Hiring a software development company is a big investment.
You’re not just paying for code. You’re trusting an external team with your business, your product, and your vision.
This raises questions like: Who owns the intellectual property? What happens if requirements change mid-development? How do you protect sensitive information?
And that’s where 3 key contracts come into play: the non-disclosure agreement (NDA), the master service agreement (MSA), and the statement of work (SOW).
In this article, we’ll break down these contracts, explain why they matter, and discuss some common mistakes you should avoid.
Table of Contents
Non-disclosure agreement (NDA)
A non-disclosure agreement (NDA) is usually the first contract you sign when partnering with a software development company, even before you commit to any of their services.
It allows open discussions while protecting your sensitive business information. Without it, sharing proprietary ideas or confidential data is a risk.
This is because software development involves more than just writing code.
You share business plans, user data, internal processes, and proprietary algorithms with your development partner.
An NDA ensures that neither party misuses or discloses this information.
This is important because intellectual property (IP) is your most valuable asset. For S&P 500 companies, 60% to 90% of their market value comes from their IP.
Without an NDA, you expose yourself to unnecessary risk. A strong NDA will protect your sensitive information and set clear boundaries.
Here’s what an NDA usually looks like:
Non-disclosure agreement (NDA) components
Definition of confidential information – Be specific. Cover code, architecture, strategies, client lists, anything that could give you a competitive edge.
Duration of confidentiality – Most NDAs last 1-5 years. Some push for indefinite protection, but that’s rarely enforceable. Keep it realistic.
Exclusions – Not everything can stay confidential. Public information, independently developed ideas, and legally required disclosures don’t count.
Legal consequences – Make the penalties clear. Breaches can lead to financial damages or court orders to prevent further leaks.
If you set the right terms upfront, your business will stay protected.
Of course, the NDA is just the starting point.
It builds trust, but it doesn’t define project terms or lock in any commitments.
Once you’ve signed, the real discussions begin – with the MSA setting the legal foundation and the SOW outlining the work.
Common pitfalls in NDAs
Overly broad restrictions – Some NDAs define “confidential information” too broadly. This can lead to unnecessary disputes over what is actually protected, so you need to strike a balance between security and practicality.
Unreasonable duration – An indefinite NDA might sound secure, but it might be unenforceable. NDAs usually last between 1 and 5 years and anything beyond that could be challenged in court.
One-sided terms – An NDA should protect both parties. A balanced agreement will build a stronger partnership and lead to smoother negotiations.
Master service agreement (MSA)
The MSA is the backbone of every software development partnership.
It defines the legal and business terms between yourself and the development company you hire. Unlike an NDA, which protects information, the MSA sets the rules of engagement.
A well-structured MSA is key to a successful development partnership. It ensures smooth collaboration and saves you time.
Instead of renegotiating terms for each new project or major change, the MSA provides a reusable framework.
But, why is this important?
Software development projects are complex. Without clear terms, disagreements over scope, payments, or liability can slow progress or even completely derail your project.
Confidentiality obligations – Keeps sensitive information protected beyond the NDA, ensuring trust throughout the partnership.
Intellectual property (IP) rights – Fully clarifies who owns what. You get full usage rights, but the development company keeps its core frameworks and methodologies.
Payment terms – Lays out invoicing schedules, late fees, and refund policies so there are no surprises.
Warranty disclaimers – Software is delivered “as is.” Unless stated otherwise, there are no guarantees against bugs or performance issues.
Limitation of liability – Caps financial risk, usually at six months’ worth of payments, so neither side faces excessive claims.
Non-solicitation clause – Stops you from directly hiring the development company’s employees for a set period.
Termination terms – Defines how either party can walk away while keeping the process structured and fair.
Force majeure and jurisdiction – Outlines which laws apply and what happens if unexpected events (like natural disasters or cyberattacks) disrupt the project.
A strong MSA protects both sides and keeps your software development partnership running smoothly.
It sets the foundation for your partnership, but it doesn’t outline project specifics.
That’s where the statement of work (SOW) comes in. Each new project with your development partner gets its own SOW, while the MSA remains in place.
Common pitfalls in MSAs
Unclear IP ownership – You need to define and clearly spell out IP ownership upfront to avoid surprises. If your contract is vague, you’re at risk
One-sided liability clauses – Don’t take on all the risk. Some contracts push full liability onto one party. A fair agreement protects both sides and keeps the partnership strong.
Undefined change management – Your project will evolve and you need to plan for it. Without a clear process for handling changes, you’ll face scope creep, delays, and unexpected costs.
Statement of work (SOW)
The SOW lays out the details of your project and keeps it on track.
A clear SOW will keep your project on track and prevent scope creep.
But, before we continue, we need to clear up one misconception – a statement of work is not the same as the scope of work. Here’s the difference:
Without a SOW, you risk delays, budget overruns, and unnecessary disputes.
And the stats prove it, too.
Software projects often fail due to poor planning. In fact, 37% of projects failbecause of unclear or wrong requirements.
The SOW ensures all requirements, milestones, and deliverables are documented before work begins.
All in all, a solid SOW is key to successful development. Here’s what it should cover:
Statement of work (SOW) components
Project scope – Clearly define what’s included and what’s not. A well-defined scope is essential to preventing scope creep.
Pricing model – The pricing model that best fits your project. Time and materials gives you flexibility and you pay for actual hours worked, while fixed price locks in costs upfront but leaves little room for changes.
Timelines and milestones – Set clear deadlines and deliverables. This keeps everyone accountable and prevents delays.
Acceptance criteria – Define success from the start. Both sides need to agree on what a finished project looks like.
Change management – Outline a formal process for handling changes. Without it, scope creep will derail your project.
Roles and responsibilities – Spell out who’s responsible for what. A clear team structure prevents miscommunication.
Payment structure – Detail when and how payments happen. Link them to milestones or time-based billing to keep things fair.
The SOW is subordinate to the MSA.
The MSA governs your overall relationship with your chosen vendor, while a SOW defines the work for each project you start with them.
If there’s a conflict, the MSA usually takes precedence.
A strong SOW ensures alignment, reduces risk, and keeps software projects running smoothly.
Common pitfalls in SOWs
Vague deliverables and requirements – In software development, ambiguity is the enemy. Make sure any and all deliverables and requirements are specific, measurable, and relevant.
Scope creep – Unplanned feature requests or scope changes can wreck your timeline and budget. Set a clear change management process in the SOW so you stay in control.
Unclear acceptance criteria – If you don’t define what “done” looks like, you’ll run into problems. Set clear acceptance criteria so there’s no debate when the project is done.
How NDAs, MSAs, and SOWs fit together
These three contracts serve different purposes, but they work as a system.
Together, they protect both the client and the software development company.
To see how this plays out in a real-world scenario, let’s say you’re a financial services company developing a secure customer portal.
Before discussing the project with a development company, you sign an NDA with them since you need to share:
Your system architecture (how your current infrastructure is built)
Your security protocols (encryption methods, fraud detection algorithms)
Your customer data policies (how your handle and store sensitive financial data)
The NDA will ensure information remains confidential.
It’s also a signal that both parties are serious about moving forward.
After agreeing to collaborate, you sign an MSA and you cover:
Intellectual property (IP) ownership – You get full rights to your customer portal and the source code, but the development company keeps the right to reuse general knowledge and non-client-specific frameworks.
Payment terms – You agree to tie payments to milestones, so you only pay when deliverables meet expectations.
Liability limitations – If a security flaw causes a breach, the development company’s liability is capped at six months of payments.
This protects both sides and keeps legal risks in check.
Finally, you define the SOW and lay out the development work in detail. It covers:
Scope – A web-based customer portal with secure login, transaction tracking, and automated compliance reporting.
Timeline – A 12-month development plan with clearly defined milestones.
Pricing model – Time and materials, since you need
Acceptance criteria – The portal must pass penetration testing, comply with PCI DSS standards, and easily integrate with your existing systems.
This way, everyone on the team you’ve hired will be on the same page from day one.
So, how does it all come together?
Each contract builds on the previous one:
NDA – Allows you to share sensitive system and security details.
MSA – Establishes the legal and financial terms of the partnership.
SOW – Defines the exact work required to build your software.
And with this structure, you have a clear and legally sound agreement with your development partner, which sets the stage for an efficient development process.
Software development contracts: FAQs
Yes. Each contract serves a different purpose and is an essential part of a solid development partnership.
The NDA protects your sensitive business information before you start working with your development partner. The MSA establishes the overall legal and financial framework. The SOW defines the specific project scope and deliverables.
Skipping any of these contracts exposes you to unnecessary legal and financial risks.
Absolutely. Most MSAs favor the development company at first.
Commonly negotiated terms include:
Liability limitations – Clients often push for higher compensation in case of failures.
Payment structures – Some clients prefer milestone-based payments over fixed schedules.
IP ownership – Clients want (and get) full rights to the software and source code.
A fair negotiation ensures both sides are protected.
The key areas you should focus on are:
Intellectual property – Make sure it’s clear who owns what to avoid disputes later.
Liability caps – Know your financial risk and what the limits are.
Termination clauses – Understand the exit conditions before you sign.
Payment schedules – Ensure they match your project milestones and budget.
A thorough review before you sign anything will ensure you have a solid foundation for collaboration.
Looking for a reliable development partner?
Signing a contract alone isn’t enough for successful development – you also need a partner you can trust to deliver.
And that’s where we come in.
We’re an EU-based, full-service software development company with 12+ years of experience building complex software solutions for some of the world’s biggest companies.
So, it’s safe to say that we know a thing or two about what it takes to successfully deliver high-quality software.
If you want to learn more, feel free to reach out and our team will be happy to set up a quick meet to discuss your needs in more detail.
A seasoned software engineering executive, Marin’s role combines his in-depth understanding of software engineering processes (particularly mobile) with product and business strategies. Humbly boasting 20+ years of international experience at the forefront of telecoms, Marin knows how to create and deliver state of the art software products to businesses of all sizes. Plus, his skills as a lifelong basketball player mean he can lead a team to victory.
When he’s not hopping from meeting to meeting, you’ll find Marin listening to indie rock, or scouring the latest IT news.
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