In today’s digital economy, software is not just a support tool – it is often the very backbone of an organization’s operations, customer engagement, and innovation strategy. As businesses increasingly rely on bespoke software solutions to meet evolving demands, software development agreement has become a critical legal instrument in governing the relationship between the client and the developer.
Unlike off-the-shelf software licences, software development projects involve collaborative creation, ongoing communication and variable outcomes, often shaped by shifting requirements. This makes the drafting of a robust and well-structured development agreement not only necessary but also legally complex.
A poorly drafted agreement can result in scope disputes, missed deadlines, intellectual property conflicts, or even project failure. To mitigate these risks, it is essential to consider and address key legal elements that can affect project delivery, cost, intellectual property ownership, and liability.
In this article, we explore the critical considerations that should guide the drafting, negotiation and finalization of any software development agreement – regardless of whether the project follows a traditional Waterfall model, an Agile approach, or a hybrid of both.
- 1. SCOPE OF WORK AND DELIVERABLES
In a software development agreement, the scope of work and deliverables are often only addressed in the latter part of the agreement, most likely in the form of schedules or appendices. These are however arguably the most important aspects of a software development agreement, for the simple reason that they determine what a client is getting out of the engagement, and what a developer is supposed to deliver pursuant to the engagement. More often than not, the scope of work and deliverables would have already been drafted and firmed up by the end users with the help of the legal team, before the procurement process even kicks off. Of course, the scope of work and deliverables will also be structured differently between a software development project utilizing a Waterfall model and one with an Agile model, in order to cater for the way these different types of software development methodologies work. The scope of this article will however not go into specifics of the differences between Waterfall and Agile model – stay tuned to our future articles on this. - 2. PAYMENT TERMS AND PRICING STRUCTURE
Payment terms and pricing structure are important for the obvious reason that they dictate when and how a client will have to pay for the services of the software developer. Depending on the software development methodologies employed, the pricing structure can either be on a fixed-fee basis or time-and-material basis, and according to a pre-defined milestone. In a software development agreement, it is important to make sure that the payment terms and pricing structure are clear and indisputable, with certainty on the circumstances where the agreed payment terms can be amended – typically only where there is a change request. - 3. TIMELINE, DELAYS AND PENALTIES
Just like most software implementation projects, clients will always have an expectation as to when the project should be completed. Timeline for the software development project should always be captured definitively in a software development agreement, and where there is a delay, it should translate to liquidated damages payable by the software developer on a per-day basis. For enforceability however, the computation of the liquidated damages should not be inflated and instead be easily justifiable. While it may be difficult to quantify actual damages, a good starting point can perhaps be either the man-day rate of the software developer or the average daily cost of the software development project. - 4. ACCEPTANCE MECHANISM
If you have been following our articles, you would have noticed that we emphasize a lot on the importance of an acceptance mechanism, whether for software implementation, technology outsourcing, or software licensing. In a software development project, the acceptance mechanism is also of particular importance because it typically earmarks the point at which the deliverables are considered to have fulfilled the requirements of the clients. For a Waterfall software development, this is also commonly when the bulk or the final tranche of the payment is payable. Having a robust acceptance mechanism will help to ensure that the end users’ requirements are met. If there is repeated failure by a software developer to pass acceptance test, the acceptance mechanism in the software development agreement should allow the client to terminate the agreement with cause without having to make full payment to the software developer. - 5. INTELLECTUAL PROPERTY RIGHTS
Malaysian intellectual property legislations would generally consider a bespoke software as a “work made for hire” where any intellectual property created therein would vest in the client that has commissioned the development of the software. This is the default position of the law assuming that the software development agreement between the client and the developer does not state otherwise. As such, it would be critical that the client ensure that the intellectual property related clauses in the software development agreement do not allow the developer to retain ownership of any intellectual property rights created in conjunction with the software development project. For a software development project, it is also commonplace for clients to incorporate some limitations or restrictions surrounding the use of open-source or third-party components to avoid jeopardizing the client’s ownership of the intellectual property rights created. - 6. WARRANTIES AND REPRESENTATIONS
In the case of a software development project, warranty is typically sought from the developers that the software and deliverables ultimately delivered will not be infringing upon third-party intellectual property rights. The significance of a warranty on non-infringement is to ensure that the software developer does not incorporate any third-party component in the software without authorization or to prevent a software developer from recycling its past work which has been delivered to its other customers. The warranty is classically paired with an indemnity to allow clients to claim damages in the event of a breach. - 7. MAINTENANCE AND SUPPORT
Not every software developer would provide support, bug fixes and updates by default after handing over the developed software. Some might offer a “warranty period”, typically for one year after hand-over, during which all faults, issues or bugs encountered by the clients during usage of the software will be remedied or fixed at no costs. Some would instead require clients to separately engage in a maintenance or support package. Whatever the arrangement agreed with the software developer, it would be vital for the clients to pen the agreed arrangement down in the software development agreement (if not subject to a separate contract) for certainty. - 8. CHANGE CONTROL MECHANISM
We have all heard horror stories from architects or designers about ever-changing requirements of their customers, it would appear that software developers have the same nightmare too. It is common for developers to incorporate change control mechanism in the software development agreement to set out the processes for clients to request for scope changes, be it in terms of functionality of the software or delivery timeline. The objective of a change control mechanism is to prevent scope creep and to set clear boundaries between the parties when it comes to the agreed scope. With a change control mechanism in place, while clients will be given the rights to request for scope changes, developers in return will be given the rights to alter their pricing in response to the scope changes to take into consideration resource augmentation.
In a landscape where software development is increasingly agile, fast-paced, and innovation-driven, a well-drafted software development agreement plays a pivotal role in aligning legal protections with commercial objectives. By thoughtfully addressing issues such as scope of work, intellectual property ownership, payment structure, acceptance mechanism, and warranties, parties can reduce ambiguity and prevent disputes. Ultimately, the goal is to strike a balance between legal certainty and the flexibility needed for successful software delivery – because the right contract does not just manage risk, it enables collaboration and project success.
The Technology Practice Group at Halim Hong & Quek frequently represents our clients on various technology and software outsourcing or development exercises. If your organisation is planning for a software development project and would need external legal support, or if you simply would like to know more about how we can help in a software development project, please feel free to reach out to the partners of the Technology Practice Group.
About the authors
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
ky.lo@hhq.com.my.
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Ong Johnson
Partner
Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”),
Fintech, TMT Disputes, TMT Competition, Regulatory
and Compliance
johnson.ong@hhq.com.my
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