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How to Draft an Outstaffing Contract: List of Tips from IT Lawyers

Companies in the US that need qualified IT specialists can hire a team, open an offshore R&D center, work with a sole entrepreneur, or get specialists under an outstaffing contract.

If you are trying to consider the differences between an offshore R&D center and a dedicated team, there are some of them. The first option means a continuation of the company. The second one is partnering with a vendor to hire from two to a few dozen tech professionals who will be entirely focused on your projects. 

The last option will fit:

  • Startups from the U.S. and the EU that have limited budgets but can optimize these by working with teams from Ukraine, Slovakia, Poland, Hungary, or Mexico. 
  • Technology companies that work on big projects and expand their teams. 
  • Businesses that assemble an IT department. For example, a bank is developing online banking software, and a clinic chain is preparing an IT solution for online patient consultations. A dedicated team is engaged both for product development and support or post-launch upgrades.

A company can get a fully formed team, or it can supplement its team with missing specialists. For example, a company has a Teamlead senior Full Stack Developer, but needs a business analyst, PM, middle Frontend and Backend Developers, UX/UI designers, and QA. Both the first and second way are outstaffing business models. It avoids the burden of hiring and the daily routine of managing a team. Especially since finding talented developers with the right expertise is not an easy task. According to   Global Talent Crunch, the current talent shortage could create 85 million unfilled jobs and close to $8.5 trillion in unrealized revenues if unaddressed by 2030.

 

What is outstaffing?

Outstaffing is a work format for businesses that do not want to hire specialists, organize their work and deal with their motivation. An IT intermediary company handles this for them. Its tasks cover hiring, onboarding, and managing the work of the team. In addition, the intermediary company takes care of all legal matters: signs contracts with the team, organizes the co-working spaces, and monitors the payment of taxes.

 

10 must-have conditions in the outstaffing contract

The contract allows minimizing the risks of outstaffing: overtime, substitutions, team downtime, employee poaching, and payroll arrears. Let's discuss each aspect separately below. 

Request for a project team

Before starting the work, formalize arrangements about the scope of work, the period of service, the project team composition, and the qualification requirements for each of the IT specialists. The request should be described in a Statement of Work (SoW). The IT lawyers of Stalirov&Co recommend our clients to add the following clauses to the SoW: 

  • Specialist's name.
  • Service: software development, testing, design, business analysis or project management.
  • The assignment and qualification. For example, Middle Full Stack NET Developer or Senior Business Analyst.
  • The cost of the specialist's work per hour.
  • The estimated period and workload of each developer. Take note of what date the work starts, in what mode: full/part-time, the number of days per week, and hours per day.

To make the SoW legally binding, mention in the text of the contract that the SoW is part of the Dedicated Team contract.

 

The cost of project team services

First of all, you should choose a pricing model: Fixed price or Time&Material. Second option is more common in the outstaffing  model.

Contractual clause can be worded as follows: SoW shall specify the cost of hourly rates for providing services by the project team based on Time&Material system.

In addition, in the terms section, you need to give a definition of Time&Material. For example, the order in which the customer makes payment on the basis of the cost of the specialist's work per hour.

 

The next step is to choose the type of settlement: prepayment, partial payment, or post-payment. Of course, it is more profitable for IT companies to work on prepayment, and to include overtime payments in the bill for the next month. If the cooperation is terminated, the IT-company puts an additional invoice. Be sure to provide for this possibility: overtime work is paid by the customer on the basis of the time actually spent, and is calculated on the basis of the hourly cost of services.

 

Payment is made against an invoice. In the contract, it is essential to fix the order of payment. Each invoice should include:

  • information about the cost and time of rendering services by the project team;
  • information about payment of overtime and additional requests of the customer.

Set a deadline for payment. For example, the client pays the invoice in full within 5 business days after receipt.

 

Four additional financial guarantees that should be in the contract

  1. The IT specialist's rate can be reviewed only with the prior consent of the customer. The clause can be formulated as follows: the IT company can change the hourly rates by informing the client about it 60 days in advance, or for a new task. This guarantee will help avoid unexpected overbudget in case the developer is replaced with a new one, with a higher rate.  In addition, the customer will be able to initiate a review of the IT specialist's rating. Do not forget to write about it in the contract. Moreover, you can fix what time tracking software the team uses.
  2. The cost of working on new assignments is discussed separately. This item is needed in case the team is updated for new areas of work. In this way, the client can make the terms of the contract more flexible.
  3. The IT company must discuss with the customer the cost of software, content, and other materials purchased on behalf of the project.
  4. The cost of paid but not rendered services are included in the bill for the next month and reduced by the appropriate amount.

 

Downtime in team performance (Downtime of team)

It is necessary to define what downtime is, and to set clear rules that will help avoid it. A list of situations that would be classified as downtime can be formulated as follows:

  1. No access, materials, or information for the team's work.
  2. No response to requests and emails.
  3. The client doesn't set or update tasks.

To avoid payments for a dedicated team downtime, define sufficient time periods to collect materials, feedback on work results, and update tasks. Agree on the maximum backup that the IT company can agree to. Exclude weekends from counting.

Another type of downtime is an unpaid invoice. Pay attention to the deadline for payment, which is set in the contract.

 

Replacing an IT specialist

The customer may initiate a replacement in the event of improper performance of the work. Specifically: 

  • violation of deadlines;
  • violation of communication rules: failure to show up for video calls, briefings;
  • insufficient competence and experience to provide services;
  • poor quality of work results.

The IT company can replace a specialist by giving one month's notice to the customer. If the replacement happens suddenly, in one day, the IT company must provide a replacement immediately, so as not to stop the business processes.

 

Disclaimers

What differs outstaffing from outsourcing is the scope of IT company responsibility. In this cooperation model, the customer is responsible for setting tasks, monitoring, and accepting results. The losses incurred due to the low level of control are the responsibility of the customer. On the other hand, the IT company will have to compensate for the losses incurred due to the team's violation of work rules. For example, installation of malware, leakage of confidential information and other incidents.

The disclaimer can be strict. Then the IT company is not responsible even for critical errors of specialists. Then the time to fix the debug is paid according to the standard rate. If the company does not write such a rule in the contract, it will have to face conflicts due to the improper work of the team.

 

In one case, a developer failed to integrate the Stripe payment system for an online shop. Then the outstaffing IT company replaced the specialist. But the new developer didn't cope with the task either. Moreover, he violated the deadlines and erased the code that had been written before him. Because of this situation, the customer declined to pay for the work of the specialist. The contract had a less strict disclaimer. According to it, the IT company was responsible for the bugs, if the client could prove that the developer was at fault. In this case, the client was able to prove the criticality of the bugs and the lack of qualifications of the specialist. Therefore, the customer did not have to pay the invoice.

 

Transfer of intellectual property rights

The contract must include a clause stating that the customer is the owner of all the intellectual property created during the cooperation.

The IT lawyer's task:

  • state the fact and determine the moment of assignment of rights,
  • indicate the value or negotiate the inclusion of a fee for the assignment of intellectual property rights in the amount of payment for services under the contract.

In addition, add a list of  the intellectual property items. For example, software, programs, source code, and object code, comments to the source or object code, specifications, documents, abstracts and summaries, methods, analyses, algorithms, strategies, research, processes, and other results of intellectual activity.

 

Confidentiality

The first step is to determine what information is considered confidential. For example, marketing research results and business analyst reports, terms and conditions, charts, flowcharts, project plans, documentation, software and hardware configurations, business processes, business plans, analyses, forecasts, trade secrets and know-how.

 

There should be a clause in the contract about the contractor's portfolio. Whether you grant the permission to disclose co-project information. For example, disclose the scope and description of services, your name, and logo, and the name of the project. We advise you to write down the rule that you can add a case to the portfolio only with the customer's prior consent, and the amount of information should be clearly defined.

 

Next, write down the period during which the information must be kept strictly confidential. As a rule, this is the duration of the contract and from 12 months after its completion.

 

A clause in the contract will help maintain the company's competitive advantage. For example, in 2020, Tesla won a lawsuit against competitor Zoox for theft of trade secrets. Former Tesla employees stole confidential information about logistics and inventory management operations. Each had signed a non-disclosure agreement with Tesla. However, U.S. self-driving car startup Zoox admitted that its new employees were in possession of Tesla documents when they joined the startup's team. So the parties in the case agreed that Zoox would pay Tesla compensation. Moreover, the startup pledged to conduct an audit to make sure that none of the employees retained or used Tesla's confidential information.

 

Non-competition

Include separate clauses to the contract that prohibit creating competing products and solicit clients of the customer. Provisions are detailed in separate agreements: NDA, NCA, and NSA.

You can prohibit outstaffers to:

  • cooperate with or provide services to competitors;
  • use customer's methods in working for competitors;
  • create competing businesses or assist others in creating or scaling them.

 

Dispute resolution

We recommend setting 3 stages of conflict resolution.

  • Negotiations

60% of conflicts the clients of our company encounter with are resolved through pre-trial dispute settlement. Therefore, we suggest making the negotiation stage mandatory. The parties exchange clearly formulated and grounded claims, and offer their solution to the conflict. The claim must be attached with evidence of violations: email correspondence, screenshots from messengers, repositories, task managers, CRM-systems. The response to a claim shall be sent within 10 days. If there is no response, the conditions are accepted.

  • Mediation

Upon mutual decision, the parties engage an independent mediator. The advantage of this way to resolve a dispute is promptness and confidentiality. The mediator's services are paid 50/50.

  • Arbitration

It is important to state the law of which country the court will hear the dispute and which authority will resolve the conflict. For example, International Commercial Arbitrations with their place of arbitration in Ontario or the United States District Court for the District of Nevada.

 

Termination of the contract

The parties have the right to terminate the contract upon mutual consent or by a 60-day unilateral notice. Separate terms shall be defined for SOW termination . For example, 30 days. However, there are grounds for termination on an earlier deadline. When it is not possible to replace the specialist or the work of the team does not satisfy the requirements of the customer. 

Contractual clause can be worded as follows: in case of improper service, the customer has the right to send a notice of replacement, or terminate the SOW in 2 days from the date of receipt of the notice of replacement by the performer.

Be sure to add a provision for the return of the advance payment in case of early termination of the contract.

 

Electronic document workflow

Most likely you will be signing the contract in electronic form using DocuSign. So include a clause stating that the contract in this form is legally binding, and write which service you have chosen to exchange documents: Dedicated Team contracts, supplementary agreements, and SoWs.

In addition, communication with the team takes place in messengers (WhatsApp), task managers (Trello, Jira) and via corporate mail. Any correspondence using them must be legally binding and can be used as evidence.

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