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• Breach of contract and remedies.
• Limitation of liabilities.
• Termination.
• Assumption upon a sale.
• Transferability.
• Detailed specifications (technical or otherwise).
• Arbitration.
• Governing law.
• Notification.
While price is usually thought of to be straightforward, that is not always the case. The contract
could be based on a fixed price or on time and materials. In a fixed price agreement, a company
theoretically believes it knows the cost. However, for that to work, a very tight specification must be
part of the contract. Anyone who has built or remodeled a house knows that the change orders can
drive up the cost to a multiple of the original contract price. Frequently fixed price contracts have
incentives and penalties for the vendor to deliver on time or to work to a specified customer service
level. The risk clearly falls on the vendor to deliver at a fixed price, and the vendor is rewarded for
doing so under cost.
In a time and materials agreement, the vendor is paid based on the efforts made and not any specific
agreed-upon price. There are often no incentives for the vendor to deliver a certain price, and there is
always the risk that the vendor will milk the job. Change orders become expensive add-ons. Also, in
many cases, the company pays for the vendor‟s learning curve, as it is not unusual for a vendor to staff
the project with new employees who lack experience with either the process or the project.
Payment terms are a point to be negotiated by the parties. For development contracts, there are
usually progress payments tied to milestones. For service agreements, typical terms require payment
on a regular basis (e.g., 30 days). Some contracts will include penalties for late payments. Conversely,
some contracts call for payment penalties for late deliveries.
Performance guarantees and incentives clauses are key points in an outsourcing contract. Whether
the agreement is for the development of a system or for providing a service (e.g., call centers or
accounts payable), timetables and performance guarantees are critical. Performance guarantees are the
most difficult aspect of the contract to negotiate, articulate, and monitor. There are a number of
possible metrics (e.g., call center response times, number of invoices cleared in a time period, how
long it takes to read an x-ray before responding, clearance of trouble tickets, how long a caller has to
wait online before an operator answers, etc.), some of which can be measured using software tools.
Others, such as quality of response, are much more difficult to measure. However the performance
clause is written, it should be done in a manner that can truly be measured; otherwise it will be a
source of contention between the parties.
In some cases, performance, or lack of performance, can trigger a termination or penalty, ultimately
resulting in a lawsuit. For all of the obvious reasons, a vendor will resist including any penalty clauses
for performance. Likewise, the vendor will frequently be motivated by a bonus for early delivery but
will try to blame any delays in delivery on the company‟s inability to deliver a specification or other
critical component necessary for the vendor to deliver the product or service. This contention may
ultimately result in another potential lawsuit.