What to Include in Your Contract With an Offshore Team

Patrick Ward Patrick Ward Follow May 02, 2020 · 7 mins read
What to Include in Your Contract With an Offshore Team

When conducting staff augmentation with an offshore (or nearshore) software developer, you’ll find that most contracts consist of two main parts: a master service agreement (MSA) and a statement of work (also called the scope of work or SoW).

Video: Contract Considerations for Offshore and Remote Teams

Master Service Agreements

The MSA tends to be very standardized. It’s all Legal English (you’ve probably heard it called “legalese,” that complicated technical language used by lawyers), and most agencies have a ready-made MSA on hand before the client (that’s you) even reaches the signing stage. It deals with the obligations, liabilities, and indemnifications for each party; it will go through a few rounds of legal edits before returning to the agency for a final co-signing by both parties.

You might wonder: will there be elements of your MSA that are specific to the staff augmentation scenario? And if so, can you expect to find further differences whether you’re working nearshore or onshore? The answer in both cases is yes, and that fundamental difference can be summed up by the term “client obligations”.

Client Obligations

With a nearshore or offshore partner, you’re obviously going to achieve a drastic saving in cost. But due to cultural and communication barriers, you’re also going to have a higher level of client obligation — in other words, what is required of you.

It’s important to understand what you’re signing up for. How much of your own team’s resources will you need to dedicate to the project? Onshore agencies tend to do what’s called the done-for-you method: you pay them X amount, usually on a retainer model, and they will periodically report their activities and resulting ROI to you. However, with offshore partners—including nearshore partners, who tend to be easier to work with — a certain portion of your team will have to collaborate on the project, and it’s important to anticipate what portion that will be.

Scope of Work Agreements

The SoW will be the more bespoke, heavily specific part of the contract, as it should flesh out items like pricing and roadmapping for your particular project with the agency you’re hiring. So, with respect to staff augmentation, there will be no done-for-you or “full project engagement” model.

Full projects bill in the form of a retainer—perhaps monthly, or something more similar to a legal retainer—but for staff augmentation, they will instead look at sprint engagements, the most notable of which will be a minimum sprint engagement.

Minimum Sprint Engagement

When hiring offshore developers, you’ll need to pay attention to this, because a higher minimum sprint engagement can be used in an effort to lock you into a longer-term contract than you’re seeking.

You’re seeking a development partner who can stand behind the quality of their work. A fairly low minimum means a more confident and likely more competent agency. A higher minimum, on the other hand, may suggest some level of incompetence on the part of the agency or its developers.

Other Important Aspects of the IT Staff Augmentation Contract

Payment Terms

There are front-end, back-end, and full-stack developers; designers to pay; and levels within those (senior or junior designers or developers). Know the rates of each of those positions, and moreover, know if there are any roles outside of that. If an agency hasn’t specified a certain role, but your project suddenly needs it in the future, that may give them leverage to charge you more as part of a scope of work enhancement.

When looking at pricing, you need to seek the words, “Dedicated developer per week,” because it means:

  1. They are 100% focused on and allocated to your work
  2. It requires more commitment from the agency than “per hour” would.

Remember: the developer must be dedicated and ideally paid per week, explicitly in the contract.

You also need to make sure that all rates are based on time and materials. Do not go with a fixed cost, no matter how appealing it looks. Fixed-cost assumes way too many things you may not be prepared for and can, ironically, end up much more expensive than first presented. Specifically seek the words “time and materials”.

Net-7 may be the first set of payment terms, but you should be able to push them to net-30, which is standard. If they can get you to accept a net-7 pay cycle, they’ll have more chances to charge you extra fees, e.g. “If you are late on this day, you will be charged X percent.”

Net-90 or “upon-delivery” are terms that only less scrupulous partners can afford to accept. Leave these for multinational corporations. Once again, you want net-30 payment.

You can be flexible with invoicing, but it’s important to show the agency that you are reputable. Agencies fear working without pay, something anyone should be wary of. They want a reputable client. You want a lower initial invoice.

In order to make this happen, you need to demonstrate your ability to pay on time and show them that you lead with integrity.

Acceptance

Software is not static; it’s an iterative process. So, how do you know when it’s done? This is defined by the acceptance barrier, and it’s your biggest negotiating tool.

If your terms of acceptance are vague or minimal, your offshore partner may not fully build the product to what were your initial expectations, leaving you at a loss.

Product Roadmap

You’ll have to make assumptions, but try to get your clearest idea of what it’s going to take to complete the project. “Build app” is not sufficient. Again, vagueness creates nothing but tension and frustration, as nobody can be on the same page when everybody is free to have a different concept of completion.

Converse with the sales team as well as with your technical team members. Identify potential problems and prospective solutions. Agree upon these ahead of time to be used in cases of emergency. Finally, all of these elements you discuss must be included in the contract or they will not be fulfilled.

The purpose is to make sure that everything discussed and documented in sales conversations is captured in the roadmap.That way, you ensure that the agency is obligated to deliver what you expect of them.

Product roadmaps are highly customizable. A word document may be more than adequate, or it could be a clickable prototype. Some people do the latter so that they can take it to investors, and once they receive investments, they’ll sign a separate agreement for the development phase. It may be even more exploratory or fluid: an agile development document or some sort of project management software with a list of different features to test.

Client Product Ownership

Nominate a dedicated person who is ready to play the role of Client Product Owner. It doesn’t have to be someone in a technical role. The purpose of this person is to ensure, along the way, that everything happening is aligned with your desired outcome. If you ever find your objectives aren’t being met, you’ll need to adjust. The CPO is the person who will stay on top of this.

It’s important that your chosen CPO remains the same throughout the duration of the project. The burden is on you to decide, at the outset, who will consistently fill that role in order to avoid complications down the line.

Onshore agencies generally don’t have these stipulations in their contracts, but they’re important nonetheless. Without them, you could find yourself six months in with a flashy product that does what it does very well, but ultimately doesn’t do what you need (i.e., drive revenue or some other form of ROI).

Having a dedicated legal consultant on staff can be expensive. There are, however, companies such as LegalZoom and LegalShield who offer certain cost-cutting services. However, you’ll also discover a subset of lawyers who’ll function as a sort of “outsourced legal counsel”, whom you can hire on an as-needed basis. You’ll still pay legal rates, which, of course, aren’t low—but they could be per-hour, rather than on retainer.

Ultimately, we cannot recommend using LegalZoom or LegalShield in good conscience: relying on them can end up with you pursuing a rescue development mission spending more money than you ever anticipated to fix an incomplete, broken, or otherwise failed product. It’s better to do your research and make sure you have the proper counsel to protect your interests when working with any offshore agency.

Patrick Ward
Written by Patrick Ward Follow
Hi, I'm Patrick. I made this site to share my expertise on team augmentation, nearshore development, and remote work.