Software Development Contracts: The Main Types and Key Elements

| Updated on March 21, 2024

Software development is a complex process that consists of many stages, and one of them is the signing of a contract. This final stage is preceded by a search for a reliable company, a comprehensive analysis of its activities, and negotiations. Drawing up a business agreement is worth paying special attention to because it should regulate all the issues that may arise between the parties, as well as serve as the basis that the parties will use in the event of disputes.

In this article, you will find information about the types of software development contracts, as well as the necessary clauses that such agreements should contain.

What is a Software Development Contract?

The software development agreement is a legal contract between two parties – the client company and the third party software development company which includes the process of development, delegating data, selling apps, or maintaining the clients’ applications. 

To avoid any setbacks, a solid agreement should contain provisions on intellectual property rights, project and payment terms, and comprehensive specifications of a future product.

Software Development Contracts: The Main Types

There are three major types of software development contracts.

Fixed Price

This contract contains information about the scope of the project and a fixed cost for the tasks performed.


  • All the necessary details are specified in the contract, so no additional monitoring is necessary.
  • All deadlines are strictly adhered to.
  • In the event of a budget overrun, the software development service provider is liable.


  • There is a lack of flexibility.
  • Product quality can be reduced because of the need to work within an agreed budget.

Time & Material

This type of contract involves paying for the number of hours a software engineer works on your project.


  • The structure is straightforward.
  • This type is flexible – you can change the priorities, as well as the functions of the future product during the development process.
  • There is extensive control throughout the development process.


  • It is tough to predict the final budget.
  • Sometimes deadlines cannot be met.
  • Constant involvement is essential.

Fixed Budget

In this contract, the project budget is specified before development begins, but the scope of work may vary.


  • It is great for start-ups or companies with limited budgets.
  • Allows you to prioritize the necessary functions and postpone the implementation of additional features.


  • It is not a good fit for large projects.

Core Elements of a Software Development Contract

Certain elements make a business agreement hassle-free and risk-free and are included in software development phases.

Project Scope Description

Everything concerning the project is listed in this paragraph: product features, maintenance services, tools and software used, source code repositories, number of revisions allowed, and the revision process.

Project Time and Cost

This clause specifies either a fixed development cost and deadlines or flexible deadlines and costs. Besides, the responsibility of the parties for delays should be specified.

Acceptance Testing and Delivery

Testing is performed at the end of each development cycle. The following information must be specified:

  • The party that will perform testing.
  • The method of transferring test results.
  • The process for making changes and allowable time limits.

Intellectual Property Rights

This section clearly states the client company’s ownership of the source code, design, patents, copyrights, and trade secrets.

Bottom Line

So, a competently drafted contract will be a reliable protection against financial losses and low-quality digital products. Besides, a decent agreement will be an excellent basis for long-term business cooperation. The most important thing is to discuss all the details of the contract with a software development company and check all the legal aspects with the help of legal aid.

Himanshu Kumar

Tech and Software Writer

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