Key Provisions In An ERP Contract

The goal of drafting and negotiating your ERP contract should be to drive all parties to deliver implementation success. While coming to mutual agreement on terms and conditions that mitigate risks and maximize success is the end goal, the way you get there as a licensee is fundamentally different than the ERP vendor’s approach. These different approaches result in conflicting negotiating strategies.

As a customer, you want to ensure that you are able to leverage the ERP contract to manage the ERP vendor relationship not only for the duration of the implementation project, but for the lifecycle of the software product you are licensing from the vendor.

Clearly stated obligations and definitions are critical. Statements of work that incorporate change orders, carefully drafted acceptance testing criteria, detailed deliverables and milestones are essential. You should view your contract (along with an incorporated project plan) as a road map for how the implementation will be conducted.

With respect to the software license, you want to maximize the flexibility with which you can use the software. Maintaining flexibility minimizes the cost of the software over the term of the license and minimizes the risk of inadvertently breaching the contract. In contrast, the ERP vendor’s goal is to provide the most limited right to use the software for a limited period of time so as to maximize revenue.

 

Below are just some of the key provisions in ERP software and ERP implementation contracts that you should focus on when negotiating with your ERP vendor.

Definition of Licensee

You want to ensure that you accurately identify the entity or entities that will use the software. If affiliates or subsidiaries will use the software, they should either be included as a licensee or the license grant should be expanded to allow them to use the software.

Scope of License

Consider whether any independent contractors or third parties will need to use or access the software.

Definition of Licensed Software Products

The software product(s) you are licensing need to be accurately described in plain English. You need to have a clear understanding of what products you have a right to use and what products you do not have a right to use.

Third Party Products

Almost all ERP contracts reference third party products. Understand what license rights you have to those products and what support, if any, is provided. You should also understand if a warranty is provided for those third party products. Pass through warranties are common and may or may not be adequate for your needs.

License Metric

Software is licensed in a number of different ways. For example, there are user based licenses, site licenses and licenses tied to revenue. The language granting you a license cannot be ambiguous, obscure or open to interpretation. You need to clearly understand how you are able to use the software, how you are being charged and you need to be able to defend your use in the event of an audit by the ERP vendor.

Source Code

Many ERP licenses do not include source code. If you are licensing source code, make sure that the ERP contract’s definition of source code matches your own.

Disaster Recovery

You want to make sure that you have the right to maintain and use additional copies of the software in the event of a disaster. Be aware that ERP vendors may charge additional fees for disaster recovery.

Maintenance

The scope of what maintenance covers needs to be clearly stated in the contract. You should understand if updates, bug fixes and upgrades are covered under maintenance. You should also understand if the vendor will “sunset” maintenance at any point. The relationship between maintenance and the software warranty should also be clearly understood.

Maintenance Fee

Maintenance is usually provided at a percentage of the software license fee. The way the maintenance fee is calculated should be clearly stated in the contract. You should also consider negotiating a cap on maintenance fee increases.

Software Performance Warranty

ERP software warranties are usually warranties of reference and limited duration. A warranty period that expires before you can use the software should raise a red flag. Also, be aware that a typical ERP vendor warranty will warrant that the software substantially conforms to the “documentation.” If you have never seen the “documentation” you have no way of knowing if the warranty is meaningful.

Vendor Representations

Be aware that standard warranty disclaimers will exclude any pre-contract representations made by a vendor. If those representations are important to you, they should be included in the contract and referenced in the warranty.

Warranty of Non-infringement

Most ERP vendors should be willing to provide a warranty that the ERP software does not infringe on any third party intellectual property rights.

Indemnification

If a third party claims that your use of the ERP software infringes their intellectual property rights, you should be able to look to the ERP vendor for assistance. The scope of indemnity should be broad. Narrow restrictions on the ERP vendor’s indemnity obligation should be avoided.

Remedies For Breach Of Warranty

If the ERP vendor breaches the warranty, the contract should define how the ERP vendor will remedy the breach. Typical remedies include replacing the software, repairing the software or providing a refund. If the warranty of non-infringement is breached, a remedy might include securing a right to use the software that is subject to a claim of infringement, modifying the software so it is no longer infringing, or providing a refund.

Payment

You should negotiate a discount off of the ERP vendor’s list price. You should also consider tying payment to milestones, deliverables or performance.

Future Options

You will never have as much leverage with your ERP vendor as you do prior to signing a contract. Think about using that leverage to negotiate discounts on future purchases.

Termination/Cancellation

If the ERP vendor breaches the warranty, the contract should define how the ERP vendor will remedy the breach. Typical remedies include replacing the software, repairing the software or providing a refund. If the warranty of non-infringement is breached, a remedy might include securing a right to use the software that is subject to a claim of infringement, modifying the software so it is no longer infringing, or providing a refund.

Confidential information

The ERP vendor will require you to treat as confidential information provided to you in connection with the software license contract. You want to ensure that the confidentiality obligation is reasonable and not over-reaching. Vague or ambiguous terms will increase the likelihood of an inadvertent breach. If the ERP vendor will have access to information you deem confidential, the contract should also obligate the ERP vendor to keep your information confidential.

Delivery And Acceptance

The ERP contract should be clear as to when delivery of the software occurs. You should consider including language that details criteria for accepting or rejecting the software. If you reject the software, the contract should clearly state what happens.

Limitation Of Liability

The ERP vendor will include language limiting its liability under the contract. The limitation of liability language should be mutual so that your liability under the ERP contract is also limited. Increasingly, we see ERP vendors limiting their liability to a certain period of time, and to fees paid for particular software components. The more restrictive the limitation on the ERP vendor’s liability, the less you can recover in the event the ERP vendor breaches the agreement. Overly restrictive language should be avoided. Further, it is reasonable for an ERP vendor to have unlimited liability for certain scenarios.

Source Code Escrow

An obligation that the ERP vendor keep the source code in escrow is usually desirable. Triggering events for the release of the source code should be clearly defined. ERP vendors sometimes ask that customers pay additional fees for source code escrow.

Implementation

Implementation: Many times ERP vendors have one master agreement that sets forth terms for both software licensing and software implementation services. In our experience, it is desirable to have a separate software license agreement and a separate software implementation agreement. Warranty obligations, indemnity obligations and support obligations are all different when applied to implementation services vs. software licensing. Additionally, ERP vendors sometimes try to tie implementation deals and software deals together thereby putting additional pressure on a customer to sign an implementation contract without fully understanding or negotiating the terms. A typical ERP implementation contract would set forth at least the following terms:

The ERP vendor will include language limiting its liability under the contract. The limitation of liability language should be mutual so that your liability under the ERP contract is also limited. Increasingly, we see ERP vendors limiting their liability to a certain period of time, and to fees paid for particular software components. The more restrictive the limitation on the ERP vendor’s liability, the less you can recover in the event the ERP vendor breaches the agreement. Overly restrictive language should be avoided. Further, it is reasonable for an ERP vendor to have unlimited liability for certain scenarios.

  • The scope of the services to be provided.
  • The location where the services will be provided. While services may be provided remotely from time to time, be cautious of ERP implementation providers that want to minimize their obligation to perform services on-site.
  • A detailed project plan that is mutually agreed upon.
  • Carefully defined and documented milestones and deliverables.
  • Acceptance testing criteria for deliverables.
  • A process for rejecting deliverables and remedying defective deliverables.
  • An implementation specific services warranty.
  • A process for remedying any warranty breaches.
  • A formal dispute resolution process.
  • Language that gives you the ability to either approve or replace vendor consultants.

Drafting and negotiating a successful ERP implementation contract is a key factor in mitigating the risk of a failed ERP implementation. Clearly stated obligations, definitions, deliverables and milestones will help you manage the vendor relationship not only for the duration of the implementation project but over the duration of the lifecycle of the software product you are licensing.

Miscellaneous 

The “miscellaneous” section of an ERP contract is sometimes viewed as less important than other sections of the contract. However, many of these provisions can have a serious impact on your legal rights if not properly addressed. While all are important, special attention should be paid to language regarding: assignment, force majeure; arbitration/litigation, non-compete/non-solicitation, integration, and remedies aside from the ones stated above.