Software development agreement

What it means

A software development agreement is a contract under which a supplier undertakes to build custom software for a client, such as a web application, an internal system or a mobile app, and the client undertakes to pay the price. It most often combines elements of a contract for work and a licence agreement.

Software is protected by copyright as a computer program. Under Slovak law, an author's economic rights generally cannot be transferred, so the client usually receives a licence, often exclusive, unlimited in time and territory and including the right to modify the software. The scope of the licence is one of the most important parts of the agreement.

The key points are the specification, meaning exactly what the software should do, the acceptance procedure and criteria, rights to the source code, warranties for defects and support after launch. In agile development the specification is refined gradually, so the agreement must also describe how requirements are changed and priced.

How it works in practice

With a fixed price, a detailed specification and clear milestones with stage payments pay off. Agile projects more often use time and materials billing, with the agreement setting rates, how hours are reported and a budget cap. In both cases it helps to agree how change requests are handled and how they affect price and schedule.

Acceptance is usually confirmed with an acceptance protocol after testing. The agreement should define what counts as a defect preventing acceptance versus a minor flaw, the time allowed for testing and fixes, and what happens if the client does not carry out the test. For critical systems, source code escrow is agreed in case the supplier ceases to exist.

In the accounts, custom-built software can be an intangible fixed asset if its cost exceeds the statutory threshold and it serves for more than a year. It is then amortised; otherwise it is an expense. What matters is whether the client obtained a perpetual licence, and the acquisition cost including external implementation costs.

What to watch out for

If the agreement does not deal with source code and the licence, the client may find that without the original supplier's consent it cannot modify the software or have another company develop it. Such dependence is hard to fix afterwards, so access to the code, documentation and modification rights should be insisted on at signing.

Watch out for third-party components and open-source libraries. The supplier should state which licences apply to the components used and that their terms are compatible with the intended use. Some licences require the source code of a derivative work to be published, which could compromise the client's trade secrets.