Documents in Software Development Outsourcing: A Brief Guide

Have you faced the lack of in-house talent? 

Have you experienced problems with cost-efficiency in the process of software development? 

Do you appeal to micromanagement when trying to urge your employees to work more productively?

If even one of the questions applies to you and your business, software development outsourcing is the topic to consider.


As people living in the 21st century, everyone has heard about the practice of software development outsourcing. There was a significant turmoil revolving around outsourcing when President Trump urged companies to avoid outsourcing and look for talent on American soil. However, reality shows that outsourcing is inevitable. 

The very framework of a business depends on the ability to find cheaper means of satisfying the demand. Outsourcing is the phenomenon that helps achieve that with the slightest degree of resistance. If you still think that software development outsourcing your startup does not need, consider the numbers.

Following the statistics offered by a prominent research agency Technavio, the total value of the entire IT outsourcing market is anticipated to reach the $486 billion mark in 2024.

Incremental Growth OutsourcingRapid digital and technological transformation in fintech, telecom, and healthcare fuel such massive growth. With the introduction of instruments like cloud technology, one can expect the further continuation of the outsourcing increase in the years to come. 

There is a bright future for outsourcing. Every startup founder and business owner working with software development needs to consider outsourcing as a possible solution to various issues that can thwart competitive advantage. 

While outsourcing is vital for your business, you need to know a simple truth — it is challenging. For software development outsourcing to work out, a range of factors must coincide. 


It would be best if you found a good software development vendor. You need to consider all the minuscule collaboration details. You need to arrange the collaboration through agreements satisfying all the parties involved. If any process stage is poorly designed, your company can experience issues influencing cooperation and business.

Fortunately, the team of our experts gathered all the essential information about the process of software development outsourcing. We focused on the crucial documents you need to consider when outsourcing. After reading the guide, you will have foundational knowledge concerning the types of software development contracts, the documentation, and the loopholes in software development outsourcing.


Types of Contracts in Software Development Outsourcing

The first point of understanding relies on the fact that IT outsourcing contracts play a paramount role. Developing a good contract entirely depends on the business goals pre-set by clients. 

Your clientele might require your business to extend software development capabilities, build new software products or present a new business solution. In any case, you need to outsource. To outsource prosperity, it is vital to deal with various aspects of contracts — intellectual property rights, stages of work, payment, copyright, and characteristics.

Depending on the particular objective your company pursues, you can choose between different types of contracts. While there is no all-in-one solution, each contract presents its benefits. You need to have a basic understanding of fixed price, monthly retainer, time & materials, and target cost IT contracts to get the most out of the outsourcing.

Types of Contracts


Fixed Price Contract

Imagine that you have a pre-established fixed budget. In the world of IT outsourcing, it means that you are looking for the so-called Trifecta of Software Development. The phenomenon poses three key questions:

  • How long will the work take? 
  • How much will the work cost?
  • What features will you get as a result?

With a fixed budget, you need a fixed-price contract. With such contact, clients and supplies negotiate a fixed rate covering the entire project. Through a fixed contract, the majority of responsibilities fall upon the supplier. 

Fixed price contracts best fit the projects with clearly defined scope, resources, and time invested. Basically, with the agreement, you pay for a product that a supplier is obliged to provide within a specific timeframe and for a special price. 


Advantage

When you have a particular vision of a software project and seek a specific software product, a fixed price contract is the best approach to use in outsourcing. 

The primary benefit of the contract is its simplicity. You know what you want to receive. You know when you want to receive it. You know what price you are ready to pay for the product. 


Disadvantage

If your project is not clearly defined, you can face some issues with the fixed price contract. The notion of a fixed price implies that there will be no changes within the development plan. Yet, the experience dictates that plans change.

The market might change. Your business model might change. The end-users might start sending feedback altering the initial vision of the product they want. All such changes thwart the fixed price model, namely because it was not designed to face change.


Remember, if you are hundred percent sure of what your clients want and have a clear budget for the entire project. Then, a fixed-price contract should be your choice. 


Monthly Retainer Contract

Similar to fixed-price contracts, monthly retainers allow clients to provide a predictable rate for completed work. The crucial difference is the fact that retainer-based contracts suppliers engage with clients on an ongoing basis. To understand the model, imagine the business relationship between employers and long-term freelancers. 

In the outsourcing world, monthly retainer contracts establish the agreement between a client and a supplier while having a specific number of hours dedicated to the task. Based on the agreed number of hours, the rate will be retained per the pre-established rate. If your company operates with a dedicated development plan, the monthly retainer contract is the option to consider.

The monthly retainer approach is ideal for value creation. For instance, if you have a prototype to test, you can outsource it for a short-term period to get critical feedback. Upon receiving user feedback, it is possible to add new features or alter the initial ones.


Benefit

When understanding the critical features of monthly retainer contracts, cost-efficiency is the factor to consider. Having a flat hourly/monthly rate is cost-effective. When facing additional costs beyond the expected budget or time frame, a monthly retainer helps avoid such a case. 


Drawback

Imagine your client exceeds the monthly retainer hours. With a limited number of hours dedicated to the project, the contract’s timeframe may expire. If you do not have alternative agreements, there will be the foundation for potential litigation. 


A monthly retainer contract is perfect for startups and projects that need to outsource a prototype and test it quickly. However, when considering monthly retainer options, always remember alternative agreements that might cover the potential loopholes.


Time and Materials Contract

If you want the experts to be prepared for any changes within a development plan, the time & materials approach is the most appealing option. Under such an arrangement, the client pays the vendor for materials utilized and time used. 

When the scope of work is hard to define, when you want to outsource a short-term project, a time and materials contract presents the opportunity for the client to be almost completely separated from the project and focus on other more relevant tasks.

At the initial stages, you pay for the development team's expertise and can direct and redirect the project in any particular way. Time and materials contract does not have a rigorous deadline and rigid scope. 


Upsides

Imagine the case when you do not care about changes that can affect the initial plan. With the time and materials approach, there is open-end cooperation between the client and the vendor. It allows moving the priority of different items within the plan. 

Time and materials contract allows you to start developing from the get-go. Do not waste time talking about elements to build. Instead, begin the process of building and witness the results later. 

If you want to deliver the product to end-users as soon as possible, the time and materials approach should be your choice. It can be vital when seeking an immediate competitive advantage. 


Downsides

There is a risk that a client might run out of finances before the project is complete. Imagine you are almost through with your prototype, but there is no money left to test its final features.

Outsourcing is effective because of the different labor prices. If labor prices rise, the phenomenon can potentially eat into profit.  


With the time and materials approach, you need to have someone tracking the costs. It means that extra work is necessary to ensure that the development team properly uses time and materials in software development. 

If the scope of a project or its duration cannot be anticipated before work begins, a time and materials contract should be your choice. 


Target Cost Contract

Is the scope of your project uncertain? 

Unable to accurately estimate the cost and hourly rate? 

In such a case, a target cost contract is a solution. 

The critical aspect of the approach is that the whole responsibility lies on the shoulders of a client. A target cost contract makes a client responsible for covering the entire project cost when the work is completed. 

The majority of companies avoid target-cost contracts. However, if you have R&D-type projects and cannot accurately estimate costs, target cost is something to consider. 

There are three core elements of a target cost contract:

  • It includes the cost of the labor and materials required to complete the project. Such aspects translate as base fees.
  • The second element is contractor fees. It has factors like insurance costs and anticipated profit margin.
  • Finally, there is a risk. In any contract situation, both the client and the vendor face a degree of risk. The target cost contract necessarily includes the element of risk dedicated to the potential withdrawal of any given party from the agreement. 


Pros

The primary advantage of the target cost is a certainty. As a client, you know the maximum you will pay for the project. Besides, with the method, risks are equally shared between the parties involved in the agreement. 

In target cost situations, both a client and a vendor are interested in minimizing the project's scope and cost. It allows reducing the total degree of project risk. Target cost contracts create incentives for both parties to cooperate and move in the same direction.


Cons

The vital issue with target cost is the possibility of cost exceeding the initial estimates. In such a situation, the agreement should consider who will bear the responsibility.

One can find it challenging to engage in joint reporting and cost audits in a target cost situation. Because the costs are offered after the project completion, both client and vendor can face reporting problems.


The evidence shows that target-cost contracts are a rare breed. Business owners do not use them often. Such contracts rely on projects with an uncertain scope of work and cost. Nevertheless, if you are engaged in an R&D software development project, target cost is one of the most appealing options.


Software Development Outsourcing Documentation

Now, we know about the contracts and understand what type of contract is best for particular needs. However, getting the proper contract is the first step in achieving software development outsourcing. 

The next phase is to get yourself familiar with software development outsourcing documentation. You might wonder why you need such a degree of bureaucracy involved? Think about this in this way — proper documentation is your safeguard against litigation, and it's your key to establishing good relationships with a development team. 

All the information stated in documents like NDA, SOW, MSA, and DPA ensures that every part of the project is executed correctly. In addition, the documents also ensure that the outsourced developers you employ are protected against exploitation. With documentation, you get legal, ethical, and executive aspects covered. 

Software Development Outsourcing Documentation


NDA

Wonder what does NDA stand for? NDA stands for Non-Disclosure Agreement. It is one of the most common documents in the business. The primary purpose of the document is to keep the project and all associated with its aspects confidential.

Speaking in legal terms, an NDA is a binding agreement between the parties involved. It covers the degree of any confidential information shared between a vendor and a client. 

There are several critical elements of NDA you need to understand.


Definition of Confidential Information

To understand what to protect, you need to have a clear definition of confidential information. In NDA for software development, you need to classify what material and information are regarded as non-confidential and confidential. Think about passwords, source codes, architecture, processes, and databases.

Confidentiality Terms

When dealing with confidential information, you need to establish the timeframe. It will show for how long the given information will remain confidential. To protect yourself from the breach of sensitive data, always use the timeframe long enough to maintain key details about your business safely (the period should range from one to three years). 

Disclosure Clause

If any third parties are involved in the project development, you need to have a disclosure clause. Part of the NDA states anyone with whom the development team can share any confidential information. 

You can have freelancers or business partners working on the project along with the outsourced development team. The clause offers everyone involved to share sensitive information to keep the project going. 

Legal Obligation to Disclose

In some cases, parties involved in project development are obliged to share confidential information with legal representatives. To cover for such an instance, the NDA must include a legal obligation to disclose elements. It indicates that all the parties involved can freely share related project confidential information in the court of law if any ongoing litigation is involved.

The Remedies and Destruction Clauses

Imagine something went wrong and the outsourced team accidentally or intentionally breached the NDA. Such an event can result in massive damages and will luckily result in legal action. To have leverage in court, you need to have the remedies and destruction clause. It details the consequences of breaching the NDA and provides a guideline for adequately utilizing sensitive information to avoid disclosure. 

Here, you can find an example of the NDA


SOW

“SOW” may look like an abbreviation for some governmental agency. In reality, SOW stands for Statement of Work. What is a Statement of Work? 

SOW Statement of Work is one of the most significant documents in the realm of software development outsourcing. It is the document where both parties describe the crucial details connected with the project: stages, features, criteria of acceptance, risks, costs, etc. 

  • Every SOW should include a so-called CI/CD pipeline diagram. The diagram provides the foundation for automating the software delivery process. 
  • Another central element of SOW is the development procedures scheduled. The segment explores all the relevant details and communications included in the entire phase of project completion. Think about the schedule of all the visits, communication linked to the project, approvals, reporting, objections, deployment, and project closing — SOW includes all these elements. 
  • Finally, when signing SOW, ensure that additional details are included—for instance, screen resolution, devices, and browsers. You do not want your final product to run on Android while most of your clients use iOS. 

When the primary elements of SOW are covered, you can include a special attachment. Within the attachment, you can offer information concerning any payments agreed upon with a development team. It is the part where you indicate the type of the project — fixed price, monthly retained, time & materials, and/or target cost. 

Do you anticipate any force majeure instances? You should include them in SOW. Suppose you know that there are particular risks associated with the project. Suppose you know how the risks might potentially influence the project's completion. You need to outline the risks and force majeure conditions in the document.

Here, you can find the template for SOW.


MSA

Let’s imagine that you have successfully outsourced your first project. It was delivered to you in time in a cost-efficient manner. Clients showed their interest in the product, and the demand started growing.

Naturally, having a good experience with outsourcing will set you on course for future agreements with the same development team. When such a thing happens, MSA or Master Service Agreement comes to the scene.

What is a Master Service Agreement?

In simple terms, an MSA contract is the document establishing the foundational terms for any future agreement between a client and a development team. 

Why do you need MSA?

It speeds up the entire agreement process and ensures that you do not need to renegotiate the deal in the future. Instead, you and the development team can focus on project details. Another interesting part about MSA is about reduction of legal expenses. One can say that MSA is the ticket to the tollway you have already used at least once. 

Each MSA should include the following elements:

  • Provision of services. It describes the specific order of project completion.
  • Payment for services. The clause covers taxes, fees, and timesheets.
  • Terms and termination. The segment defines the duration of MSA’s validity and explores the conditions required to terminate the agreement.
  • Intellectual property rights. It illustrates how parties involved can manage intellectual property.
  • Confidentiality. Similar to the NDA, the clause includes non-confidential and confidential information provisions.
  • Liabilities and warranties. The segment explores party warranties and the field of liability. 
  • Indemnification. It details the process of compensation in the case of any of the parties going against the agreement.
  • Notices. The clause outlines any notifications concerning project delivery.
  • Miscellaneous. The segment includes any additional information—for instance, data protection, law benefits, modifications, etc. 

Here, you can see the example of an MSA. 


DPA

In the IT industry, data protection is one of the most pressing concerns. Numerous examples illustrate massive leaks and data breaches. Such events result in massive damages and have a significant adverse impact on the reputation of tech companies. 

There are laws and regulations dedicated to data protection. You do not need to invent anything to protect your data legally. You need to have a properly designed DPA or Data Processing Agreement. 

What is DPA? 

It is a legal document signed by parties involved to regulate both terms and conditions of personal data processing.  

What constitutes personal data? 

Any information that one can use to identify a person is considered personal data. 

There are several critical aspects of the DPA:

  • Purpose and scope of any data processing procedures.
  • The illustration of data that will be processed.
  • The presentation of techniques employed to protect the data.
  • The relationship between the party controlling data and the party processing data.


Remember! Before signing a DPA, you need to select a data processor. Keep in mind that having a data processor significantly reduces the risk of any given data breach. While paying close attention to the choice of data processor, you will avoid any damages linked to a potential data breach. 

Important! If you work with DPA, you need to know about General Data Protection Regulation (GDPR). It is a particular regulation in the law of the European Union that offers an oversight on any operations working with personal data. 

In reality, many companies ignore DPA. Such an action leaves personal data exposed, which creates the foundation for a data breach. 

Set an example, always sign a DPA when outsourcing any software development projects.

Here, you can have a look at the DPA example.


Loopholes in Software Development Outsourcing Documentation

There is the saying: “Hope for the best, prepare for the worst.” When dealing with software development outsourcing, it is vital to cover some potential loopholes to avoid major problems in the future. The key to insurance lies in a software development agreement. 

After intense research, one can present the guidelines for covering loopholes in IT outsourcing services documentation. 

Let’s explore them together. 


Working with Right Developers

The simple truth — you need to know with whom you will be working. You do not need to know their family tree or credit histories. However, it is paramount to know the developers’ qualifications and expertise. What is more, the agreement should present the exact number of developers working on the project.

When engaging in outsourcing, you need to ensure flexibility. To illustrate, you might see that the development team will not create the project in time. To fix the issue, you decided to hire a freelance developer. At this point, ensure that the agreement includes a simplified procedure for adding a new software developer to the outsourced team (usually, it can be done via email).

Takeaways:

  • Consider the exact number of people working on the project.
  • Determine a simplified procedure for adding new people to the team.


Time is of the Essence

Every agreement MUST illustrate the exact time, usually in hours, dedicated to the project. Keep in mind that overtime should be paid extra. 

If you want to be a professional outsourcer, include the overtime rates and anticipate potential factors that can affect the timeframe. For instance, the nation to which you outsource the software development project probably has different holidays. Besides, some members of the development team might need medical leave or any other type of absence. 

Takeaways:

  • Agree on the exact time dedicated to the project.
  • Decide on rates of overtime.
  • Consider the rules of absence for the development team.


Taking Responsibility

There is always the question — who’s in charge? 

Having an outsourcing agreement means that parties must decide on the degree of responsibilities and liabilities assigned to each side.

The responsibility and liability depend on the type of team involved in outsourcing. The rule of thumb dictates — if a mixed team is involved, which means it is composed of your and outsourced developers, responsibilities, and liabilities should be divided adequately. 

Takeaway: 

  • Ensure the proper division between the company and the outsourcing team. 


Payment

One of the most common hiccups in IT outsourcing revolves around cost and payment. From the get-go, it is crucial to be clear about payment methods and hourly rates. 

Want advice? Determine strict deadlines for invoice and invoice payment in advance. 

Avoid hidden costs! Before the agreement, determine the overtime rates and consider any additional fees. For instance, the project might need a specific license. You need to decide who will pay for the licensing. 

If the project is expected to be carried out in several outsourcing venues, you need to agree on travel and accommodation expenses reimbursement rules. 

Takeaways:

  • Have a clear vision of costs and billing methods. 
  • Determine deadlines for invoice and invoice payment. 
  • Anticipate hidden costs. 


Rules of Engagement

Have a clear outline of notice periods and an accurate time frame. The elements are crucial because they ensure project execution and delivery. 

In any given situation, you need to have a notice for contract termination. It is vital to ensure that a client provides early notice concerning team dissolution. It gives you time to work out the knowledge transfer. 


Something to Consider

Congratulations! You have sufficient knowledge to work with software development documentation, which is the core of software development outsourcing. 

Having a solid contract is a significant step toward striking a win-win deal. 

Choose the type of contract appealing to your business.

Consider all the elements you want to include in the contract.

Work with the essential documents — NDA, SOW, DPA, and, if needed, MSA.

Get a piece of the IT outsourcing segment and ensure that your project sees the light of the day for the lowest price and in the shortest time. 

How can you find a cost and time-efficient solution for your project? The most appealing answer — software development outsourcing.