What Are the Typical Types of Contracts Used in IT?
Contracts used in IT typically are of several types, each of which has different characteristics, responsibilities and approaches for contract management:
Sales contract
This type of contract is between a supplier of standard “off-the-shelf” IT products or services and a customer. The supplier takes the lead role in contract management, defining the terms and conditions of the contract. Typically, the contract details will be the same for all customers. The customer accepts the contract’s terms and conditions by placing an order for the products/services, including a requirement to pay the supplier for them. In this type of contract, the customer’s contract-management activities are limited to determining if the goods/services were delivered and based on any terms for non-delivery defined in the supplier’s contract. The supplier’s contract-management activities are limited to defining the contract, communicating its contents during the ordering process and requesting payment according to the contractual terms and conditions. No negotiation occurs with the customer. Examples of where this type of contract and management approach applies include when a customer procures “shrink-wrapped” software, PCs, network services, cloud-based software services and desktop support services.
Purchasing contract
This type of contract is typically used when the customer wants to purchase bespoke products or services, or when it wants a higher level of contract management than is defined in a supplier’s sales contract. In this type of contract, the details will be specific to the customer and supplier. The customer will take the lead in contract management, including defining and negotiating the contract. The contract may be based on the supplier’s standard contract or the customer may have a contract template that matches with how it wishes to manage the contract. The customer will manage compliance of the supplier against their contractual requirements, taking remedial action as required and managing any changes to the contract. The supplier is also involved with contract definition and negotiation to ensure it can deliver according to the requirements of the contract. This type of contract includes the agreed approach to manage continuous delivery and compliance, and both parties normally sign it to signify their agreement. Examples of where this type of contract and management approach are used include the outsourcing of IT services, bespoke software developments and employment contracts.
Partnership agreement
This is a type of contract that formally documents the terms and conditions of a partnership of two different organizations, so they become “partners” in a commercial arrangement. In a partnership agreement, both parties will jointly manage the contract, acting as if they were a single organization. The contract may still contain individual liabilities for each party, but will also specify all joint liabilities. Examples of where this type of contract and management approach is used include a customer and supplier working together to develop a new product, which is then jointly owned; two suppliers working together to deliver services to the same customer; and one supplier providing hosting services and another providing application services. In this last example, each supplier would still have separate contracts with the customer, and the contracts would be managed independently.
Collaboration agreement
A collaboration agreement is used where several suppliers provide services to the same customer and where the customer has a contract-management requirement for them to work together. As well as individual contracts the customer manages, each supplier and the customer also have a contractual obligation to sign a common collaboration agreement. This type of agreement contains contractual obligations that are specifically designed to encourage all parties to work together, often including requirements for shared objectives, measuring the willingness to work together and collectively driving improvements. The customer or its appointed service integrator manages compliance of the contractual requirements. This type of contract and management approach is typically used where the IT supply landscape includes a need for service integration and management.
Sub-contract
This is a type of contract used between a supplier and another supplier, where the primary supplier has a contract with the customer to provide products/services but requires assistance from another supplier – the subcontractor. The primary supplier, sometimes called the “prime”, creates and then manages a contract with the subcontractor. The subcontractor has no contractual relationship with the customer, and it does not manage the subcontractor. The prime supplier is still accountable for delivering of its contractual obligations to the customer, even for any parts the subcontractor delivers.
Master-services agreement
A master-services agreement (MSA) is often used in contract management for complex purchasing contracts when a single supplier provides one customer with many different services. Common obligations of the different contracts are added to a master services agreement to reduce the size of each contract and simplify the management of these shared contractual obligations. Examples of obligations are payment terms, intellectual property ownership and approaches for contractual dispute management and resolution. MSAs can also be used with multiple suppliers providing services for a service integration and management landscape, where they have common contractual management obligations.