Agile Software Development Contracts

Is there such a thing as an Agile Contract?  You bet!  We have been asked on a number of occasions to draft and settle software development contracts based on the agile software development process.  But how can a rigid contract conform with the agile philosophy?  The answer lies in understanding the agile process and formalising the legally binding parts in the form of what we call an “Agile Contract”.

What is Agile?

There are of course various software development methodologies which fall into the broad category of rapid development methodology – Agile is just one.  The names of the players and their roles differ from region to region, and methodology to methodology, however from a legal perspective there are many common threads.  Scrum is one such Agile software development methodology.  Scrum as defined by Schwaber & Beedle in “Agile Software Development with Scrum” is defined as:

a management and control process that cuts through complexity to focus on building software that meets business needs“.

The common threads have been unified into our Agile Contract.  The Agile Contract deals with the Agile Development methodology (with Scrum) according to the philosophy but is not so prescriptive so as to include things such as how many sprints their will be.  The day to day decisions are to be left to the participants, except for the achievement of milestone which must, by their nature, be linked to contractual obligations of the parties themselves.

The contract does not need to be overly prescriptive, but provides a framework to collaboratively develop a software application whilst defining the legal relationships and responsibilities.

What are the major decisions to be made in the Agile Contract?

Each Agile Contract is different, however as a starting point, the following issues need to be considered:

  • Who are the parties to the Agile Contract?
  • Who appoints the Scrum Master?
  • How many people in the Developer team?
  • Is the contract a lump sum contract or one limited by a hard deadline, or both?
  • What are the hourly rates of the Developer team?
  • What are the rules for code repository?
  • Who owns the intellectual property in the code?
  • When does title to the code pass?
  • What are the roles and responsibilities of the parties?
  • Termination – penalty – agreed or the minimum for the developer to be compensated for loss associated with termination?
  • What are the payment milestones?
  • Liquidated damages clause – agreed or minimum amount payable?

Warranties by the Project Owner

Its usual for the Project Owner to provide various warranties to the Developer in regard to its ability to perform its obligation under the Contract.  Some of these may include:

  • Statement of work will not vary materially significantly from what was initially presented;
  • They will be available to provide prompt feedback and participate in the team; and
  • They have the money to pay the developer its projected fee at the designated milestone;

Developers Warranties

Its usual for the developer to provide various warranties regarding their capacity to bring the project in on time and on budget. Therefore it is usual for Developers to consider the following warranties:

  • that its employees and contractors will sign a deed binding them to the terms of the Agile Contract
  • the sorts of projects that they have completed.

Other considerations

Gain sharing

One thing to consider is whether the parties could share in any of the proceeds if the project is brought in ahead of time and ahead of budget. Clearly the Project Owner is incentivised to do this, but practically, there is nothing to encourage the Developer to achieve this.  If the benefits of the incentive are shared, then its more likely that both party’s interests will be aligned.  Much like a physical infrastructure project, it’s worth considering the inclusion of a gain sharing clause.

Escrow of the budget

One of the risks for the Developer is that they Project Owner does not pay in the agreed installments.  Subsequently, one way around this is to deposit the funds into a trust account to draw down the funds according to the achievement of the project milestones.  This eliminates the payment risk for the Developer and ensures that milestones are promptly addressed.

Further references

Related articles by Dundas Lawyers

Are software developers liable for defects in their software?

What is a Software Development Agreement?


Dais Studio Pty Ltd v Bullet Creative Pty Ltd [2007] FCA 2054

Further information

Malcolm Burrows Lawyer Brisbane





Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
Facsimile: (07) 3221 0031
Mobile 0419 726 535
Twitter: @ITCorporatelaw


This article contains general commentary only.  You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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