means the IT supplier is not obligated to deliver a specific result but is required to make efforts to achieve a particular outcome.
While this is understandable from the IT supplier’s perspective, the customer may prefer an obligation to achieve a certain result. If an effort obligation is agreed upon, it’s crucial for the customer to examine the options in case the development doesn’t proceed as desired. For instance, can the agreement be terminated during the process? And what about the costs that have already incurred?
Tip 2: Make clear agreements about the costs
A common point of discussion during software development is the associated costs. This discussion is closely related to what is precisely being developed. If it’s not clear in advance, the potential costs may also remain uncertain.
If it’s not possible to agree on the final costs beforehand, it’s advisable to work with interim budgets and ensure that the costs are as much as possible aligned before commencing the work.
It should also be determined what the consequences are if the parties fail to reach an agreement on further costs. For example, may the client engage another party to continue the development?
Tip 3: Check if a delivery date has been agreed upon and what the consequence will be if it’s not met
IT contracts often include a specific timeline for when the software should be ready for use. If only a timeline with a Go Live date is mentioned, it is not necessarily a strict deadline. This means that if this date is not met, the IT supplier must be given an additional period to deliver the software as per the agreed terms.
Only if the IT supplier still fails to deliver a working product by then can the agreement possibly be dissolved or a claim for damages be made. Therefore, it’s crucial to clarify the consequences of not meeting a specific delivery deadline.
Tip 4: Determine the ownership of intellectual property rights
The source code or visual design of software can be protected by copyrights. Copyrights typically belong to the creator of a work, which, in this case, would be the IT supplier.
If no agreements are made regarding the transfer of copyrights, the IT supplier remains the copyright holder. This means that, for example, the software cannot be further developed without the IT supplier’s permission.
Additionally, it might be possible for the IT supplier to terminate the customer’s usage rights of the software.
Tip 5: Check who is responsible for security, maintenance, and backups
Considering the confidentiality of many business data, the security of the software is crucial. It’s essential to specify in IT contracts who is responsible for security measures and tasks like making backups.
If this is not clearly defined, questions arise who is liable if business data is lost or exposed. In this context, agreements about maintenance are also essential. Is it the IT supplier’s responsibility, or does the client have an obligation to perform updates? And within what time must an IT supplier respond if there is a malfunction?
Tip 6: Check the contract duration and obligations upon termination
Contracts for developing custom software often continue at least until the software is delivered. But when a license is granted for software usage, the IT supplier may have the right to terminate this license after a certain period or under specific circumstances. This can create problems if a company heavily relies on specific software, especially when the software forms the basis for other systems.
No automatic renewal
If the agreement, for example, has a one-year term with a possibility of renewal, it cannot be assumed that this renewal will automatically happen. In any case, it is important to find out what period of time would be needed to switch to another IT supplier and to agree on a sufficiently long notice period for this purpose.
Consequences after contract termination
Next, consider the consequences of terminating the contract. A software application often stores a large amount of data. It is generally important to maintain access to this data when switching to another system.
Additionally, switching to another system usually involves significant work. Therefore, it’s essential to include agreements in the IT contract about the obligations of both parties during an exit and the migration to another system. It may be necessary to enlist the IT supplier’s help in this process.
Are you about to enter into an IT contract? We’d be happy to assist in determining whether your interests are adequately safeguarded. Or, if you already concluded a contract and want to know your rights, we are here to advise you. If so, please contact Valerie Lipman, attorney commercial contracts, IT and IE at Poelmann van den Broek lawyers.