Dedicated Team IT Outsourcing Contract

Dedicated team model is a win-win option for long-term projects with evolving requirements when the client gains control on and manages the workflow. This option is offered by outsourcing companies or outstaffing agencies and is widely used nowadays for software development due to its flexibility. 

Once the outsourcing company and client have found each other and agreed on dedicated team model of cooperation, it’s time to pay attention to the legal basis, namely Dedicated team outsourcing contract. At the very beginning, the parties should outline and regulate all the issues that may potentially increase in the course of contract execution. It will help to avoid misunderstandings in the future. 

The way parties agree on terms of interaction plays the key role for the whole project and may affect the result.

Under Dedicated team model a contractor (outsourcing company) engages the team of developers, designers, QAs, project-managers and other specialists to work on customer`s project, and a customer pays for the time of each specialist involved.

The most important provisions to pay attention for when contracting with outsourcing company on dedicated team model are as follows:

1. Subject matter of a contract.
2. Dedicated team itself (the team structure, specialists availability, terms of assignment etc.).
3. Cost and payment order.
4. Deliverables delivery and acceptance procedure.
5. Management and communication.
6. Intellectual property.
7. Confidential information.
8. Non-solicitation clause.

Subject matter

The outsourcing company is a contractor party, while the dedicated team actually works on project. Thereby, the subject matter should be clarified properly, e.g. parties agree that contractor provides services by engaging the dedicated team of certain specialists:

Contractor shall provide the software development services by engaging the dedicated team of developers, designers, QA engineers from the pool of its own staff of employees and contractors and Customer shall accept the deliverables and pay to the Contractor for the services provided.

The exact scope of services are not usually specified in the contract nor in Statement of Work. Considering the high flexibility of this model, contractor may change certain goals and terms depending on the situation, including scope and specifications of tasks.

Dedicated team

It should be specified how parties agree on the number and seniority of developers to be engaged, as well as level of involvement of customer in the selection process.  Dedicated team is usually determined under the Annex to the contract or by communication means agreed by parties.

Considering the flexibility of dedicated team model, the customer is able to increase or decrease the number of developers. The dedicated team may be agreed once and then reviewed periodically, e.g. each month.

 The number, type, seniority, and identities of developers engaged in the provision of services shall be specified via the task-tracking system on a monthly basis.

Parties shall also agree on the terms of developers replacement procedure and set out grounds for replacement, initiating order, notice periods and a deadline for the contractor to assign a new IT specialist with the appropriate experience. A developer may be replaced because of its unacceptance by the customer for any reason, as well as due to legal provisions, defining relationships between the outsourcing company and its employees. 

Availability of developers. Parties should determine particular time when the developers are active. It could be done by specifying the amount of hours per week and/or setting out the work schedule. It is common situation when developers and customer are located in different countries. So don’t forget to note that developers will be inactive and unavailable on official holidays in their country of location.

Developers expertise warranties. Under Dedicated team outsourcing contract a customer pays for particular specialists engaged, so pay attention of the warranties section of the contract. The contractor shall guarantee that developers involved have the relevant and sufficient expertise to provide services in a competent and professional manner.

Cost and payment order

Parties should clearly agree on the following terms:

1. Cost of the services;
2. Reporting period the customer pays for;
3. Post- or pre-payment;
4. Invoicing and payment procedure;
5. Late payments consequences.

Cost of the services

Pricing in dedicated team outsourcing contract is quite simple and depends on the type and quantity of specialists involved in performing tasks within reporting period of services provision. The most common way is to designate monthly rates for each specialists involved. Parties may also agree on administrative fees for project coordination or other expenses occurred in the course of services provision. It is highly recommended to agree on the terms of reviewing the cost of services (e.g. by mutual agreement in writing).

It is also essential to agree on pricing in the events of 1) overtime work and 2) early termination of the contract. In the first case, additional time is to be paid according to hourly tariff set out in the contract or agreed by parties additionally. If early termination occurs, the hours actually worked should be paid.

One more situation to consider is when the customer do not set the tasks enough to use all amount of hours that was agreed. As usual customer shall pay in full anyway. It’s because the cost of services, as been said above, depends on the time of specialists and not on results.

Reporting period the customer pays for

Traditionally customer shall pay for a month of developers’ engagement to the project. However, parties may agree on other reporting periods.

Post- or pre-payment

It is up to you only which one to apply. If parties choose a prepayment of services to be provided in the respective reporting periods, they should be clear as of the % of prepayment. 

Invoicing and payment procedure

Parties have to define deadlines for issuing an invoice and invoice payment, namely 1) when the contractor shall invoice the customer (e.g. n days following the end of the reporting month) and 2) when the customer shall honor the invoice (e.g. n days after the invoice is received).

Late payments

Parties shall determine late payment consequences. As a rule, the contractor reserves the right to stop all services to customer in case of a payment delay longer than a certain period of time and unilaterally terminate the contract.  Penalties may also apply.

Deliverables delivery and acceptance procedure

Make sure to outline the order of transferring the deliverables, as well as process of their acceptance. Deliverables are usually subject to upload to the resource – it may be cloud storage, client`s server, software repository etc. The appropriate resource may be agreed under agreement as well as in other way (e.g. via task-tracking system).

Parties shall specify which action is considered to be a proof of acceptance of the deliverables. Would it be a payment against the invoice or signing a certificate of completion? The latter is less common for dedicated team model.

Management and communication

As a rule, the customer under Dedicated team IT outsourcing contract has a control over specialists as to setting tasks, management of workflow, defining the priority tasks. The customer monitors and coordinates the work process by his own or assigns a project manager. The management responsibilities should be clearly specified in the contract. 

Parties should also agree on the model of communication between the customer and dedicated team to manage the process. As a rule the customer is entitled to communicate with the specialists directly without the outsourcing company involvement and specialists shall follow customer’s instructions regarding the provision of the services. Specialists shall report on tasks completed and time spent for tasks each reporting period. Communication channels should also be designated.

Intellectual property

Any software development leads to creation of intellectual property objects. Intellectual property rights to the deliverables under outsourcing agreements are assigned to customer. Considering the importance of intellectual property in the software development, parties should clearly agree on the following:

1. designate a fact of assignation of all the intellectual property rights to deliverables to the customer;
2. specify a moment of transferring the rights (at the moment of payment as usual);
3. specify a cost for the intellectual property rights transfer (or to agree that remuneration for the assignment of  IP rights is comprised in the sum of the payment for the services).

Note that a contract may indicate the contractor’s right to use any deliverables that remain unpaid. 

Confidential information

Confidential information section is essential in software development outsourcing contracts. Customer is disclosing its confidential information and trade secrets to contractor as well as to developers directly. 

Parties to dedicated team outsourcing contract should agree on the following;

1. the list of confidential information;
2. non-disclosure obligations; 
3. fine for breach of non-disclosure obligations.

Do not forget to pay attention to the contractor`s warranties of the developers confidentiality obligations under outsourcing company’s internal NDAs.

e.g.

Contractor shall ensure that developers are bound by terms and conditions regarding use of the confidential information that are consistent with, and no less onerous than, the terms and conditions set out in this agreement.

Non-solicitation

IT specialists are the most valuable resource for software development outsourcing companies. Under Dedicated team model the risk of solicitation is higher due to direct cooperation between the team and customer. That is the reason why high fines for hiring of specialists are usually designated.

The following is to be considered when contracting with outsourcing company:

1. a period of time during which the customer undertakes not to hire developers engaged into services provisions;
2. fines for breaching this obligation.

The sum of fine may be fixed or depend on the seniority of developer (e.g. its annual salary).

Both parties may agree on the terms under which an outsourcing company allows direct cooperation between the customer and employees for separate projects. Buy-out clause entitles the customer to work directly with the contractor’s employees or contractors, if the customer pays the established remuneration for such specialist.

No doubts that Dedicated Team model has lots of pros for both outsourcing company and a customer. The essential point for best outcome is to be on the same page starting from the moment parties sign the contract. The clear and fair provisions of contract are necessary considering long-term cooperation and high flexibility of Dedicated team model. So make sure to outline and regulate all the issues that may affect your interests under the agreement.

IT lawyers are here for you to draft the win-win contract as well as review the existing one 🙂 

P.S. Good news for you if you are looking for highly qualified developers to work on your project and do not want to pay all money of the world. Most of Ukrainian software developers work under Dedicated team or other outsourcing contracts. Check out options available.