[IT Litigation] Software service contracts, the key conditions to prevent disputes are scope of work!

As the acceleration of the digital transformation era continues, demand for software development is rapidly increasing across various industries. Companies often enter into ‘software service contracts’ with external professional development firms to build systems or develop services. However, software development projects should inherently be carried out based on clear design and requirements, but in reality, frequent changes and additional requests arise even after the contract is signed.

Software service contracts are typically structured as ‘fixed-price contracts’ where a certain deliverable is completed and compensation is paid accordingly. In other words, developers only receive payment upon completion of the specified software, making it crucial to clearly define the ‘scope of work’ in the contract to determine software completion.

In actual software development projects, the scope of work is often vaguely stated in the contract. For example, it may be described with abstract terms like "system enhancement" or "including functional improvement," or the client may promise to provide specific requirements in a separate document (e.g., RFP) later. When the scope of work is unclear like this, disputes arise over whether additional requests or work orders that arise during the contract’s progress were included in the original contract.

Are all additional work orders part of the ‘scope of work’?

During the development process after the contract is signed, the client often requests additions like "Please also add this functionality" or "Please also create an administrator page in addition to the existing screen." The problem is that if it's unclear whether these requests are included in the scope of work, the client may refuse to pay additional compensation, claiming it's an extension of the existing contract, while the developer may argue that it's extra work and should be charged separately.

From the developer’s perspective, they may not receive compensation for the additional work performed. Even if they claim the work is outside the contract and demand compensation, they may not receive it if they can't prove it was outside the scope. Conversely, the client may refuse to accept the completed work, claiming certain functions were not included, and demand additional compensation, arguing that the functions were beyond the scope of the contract.

Clearly define the scope of work at the contract stage!

To prevent disputes in ‘software service contracts,’ it is essential to clearly define the scope of work at the contract stage.

By specifying all possible details in the contract or attachment, you can clearly determine whether ‘additional requests’ or ‘change directives’ that may arise during project progress are beyond the existing contract’s scope, thus clarifying the possibility of additional cost claims.

Furthermore, it's not enough to simply define the scope of work to determine the actual impact of these requests or directives. Therefore, it’s desirable to stipulate in the contract in advance how to negotiate these requests and directives when they arise, and what procedure to follow to reflect them in the contract if they affect the cost or schedule. Developers can receive legally justifiable protection if such procedures are specified.

In addition to the contract, it is very important to meticulously record ‘all communications’ that occur during the project's progress. From the developer’s perspective, maintaining work logs, and securing evidence through email or messaging regarding the client’s additional requests or directives, is crucial for demonstrating that the work was outside the contract and eligible for additional cost claims.

Disputes related to software service contracts are complex issues that require both technical understanding and legal interpretation. In cases where issues such as scope of work interpretation, claim for service fees, and delay penalties are intertwined, it is often difficult to respond without the help of an expert.

Law firm Veat helps review and draft contracts, clearly defining clauses such as scope of work and contract payment, to minimize risk when a legal dispute arises. We also assist in recovering unpaid service fees through litigation if additional work is performed but not compensated.

Law firm Veat provides legal advice, leveraging extensive experience advising startups, development firms, and IT projects, to proactively control potential risks inherent in software service contracts and respond effectively in case of disputes.

If you need assistance with scope of work definition or dispute prevention and response related to software service contracts, please contact Law firm Veat at any time.

Thank you.

Law firm Veat