Professional Practices

COMPUTER CONTRACTS [CH. 5]

A contract is a legal agreement between two or more parties. Or contracts set out the agreement
between the parties like:
 They set out the aims of the parties;
 Ways of terminating the contract and the consequences of termination.
Where there are gaps in the agreement because the parties have failed to complete a particular
issue, it is a function of contract law to fill them, for example contract law provides rules for the
termination of the contract if performance becomes impossible.
It is important that:
 A contract is set in a clear and logical manner;
 A contract is complete and consistent;
 And the parties to the agreement should be left in no doubt as to their rights and duties.
Software engineers are likely to come across many different types of contract like:
 Insurance contracts;
 Contracts of employment;

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 Contracts with hardware suppliers and so on.

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CONTRACTS FOR THE SUPPLY OF CUSTOM-BUILT SOFTWARE:
There are three major types of contractual arrangement which are widely used in connection with

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the supply of software services:
1. Contract Hire: rs e
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Under a contract hire agreement:
 The supplier agrees to provide the services of one or more staff to work for the client;
 The staff works under the direction of the client.
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Payment is on the basis of a fixed rate for each man day worked; the rate depends on the
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experience and qualifications of the staff. Contract hire is sometimes referred to as “body
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shopping”.
2. Fixed Price:
A fixed-price contract is a contract where the amount of payment does not depend on the
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amount of resources or time expended, as opposed to a cost-plus contract which is intended

to cover the costs plus some amount of profit.
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3. Time and Materials:

A time and materials contract also referred to as a “cost plus” contract; is somewhere
between a contract hire agreement and a fixed price contract.
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 The supplier agrees to undertake the development of the software in much the same way
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as in a fixed price contract;

 But payment is made on the basis of the costs earned, with labor charged in the same way
as for contract hire.
The supplier is not committed to completing the work for a fixed price.
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STRUCTURE OF THE CONTRACT :

Producing a good contract costs a lot of money; good commercial lawyers are not cheap. For this
reason, software suppliers try to use what are known as standard form contracts,which are used
or intended to be used many times over. Such a contract might consist of:

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 Professional Practices

 A short introductory section, which specifies, among other things, the names of the parties to
the contract;
 A set of standard terms and conditions;
 A set of appendices or annexes.
Following is the brief description of the contractual issues.
1. The Introductory Section:
The first part of the contract is brief; it states that it is an agreement between the parties whose
names and registered addresses are given. It is dated and signed by authorized representatives of
the parties.
The following subsections discuss the issues which must be addressed by the standard terms and
conditions.
2. What is to be produced:
It is clearly necessary that the contract states what is to be produced.
3. What is to be delivered:
The contract states what exactly is to be provided. The following is a list of possibilities:
 source code;

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 documentation of the design and of the code;

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 reference manuals;

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 user training;

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 test data and test results etc.
4. Ownership of rights:
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It is important that the contract should also state just what legal rights are being passed by the
software house to the client under the contract.
5. Confidentiality:
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It is usual for each party to promise to maintain the confidentiality of the other’s secrets.
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6. Payment terms:
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The standard terms and conditions will specify the payment conditions, that is something
along the lines that:
“Payment shall become due within thirty days of the date of issue of an invoice. If payment is
delayed by more than thirty days from the due date, the Company shall have the right, at its
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discretion, to terminate the contract.”

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7. Calculating payments for delays and changes:

 Delay payments and payments for variations to the original requirements are, perhaps, the
commonest cause of contractual disputes, not only in software engineering but in most other
contracting industries. This compensation for delays is caused by the clients.
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 The contract must specify the process by which these extra payments are to be calculated.
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Typically, an annex will include daily charging rates for each grade of staff employed on the
contract and the amount of extra effort to be paid for will be agreed at progress meetings.
8. Penalty clauses:
 Delays are also caused by the supplier and they are handled differently.
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 The normal mechanism used is to include a penalty clause which provides that the total
payable to the supplier is reduced by a specified amount for each week that acceptance of the
product is delayed.
9. Progress meetings:
Regular progress meetings are essential to the successful completion of a fixed price contract.

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 Professional Practices

10. Project Managers:

Each party needs to know who has day-to-day responsibility for the work and what the limits
of that person’s authority are. The standard terms and conditions should therefore require
each party to nominate, in writing, a Project Manager.
11. Acceptance procedure:
 Acceptance procedures are a critical part of any fixed price contract for they provide the
criteria by which successful completion of the contract is judged.
 The essence of the acceptance procedure is that the client should provide a fixed set of
acceptance tests and expected results and that successful performance of these tests shall
constitute acceptance of the system.
12. Warranty and maintenance:
Once the product has been accepted, it is common practice to offer a warranty period of,
typically, 90 days. Any errors found in the software and reported within this period will be
corrected free of charge.
13. Arbitration:
Court action to resolve a contractual dispute is likely to be expensive. For this reason, it is

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common practice for contracts to include a statement that, in the event of a dispute that
cannot be resolved by the parties themselves, they agree to accept the decision of an

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independent arbitrator.

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