How to Manage Custom Software Development for Your Business

Custom software is becoming an increasingly desirable alternative to off-the-shelf programs among small businesses. For years, small to midsize businesses struggled to find enterprise software that met their unique needs and were forced to simply work around retail software as best they could. All that has changed with accessible open source tools and the world’s greatest delivery platform—the Internet. Open source has also made customized software more affordable. Small business owners may commission custom web-accessible databases for tracking specialized inventories; custom real-time sales tracking and product-demonstration software for remote sales personnel; or custom client-service tracking software for a short-term office rental suite. However, hiring a developer to do this type of sensitive work can expose your business to all types of liabilities.

A well-drafted development contract should be the starting point when you have any custom application developed. The following example provides a breakdown of some fundamental clauses and concepts that will enable you to confidently engage someone to create software that will help you grow your business.

To explain how contract clauses and concepts can protect your business during the software-development process, I’ll use a fictional company for illustration. “GrowthCo” is a privately owned New York–based business that needs a custom web portal and data collection tool for its website to help streamline its growing operations. It turns to an off shore company to develop the tool. What should GrowthCo negotiate for in its contract with this developer?

Do You Really Own Your Intellectual Property?
Commissioning custom software is not the same as hiring a contractor to build a house. The actual deliverables (code, libraries, design, etc.) are abstract in nature. As a result, these items are governed by intellectual property law, with copyright being the most prevalent property right. Failing to own the copyright in software is akin to not having the deed to that new house. And “I bought it, I own it” simply doesn’t work under the law.

Without a contract that clearly transfers the copyright from the developer to GrowthCo, even after full payment, GrowthCo may not own it. Hence, the software development contract should have work-for-hire and copyright-transfer language to ensure that GrowthCo gets what it paid for. Under copyright law, using the words “work for hire” to describe the developer’s work in the contract will weigh in favor of one’s copyright ownership claim.

Basically, the buyer will own the copyright. In addition, attaching a copyright transfer form to the contract as a redundancy will further weigh in favor of one’s copyright ownership claim. Also, since GrowthCo is dealing with an offshore developer, it should negotiate a “code dump” provision. This is a clause that calls for the periodic transfer of the software code to GrowthCo. In the event there is a breach or termination of the relationship, GrowthCo will at least have some of the code to possibly begin the process with a new developer. This would apply whether or not open-source components are being used. Without the specific implementation of code, the client could be out of luck.

What’s Mine is Mine—Client IP
Now that GrowthCo has secured the deliverables, the contract should also make clear that any of GrowthCo’s property (copy, logos, designs, etc.) is and continues to be its property. The contract should also make clear that the developer has a license to use those items only in connection with developing the application.

Secrets Only Work if They Stay Secret—Confidentiality
All businesses have valuable data that contains innumerable secrets. Customer lists, formulas, and financial records are just a few of those secrets. Failing to protect this information could spell the end of your competitive advantage. That’s why it is absolutely critical that the contract obligates the developer to prevent the disclosure of that information. GrowthCo should be very careful about the information it discloses, and it should insist on confidentiality and perhaps even set damages if this obligation is violated.

Knowing the Source—Warranties
Software, unlike physical goods, is a constantly evolving tapestry of code, concepts, know-how, and components that can come from a variety of sources, some proprietary, some not. All software contracts should have warranties that the deliverables do not infringe third-party rights. And in GrowthCo’s case, since the company wants to minimize costs, it might be using open-source components. Its contract should make clear that the developer not use these open-source components in a manner that violates open source licenses (such as an open-source license that requires the public release of all code incorporating the open-source libraries; something that can devastate a business caught unaware).

What Does This Button Do?—Documentation
Custom software is unique. Unlike Microsoft Office, there aren’t thousands of manuals, guides, and forums to get you on your way. GrowthCo should negotiate, as a deliverable, commercial-grade documentation to assist it in using the software for the long haul.

One Step at a Time—Using Milestones
Software development is a complex and time-consuming process and it is not wise for a business owner to simply wait until the end before acting on problems. Rather than make the contract “all or nothing,” it should provide for a set of stages, usually called milestones. The contract can then condition payment against the successful completion of these milestones. With milestones, both parties can track the progress of the project, and if the case demands it, terminate or modify the relationship.

Fool Me Once—Exit Clauses
There is a tremendous spectrum of developers with varied training, professional experience, and skill. As a result, it can be very difficult for the client to really gauge if the developer is up to the task. Often, this means termination in the middle of the project after it becomes obvious the developer cannot deliver. GrowthCo should not fear this possibility, and it should negotiate clauses in the contract that allow a clean break, upon written notice, in addition to the milestones and code-dump provisions above.