5 Core Principles for Negotiating Software Development Contracts

Artistic computer generated handshake

As a consulting company in the tech space, contracts are a mainstay in our line of business. At Techtonic, we have garnered our fair share of knowledge when it comes to negotiating mutually beneficial contracts for both parties. Read on to learn more about the core principles for negotiating successful software development contracts for your next project!

Before The Negotiation Gets Underway

Contract negotiation isn’t always a straightforward path. Before we even start writing a contract in earnest, Techtonic always seeks to get a thorough understanding of our client’s goals. Both companies will have priorities and goals to meet, and understanding these early in the process of contract negotiation is key. This process is typically time-consuming but is essential to forming solid partnerships.

Principle 1: Knowing the Objectives for Each Party

Business partners getting on the same page from the beginning is extremely important. Both parties should be clear about the project requirements and deliverables. Is there an exchange of services, technology or both? Will the partnership include licensing of software, technology, or a product? In Techtonic’s case, what are the staffing needs and plans for retention of technical talent over the course of the project? Deal breakers need to be identified at this point as well. Both parties should be equipped to lay it all out on the table. Open lines of communication from the beginning will set a tone of professionalism and ensure both parties walk away from the negotiating table feeling understood and on the path to a valuable partnership.

Principle 2: Market Overview and Doing Your Research

Being armed with extensive knowledge allows you to make better-informed decisions. This is why doing research prior to negotiating a software contract is extremely important. When negotiating a contract with another company, you should be versed in what that company has to offer. You should also have a solid understanding of their experience and reputation. Likewise, it’s also important to assess expertise, financial details, and why this particular entity stands out among competitors.

Principle 3: Preparation for Negotiation

Negotiation is not a small step when forming a contract; therefore, it’s necessary to dedicate a significant amount of time and energy into preparing before the negotiation itself. Internal stakeholders should think strategically to determine important negotiation aspects of each deal. This phase should include the creation of a negotiation team that will delegate responsibilities, specify goals, and manage communication with the potential partner.

Principle 4: Leverage- Recognizing Your Power in Negotiations

No matter which side of the table you sit on, it can feel like there is an imbalance of power in any negotiation. However, despite perceived inequalities based on a company’s size, experience, output, intellectual property, and so on, both sides have leverage they can put to use. In regards to negotiating a software development contract, the party responsible for the technology usually has a powerful reserve of talent and know-how at their disposal. The counterparty brings their financial resources to the table along with a pressing business need. Both parties have their strengths and areas of expertise and should leverage them to create a best-case scenario for both businesses. 

Principle 5: Decision Making & Signing the Contract

When it comes time to make a final decision, it’s very important to have complete confidence in the outcomes at stake. As entering into a binding contract is a large step for both entities, there should be a brief period of reflection at this stage. All of the original goals should be reevaluated to ensure the proposal will fulfill them. Reviewing ROI is crucial, along with ensuring that both parties will be able to meet their business needs under the terms of the partnership. It’s also important to review whether any key factors in the negotiation’s early terms have changed or evolved through the process, and adjust accordingly. 

Once the draft of the contract accurately reflects the needs and operating procedures of both organizations, it’s time to sign. 

The Key Points of Focus for Negotiating a Software Contract

  1. Clarity - Layout objectives from the beginning.
  2. Research - Prior to negotiations, it’s important to establish intended results from both parties. 
  3. Prepare - How will your team own and run the negotiation? What are the top priorities, and who is in charge of fulfilling them? 
  4. Leverage - Recognize your strengths and use them to find the common ground and need with your potential business partner 
  5. Decision-Making - It’s the aim of the negotiation, so you’ve got to get prepared to make one by the end of the negotiation process. Both parties should be confident in the terms of the contract, and eager to work together towards a shared goal. 

In Conclusion

Contracts are a necessity in the world of software, however, negotiating these contracts may not come naturally to all. Time, experience and research will arm organizations with the skills and tactics to foster positive, mutually beneficial negotiations. It is our hope that we have helped you gain insight into the process of contract negotiation in our industry.

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If you're interested in learning more about Techtonic please Contact Us today! Techtonic is the premier partner for developing onshore, commercial-grade software. We've also developed a unique method to simultaneously close the talent gap that exists within technology, by tapping into a new and highly diverse workforce. Our model is pioneering the way clients develop and hire top talent, and we'd love to work with you!