Most legal professionals can relate to the struggle of juggling multiple tasks, only to find themselves buried under a mountain of software contracts that demand their attention. 

Human contract review takes an average of 92 minutes! That’s 1.5 hours spent in only reading a contract and redlining it! To add to it? The negotiation. It’s a lot of back and forth.

If you're nodding your head in agreement, you're not alone. We understand the frustration of feeling stretched thin and struggling to find the time for thorough contract reviews. That's why we've developed the ultimate software contract review checklist to help you reclaim your time and streamline your software contract reviews like never before.

With our checklist in hand, you will be able to breeze through contracts faster than ever, leaving you with more time to focus on what truly matters.

Why a software contract review checklist is essential

“As an in-house lawyer, it is vital that you understand how to read contracts – they are the lifeblood of any company and working on them is, in my opinion, the highest and best use of the legal department.  Even if you don’t work on contracts every day, it’s an important skill to develop and it will help you with your day-to-day work because at some point someone will slide a contract over to you to look over for some purpose – yes, even the litigators kept chained to the wall down in the basement waiting to be unleashed.”

~‍Sterling Miller, CEO and Senior Counsel for Hilgers Graben PLLC 
Ten Things – How to Read a Contract

When you're about to sign a software contract, you're not just agreeing to use a piece of software. You're entering into a legally binding agreement that outlines the rights, restrictions, and responsibilities of both you and the software provider. 

That's why conducting due diligence before signing off on a software contract is more than just a good practice—it's essential. 

Embarking on due diligence means you're thoroughly reviewing and understanding each clause of the contract. This isn't just about ensuring the software meets your business needs; it's about recognizing and mitigating legal risks that could impact your operations, finances, and reputation.

By scrutinizing the contract's terms, you can identify any unfavorable conditions, negotiate better terms, and make an informed decision about proceeding with the software.

Also read: Company Due Diligence Checklist

Common pitfalls and risks associated with software contracts

Software contracts are fraught with pitfalls and risks that can catch you off guard if you're not careful. Some of these include ambiguous terms of use, hidden fees, stringent termination clauses, data ownership ambiguities, and inadequate support or service level agreements (SLAs). 

These issues can lead to unexpected costs, legal disputes, and operational disruptions. According to recent statistics, a significant percentage of businesses face challenges with software contracts due to overlooked clauses that lead to compliance issues and financial penalties.

How a software contract review checklist ensures comprehensive coverage of all essential aspects

A software contract review checklist is your roadmap through the forest of legal jargon and complex clauses. It ensures that no stone is left unturned, covering everything from license grants, fees, and payment terms to confidentiality, data protection, and termination rights. 

This comprehensive approach guarantees that you assess every crucial aspect of the contract, making it less likely that you'll overlook a detail that could have significant implications down the line.

By adopting a software contract review checklist, you arm yourself with a powerful tool that enhances your understanding, strengthens your negotiating position, and ultimately protects your interests.

Also read: The Perfect Contract Review Checklist

Comprehensive steps for software contract review

When you're about to review a software contract, think of it as making sure everything matches what you need and keeping yourself safe from any surprises. Here's a simple way to tackle it:

#1 Go through the scope of the contract

The scope of the contract serves as a roadmap for the entire project. It defines what will be delivered, when, and by whom. A well-defined scope helps prevent scope creep, which can lead to unexpected costs and delays. It also sets clear expectations, reducing the chances of disputes down the line.

As in-house legal counsel, your role is to ensure every aspect of the software delivery is spelled out:

• Services and deliverables: The contract should clearly list the software products, updates, and any other deliverables. 

For example, if your company is buying a customer relationship management (CRM) system, the contract should detail the specific modules and features included, any custom development work to be done, and the format of any data reports or analytics to be provided

• Timelines: Ensure that the contract specifies realistic timelines for each milestone and deliverable. Look out for any provisions that allow for extensions and understand the circumstances under which they can be invoked. 

If the vendor promises to roll out the CRM system in three months, check if this timeline is contingent on certain prerequisites from your side, such as providing access to existing customer data.

• Responsibilities: It’s crucial to define not just what is being delivered but who is responsible for what. This includes not only the vendor’s responsibilities but also any obligations on your part, such as providing access to systems or ensuring that employees are available for training.
  For example, the vendor might be responsible for implementing the CRM system, but your IT department might need to ensure that your infrastructure meets certain technical requirements.

When you identify any unclear areas or gaps in the scope, approach the vendor to clarify these points. It’s better to address these issues before signing the contract than to dispute them later. 

For instance, if the contract doesn't specify who is responsible for data migration to the new CRM system, bring this up and ensure it's clearly defined in the contract.

If necessary, draft amendments or addendums to the contract to include any details or clarifications agreed upon. Make sure these documents are signed by both parties.

#2 Read the licensing terms carefully

Licensing terms define how your organization can use the software, any limitations on its use, and the responsibilities your organization has to remain compliant with the license.

Licensing terms can vary greatly depending on the software and vendor. Some licenses may restrict the software's use to a certain number of users or devices, while others may allow unlimited use across your organization. Some licenses may permit you to modify the software or access its source code, whereas others may not. Violating these terms can lead to legal issues, financial penalties, or both.

Here are key aspects of licensing terms you should scrutinize:

• Usage rights: Identify what the license allows you to do with the software. For example, if you're licensing a project management tool, does the license allow for an unlimited number of projects and users, or are there caps that could limit your team's usage?

• Limitations and restrictions: Be aware of any restrictions that could affect your organization's operations. This might include prohibitions on using the software in certain countries due to export controls or limitations on using the software to provide services to third parties.

• Compliance obligations: Understand any obligations your organization must fulfill to remain compliant with the license. This could include requirements for regular auditing, reporting usage to the vendor, or ensuring that the software is used only for authorized purposes.

When you encounter terms that are not aligned with your organization's needs or expectations, open a dialogue with the vendor to discuss the specific terms that are problematic for your organization. Clearly explain how these terms conflict with your operational needs or strategic objectives.

Suggest alternative terms that would be more acceptable. For example, if the email marketing software license restricts usage to one country, negotiate for a global license that allows for international campaigns.

Ensure that any agreed-upon changes to the licensing terms are accurately reflected in the contract or in an addendum to the contract, and that all changes are duly signed by both parties.

Also read: How to Review Software Licensing Agreements

#3 Evaluate the vendor’s maintenance and support clauses

Support clauses outline the vendor's obligations regarding updates, bug fixes, technical support, and other assistance necessary for the smooth operation of the software.

Effective maintenance and support are crucial for minimizing downtime and ensuring that any software issues are resolved promptly. Poor maintenance and support can lead to operational disruptions, security vulnerabilities, and increased costs.

You need to assess the maintenance and support clauses with a focus on:

• Availability: The vendor's support hours should match your organization's operational hours. If your company operates 24/7, but the vendor only offers support during standard business hours, this could leave your team without assistance when they need it most.

• Responsiveness: Look for specific commitments regarding response times. For example, critical issues should have a shorter response time compared to minor problems.

• Updates and upgrades: Understand the policy for software updates and upgrades. Are they included in the maintenance fee, or are they charged separately? How frequently does the vendor release updates?

• Exclusions: Be wary of any exclusions in the support services. Some vendors may exclude certain types of support or charge extra for them.

When the vendor's standard maintenance and support terms do not meet your needs, explain to the vendor how the discrepancies between their standard offering and your requirements could impact your operations. Use these discrepancies as leverage to negotiate better terms.

Ensure that the contract clearly defines what constitutes a "critical" issue versus a "minor" issue to avoid any ambiguity in response times.

If the vendor agrees to provide enhanced support services, discuss whether these will be included in the standard fee or if additional charges will apply. Strive for a balance between cost and the level of service your organization requires.

#4 Make sure all ownership rights are clear

Ownership clarity helps prevent future disputes over intellectual property and ensures that your organization can use the software as needed to support its operations.

Software ownership and rights can significantly affect your organization's ability to adapt the software for its needs, protect its intellectual property, and even determine the software's value as an asset. Ambiguities in this area can lead to legal challenges, including copyright infringement claims or disputes over software modifications or usage rights.

• Ownership of custom developments: If the software is being customized for your organization, ensure that the contract specifies who owns these customizations. 

For instance, if your company commissions specific features to be developed for an existing software platform, you'll want to ensure that your organization retains ownership of these features or at least has broad rights to their use.

• Usage rights: The contract should clearly delineate your organization's rights to use the software, including any limitations on the environments in which the software can be deployed (e.g., server installations, cloud platforms) and any restrictions on its use within your company or with third parties.

• Modification rights: If your organization needs to modify the software for integration with other systems or to add new features, ensure that the contract grants these rights. Additionally, it should specify any obligations your organization has when making such modifications, such as sharing changes with the vendor or restrictions on distributing modified versions of the software.

Negotiate terms that clearly state your organization owns any custom developments or has the right to use, modify, and integrate the software as needed.

If modifications are necessary, discuss these upfront and include specific provisions in the contract that allow your organization to modify the software or have the vendor make modifications on your behalf.

Ensure the contract allows for the software's use in various operational environments and doesn't unduly restrict your organization's flexibility in using the software.

#5 Review security measures to meet industry standards

Conduct a thorough review of the vendor’s security protocols and ensure they meet or exceed industry standards and regulatory requirements. This scrutiny is essential in today's landscape where data breaches and cyber threats are increasingly common.

A breach can lead to significant financial losses, legal repercussions, and damage to your organization's reputation. Strong security protocols and data protection measures are your first line of defense against these threats.

What to look for:

• Compliance with industry standards: Ensure the vendor complies with recognized security standards such as ISO/IEC 27001, SOC 2, or industry-specific regulations like HIPAA for healthcare or PCI DSS for payment card information.

• Data encryption: Confirm that the software includes end-to-end encryption for data at rest and in transit to protect sensitive information from unauthorized access.

• Access controls: Review the system's access controls to ensure that they are robust and can restrict access based on roles and responsibilities within your organization.

• Incident response plan: The vendor should have a documented incident response plan that outlines procedures for responding to security breaches, including notification timelines that comply with applicable laws and regulations.

Request that the contract include explicit commitments to data encryption standards and compliance with GDPR. Ask for documentation or certifications that verify the vendor's adherence to these requirements.

If the vendor’s incident response plan does not meet your organization's standards or regulatory requirements, negotiate terms that strengthen these protocols, including specific notification timelines in the event of a data breach.

For access controls, if the vendor's standard offerings do not align with your needs, discuss customized solutions that ensure only authorized personnel can access sensitive information.

Also read: In-House Legal Guide to Safeguarding Company Data

#6 Check for liability and insurance clauses

The liability clause outlines the extent of the vendor's responsibility if the software fails to perform as promised or causes harm to your organization, such as data loss or operational disruption. The contract must clearly define what constitutes a software failure, the time frame for the vendor to remedy such failures, and the consequences if the issue is not resolved.

In addition to liability clauses, verifying the vendor's insurance coverage is paramount. This ensures that in case of a significant failure or breach, the vendor has the financial backing to compensate your organization for any losses incurred. Insurance coverage should align with the potential risks and liabilities specified in the contract.

If the standard liability cap is insufficient, negotiate a higher cap based on the potential risk and impact assessments. For instance, if the potential impact of a software failure is estimated at three times the annual licensing fee, propose adjusting the liability cap accordingly.

Ensure the liability clause covers all forms of damage that your organization may incur, including direct, indirect, incidental, and consequential damages. This is particularly important for software that is critical to your operations.

Request documentation of the vendor's insurance policy to confirm it covers the types of risks associated with the software's failure. This might include professional indemnity insurance and cyber liability insurance. Ensure the coverage amount is commensurate with the potential risks.

Consider including indemnification provisions that require the vendor to defend and indemnify your organization against claims arising from the software's use, such as infringement of third-party intellectual property rights.

#7 Negotiate favorable termination clauses

Termination clauses in software contracts define the conditions under which either party can end the agreement. They're crucial for ensuring your organization isn't locked into a long-term contract without sufficient flexibility or exit strategies. 

Understanding these clauses and negotiating favorable terms can protect your organization from staying bound to a contract that no longer serves its interests or becomes unfavorable.

Termination clauses typically cover several key areas:

• Termination for convenience: This allows either party to terminate the contract without cause, given proper notice. It's crucial to negotiate the notice period to ensure it's reasonable for your organization to transition to another solution if necessary.

• Termination for cause: This outlines specific reasons either party can terminate the contract immediately. Common reasons include breach of contract, failure to meet service levels, or insolvency.

• Effects of termination: This section details the obligations of both parties upon termination, such as the return of data, settlement of accounts, and payment for services rendered up to the termination date.

If a 90-day notice is too lengthy, propose a shorter period that gives your organization enough time to transition to another service without being too burdensome.

Discuss the possibility of capping early termination fees at a reasonable amount or eliminating them for terminations for cause. This can protect your organization from significant financial penalties if the service fails to meet contractual obligations.

Ensure the contract clearly outlines the process for data return and any post-termination assistance from the vendor. For example, in the case of cloud storage services, the contract should specify how your data will be returned or transferred and the timeframe for this process.

Also read: Managing Contract Terminations: The Ultimate Guide

#8 Review the dispute resolution clause carefully

The dispute resolution clause should specify the steps to be taken when a dispute arises, often starting with negotiation or mediation as the first step. If these methods fail, arbitration or litigation may follow. 

Each method has its advantages and disadvantages, and the choice between them should be based on the nature of the potential disputes, the relationship between the parties, and the need for confidentiality.

Recommendations:

• Opt for mediation then arbitration: Mediation, followed by arbitration if necessary, is a popular choice for dispute resolution in software contracts. Mediation allows for a more informal negotiation with the help of a neutral third party, often leading to a mutually agreeable solution. 

If mediation fails, arbitration provides a more formal but still less adversarial process than litigation, with the benefit of being quicker and more cost-effective.

• Specify the jurisdiction and governing law: The contract should clearly state the jurisdiction and governing law that will apply to the dispute resolution process. This is particularly important in contracts involving parties from different countries, as it affects the legal frameworks and standards that govern the contract.

• Clarity on process: Ensure that the clause details the process for initiating dispute resolution, the timeline for each phase, and the mechanism for selecting mediators or arbitrators. This clarity can prevent additional disputes over the dispute resolution process itself.

A well-crafted dispute resolution clause in your contract might outline a process where you first attempt to resolve the issue through direct negotiation with the vendor. If this fails, the clause could require mediation as a next step, specifying a deadline by which mediation must start. 

Should mediation not lead to a resolution, the clause would then allow for arbitration, detailing the method for selecting an arbitrator and the location for the arbitration proceedings. This structured approach gives both parties a clear framework for resolving the dispute, potentially saving time and money compared to going directly to court.

Also read: How to Resolve Contract Disputes

#9 Evaluate software costs and fees

Ensuring that all costs and fees are transparently outlined and scrutinized for reasonableness is key to protecting your organization from unexpected financial burdens.

Transparency in the cost structure of a software contract involves more than just the upfront purchase price or subscription fees. It includes, but is not limited to, implementation costs, ongoing maintenance fees, additional charges for support, and costs related to scaling or modifying the software. 

For instance, if your organization is considering a new customer relationship management (CRM) system, it's crucial to identify not just the license fee but also the costs associated with data migration, training, and any per-user fees that could significantly impact the total cost of ownership.

When discrepancies or unjustifiably high charges are identified, use the following strategies to negotiate better terms:

• Benchmarking: Compare the vendor's pricing against industry standards and competitors. If you find that the vendor's fees are significantly higher than the market average for similar functionality and service levels, present these findings as leverage in your negotiations.

• Eliminate or reduce unnecessary costs: Identify any line items that may not be necessary for your organization's use case. For example, if the software includes advanced analytics features that your organization is unlikely to use, ask if these can be removed from your package to lower the cost.

• Volume discounts and long-term deals: If your organization plans to use the software extensively or expects to scale up its use, negotiate volume discounts or more favorable terms for committing to a longer contract term.

Consider a scenario:

Your organization is negotiating a contract for an enterprise resource planning (ERP) system. The initial proposal from the vendor includes not only the software license fees but also significant charges for onboarding, training, and a high annual maintenance fee. 

Upon review, you find that the training fees are based on in-person sessions, which your organization does not require as it prefers online training modules that are generally more cost-effective. Additionally, the maintenance fee is high compared to industry benchmarks for similar ERP systems.

In this scenario, armed with benchmark data and a clear understanding of your organization's specific needs, you can negotiate to replace in-person training with online modules, significantly reducing or eliminating the associated costs. 

You can also leverage your findings on maintenance fees to negotiate a more reasonable rate, perhaps by agreeing to a longer-term contract in exchange for a lower annual fee.

Also read: SaaS Contract Management 101: Essential Strategies and Tips

#10 Ensure contract compliance with laws and regulations

Ensuring compliance with laws and regulations encompasses a wide array of concerns, from data protection and privacy laws to intellectual property rights and industry-specific regulations.

Given the dynamic nature of legal and regulatory landscapes, particularly with the advent of global data protection regulations like GDPR in Europe and varying state laws in the US such as the California Consumer Privacy Act (CCPA), staying compliant is both crucial and challenging.

The compliance review involves a thorough examination of the contract to ensure that all provisions are in line with relevant legal and regulatory requirements. This includes, but is not limited to, clauses related to data handling and processing, security measures, reporting obligations, and the protection of intellectual property rights. 

You would need to:

• Review the contract's data protection clauses to ensure they align with GDPR, CCPA, or any other applicable privacy law.
• Consult with privacy law experts to identify any potential gaps in the contract's compliance provisions.
• Negotiate with the vendor to include specific language or amend existing clauses to ensure full compliance with privacy regulations, potentially including audit rights to verify compliance.

Also read: What is Contract Compliance? The Ultimate Guide

Free software contract review checklist 

Accessing and using the checklist is a piece of cake. Take a moment to familiarize yourself with the various sections and items.

When you're ready to start your review, grab a copy of your software contract and pull up the checklist. Then, just work your way down the list, checking off items as you go. Feel free to jot down notes or questions as you review - it's all about making sure you understand what you're getting into.

You can customize this checklist to fit your specific needs! Maybe there are certain clauses or terms that are particularly important to your organization. Or perhaps there are industry-specific regulations that you need to keep in mind. 

Securing success through thorough software contract review

“If you try to read a complex contract carefully, from front to back, and expect to understand it on just the first read-through, that’s wishful thinking (and potentially very messy).”

~Sterling Miller, CEO and Senior Counsel, Hilgers Graben PLLC
Ten Things: How to Read a Contract

Reviewing software contracts can be quite the journey, but it's an essential one. Ensuring clarity, compliance, and alignment with organizational goals can save you from potential headaches down the road.

With our free software contract review checklist template in hand, you've got a powerful tool to streamline your contract review process. By meticulously going through each item on the checklist, you can identify potential pitfalls, negotiate better terms, and ultimately safeguard your organization's interests.

And, if you're looking to supercharge your contract review process even further, consider checking out VerifAI by SpotDraft. With its innovative AI-powered features, VerifAI takes contract review to the next level, automating tedious tasks and providing valuable insights to enhance your workflow.

Whether you're using our checklist template or exploring advanced AI solutions like VerifAI, one thing's for sure: due diligence pays off. So, take the time to review those software contracts thoroughly. Your future self will thank you for it.