Outsourcing Contract Clauses You Should Know, Include or Avoid

Welcome to our in-depth guide on outsourcing contract clauses. Crafting a successful outsourcing agreement requires careful consideration of various clauses that can greatly impact the partnership. You need to familiarize yourself with the ground rules before you begin your next IT project so that you don’t make any costly mistakes. The first meeting will, of course, get off to a great start, but your job as a manager is to prepare for the worst-case scenario and to ensure that the correct legal due diligence has been done.

Outsourcing Contract Clauses

In order to formalise any business practice, you should be prepared to formalize it as soon as possible. It goes without saying that a significant part of this process involves knowing what to include in your formal arrangements.

Outsourcing offers a world of opportunity. However, you may be missing some of the most crucial benefits if you do not have a good understanding of the legal requirements. It is important that you understand what outsourcing contract (Outsourcing Contract Clauses)clauses and conditions to keep in mind, what definite terms, and what kind of clauses you should avoid in your outsourcing contract.

Introduction to contract clauses

When working with software companies, it is common to outsource some of the work. Despite the fact that this practice has existed for decades, it has evolved to reflect the business practices in the age of the digital revolution.

In addition to this, it is important to note that this practice applies to both long-term and short-term business dealings since (Outsourcing Contract Clauses) provide employees with more time to focus on the core activities of a business. Accounting, payroll, marketing, and administrative functions are just some of the functions that fall under this category.

What you should have

In some of our other publications, we have discussed that there are many ways to identify if a software development partner is viable, especially when it comes to distant, nearshoring companies.

You can tell a lot about your partner firm by its commitment to a legal framework. It’s now time to explore the conditions(Outsourcing Contract Clauses) and clauses that make up this framework.

1. Introduction

The first important detail to note here is the detailed description of the parties involved. By doing this, it will be clear who is a party to the agreement and what its legal form is. In addition, the intro must ensure that the party is represented by the appropriate person. We want to avoid unauthorized agents or ‘false procurators’ in such cases.

2.      Drafting clauses that are essential

a.       Purpose

Outsourcing IT services can be done in three ways. Choosing a path should be clear from the beginning. You can choose from:

  • Time & materials (TM)-billed external subteams to extend a team
  • Usually billed under a TM agreement, body leasing one or several specialists
  • A fixed-price project or specific tasks can be delegated

b.       Benchmarks

Depending on the path chosen for cooperation, this part of the agreement may vary. FP or TM-billed projects should include specific documentation, such as an appendix citing bodyleasing or team extensions. Professional criteria, such as diligence and professionalism, could be taken into consideration. There can, for instance, be a clause that requires all workers to be senior IT engineers with a certain amount of experience in technology ‘X.’

c.       Transfer of assets

Regarding what is shared with contractors’ personnel. IT environments may include devices, software, or credentials. We can expect to find here the contractor’s defined liability for these, how they are returned, etc.

d.       Representation and Warranties

IT companies tend to differ in terms of liability according to the type of cooperation chosen. In bodyleasing, the contractor often seeks to retain liability for only matching the ordering party’s requirements in team composition. A required specialist’s seniority or experience can be an example of this.

FP-billed projects require the contractor to comply with the software documentation and other ordering party requirements. Therefore, this clause pertains mainly to the results of the team’s work. Often, this is accompanied by an additional guarantee.

e.       Ownership of product

Intellectual property rights clauses usually include this subclause. Contractors are usually ready to sell all their rights, titles, and interests in the results of their services. The services must be paid for.

As a result, the ordering party remains free to use and develop the software in the future. The acceptance procedure is also important to note. Several factors are taken into account here:

The frequency with which the results of the services can be inspected by the ordering party

  • To be performed tests
  • If applicable, who tests, and who pays for removing errors
  • The parties sign the acceptance protocol
  • Acceptance procedures can be performed by persons authorised to do so
  • Methods for accepting ‘silent consent’

f.        Intellectual property rights (IPR)

Contractor personnel services should be distinguished from the original results of those services. Here are some factors to consider:

Software as a whole or components of it

As a result of being a subject of their IPR and thus being sold under the agreement to the ordering party

In such a collaboration, IPR is used by the following external subjects:

  • Fonts that already exist
  • Libraries
  • Icons, photos, animated items, etc al.
  • Work licensed by the contractor and transferred to the ordering party by the contractor
  • Free software, open-source licenses, copylefts.

g.       Payment clause

The following are the two most common methods of settling payments with contractors:

1.       Fixed Price (FP)

An agreed-upon amount of compensation is provided to the contractor. Contractors(Outsourcing Contract Clauses) are paid when they complete a service and the ordering party accepts it.

2.       Time & Materials (TM)

During this time, there is only one remuneration rate for a single unit of service, such as an hour or a day. Total remuneration depends on the total number of ‘units of service’ completed by the contractor.

The amount to be paid is flexible, whereas fixed-price projects are specific and understood from the start.

It is also important to state when an invoice may be issued, the method and terms of payment, as well as any other requirements. In the event of late payments, the contractor may be permitted to pause service and activities until all outstanding payments are made. In order to avoid postponements, it is recommended that a contract addresses this in advance.

h.       Duration for completion

FP projects may have agreed-upon schedules for specific services from the start. It is possible that TM projects may need to be adjusted according to the evolving scope of cooperation and actual progress in development.

i.         Dispute resolution clause

The course of action for resolving legal conflicts needs to be determined. In this section, you can determine whether disputes can be resolved amicably, through arbitration, or through a common court. In addition, the clause should identify the person(s) paying and the steps to be taken if a third party is involved.

j.         Sub-contracting

Freelance IT specialists may be considered subcontractors if IT services are outsourced(Outsourcing Contract Clauses). A subcontracting agreement should specify how much subcontracting is permitted.

Subcontractors are treated similarly to members of the contractor’s staff, i.e., the contractor remains liable for such an external specialist

The contractor must ensure that the subcontractor’s IPR is gathered so that the ordering party can receive them

Contractors are responsible for ensuring the security and proper configuration of subcontractors’ assets, such as devices and software, by connecting them to contractors’ or ordering parties’ networks.

3.      Other clauses for consideration

Indemnification clause

Force-majeure clauses exclude liability for events outside the parties’ control and prediction, such as war, pandemics, or natural disasters. A proper indemnification clause, where we establish a delimitation of parties’ liability, can state that the contractor agrees to indemnify and hold harmless the ordering party also from other circumstances, including any alleged copyright infringement claim and/or the costs of such a court dispute.

Termination clause

  • It is possible for an agreement to have three layers of stipulations regarding its existence:
  • Whether the agreement should remain in force indefinitely or for an ‘X’ period
  • If it can be unilaterally terminated by giving notice and identifying a notice period
  • Can it be terminated unilaterally without notice – with reasons for termination

There are also more specific legal frameworks that use instruments such as rescission. After a legally effective rescission, parties have to return everything they gave, paid or did for the contract as if it never existed.

Any such clause should have an exit plan. In this case, you’d decide what happens to the software, especially if it’s already running, or to any data.

Your upcoming outsourcing agreement includes

  • Service scope and performance
  • Agreement dates
  • Termination provisions
  • Fee structure and pricing
  • Terms of payment
  • Warranty and representations

Changing the scope of the project Since ‘variation’ has not been covered before, remember to set a specific delimitation between Managing errors and faults discovered during the acceptance process. The contractor must correct these factors within the warranty and under the basic contractor’s compensation. Managing change requests and alterations to the scope of services. Inspecting the software triggers these requests, which may be introduced by the contractor(Outsourcing Contract Clauses), but should be paid for separately by the ordering party.

How to avoid certain provisions

Outsourcing contracts that are poorly aligned with business outcomes is one of the leading causes of disputes. In many cases, the contract form used does not match the project where the contractor is hired. When an agreement template is inherited from a previous business contract, this can happen.

In addition, an unbalanced agreement may not be respected in the future. Some (Outsourcing Contract Clauses)contracts favour only one party to the agreement. Examples of balance-induing measures include clear requirements, a transparent schedule, acceptance criteria, budget outline, confidentiality protection, IPR transfer, exit plan, or warranty. Generally, a balanced agreement increases the chances that the parties will not try to bypass it or breach it, causing a dispute to arise.

Examples of contractual errors:

Examples of contractual errors:

  1. A contract is concluded without checking the other party’s entity, its legal form, or the authorization of those who signed it.
  2. The ordering party has no control over who will perform the contractor’s services (e.g., who may be the subcontractor, how the composition of the team may be changed in case of objections).
  3. Documentation, schedules, and budgets are absent – or it is unclear how the scope of the agreement is determined and altered when circumstances change, and how this impacts timelines and costs.
  4. Licensing is granted only with a license, whereas IPR transfer is paid separately or involves an excessive (costly or time-consuming) process
  5. The open-source components, for example, are not covered by IPR provisions
  6. Warranty is excluded and there is no guarantee or either of them is unclear
  7. There is no termination clause, exit plan or cause of termination without notice
  8. Data protection, confidentiality, and non-compete clauses are not included in the contract.
  9. A contract that states the buyer is responsible for all exit management costs
  10. Contract Terms that exclude your supplier’s advice and representations
  11. Unaligned KPIs in contract terms(Outsourcing Contract Clauses)
  12. Limits on a client’s remedial rights under a contract
  13. In the event that outcomes are not met, contract terms exclude the client’s costs
  14. For additional project work, standard contract terms apply

As we conclude our journey through the intricacies of outsourcing contract clauses, one thing remains clear: precision is paramount. Crafting and negotiating an outsourcing agreement demands a deep understanding of the nuances, potential pitfalls, and opportunities that lie within the contract clauses.

At AskTech, we’re committed to empowering businesses with the insights they need to make informed decisions. From clauses you should know to those you should include or avoid, our aim is to provide clarity in an often complex landscape. By strategically navigating outsourcing contracts, you can safeguard your interests, enhance collaboration, and set the stage for successful partnerships.

Remember, every clause holds the potential to impact project outcomes, timelines, and the overall relationship between parties. Our experts are here to guide you through the process, ensuring that your outsourcing contracts reflect your goals and values.

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