IT Contract Negotiation Tips and Tricks

By Chad A. Eckes
10:23 AM

Last month we discussed the process of selecting the correct healthcare software solution by utilizing a detailed analysis supported by quantifiable data. The next subject to consider is negotiating a solid contract. We cannot over emphasize the importance of a complete and well defined contract to the successful completion of the implementation project. Without this, the long-term relationship between the selected vendor and your organization may be put at risk.

Right from the outset, it is critical to ensure that both sides keep the big picture in mind; doing so ensures that the select few deliverables that are of common interest to both parties do come out of the contract process. These include:

  • Terms and conditions which are fair to both organizations.
  • A good or improved working relationship existing after the negotiation is complete.
  • A complete contract which defines the formal working relationship of the organizations moving forward. (despite this, the hope would be that this can be safely put in a drawer upon signing, available only in the event of a problem).

Our first recommendation is to retain counsel that specializes in information technology (IT) contract law. Even if you have internal counsel, we still recommend utilizing external assistance for large software contracts. Considering the budget size typical of projects such as electronic health record implementations, spending $50-100,000 on an enforceable contract is well worth the cost.

Our second recommendation is to not force a relationship. If you can't come to an agreement contractually, you must consider this a poor sign regarding the future relationship. Furthermore, it is worth remembering that "meeting in the middle' often results in a lose/lose situation. You must clearly define what you consider to be your success criteria before beginning contract negotiations and focus on achieving that goal.

One of the reasons you need to have narrowed down your vendor selection to 3 top choices is to allow your organization to be in a position to walk away from a bad contract or relationship.

Now that we have discussed the groundwork, let's consider the six key areas to most software contracts:

  1. Software
  2. Hardware
  3. Professional Services
  4. Training
  5. Implementation Scope
  6. General Terms and Conditions

These areas, nor our recommendations, should be considered an exhaustive list of contract topics. Nonetheless, we do recommend that these items certainly be included in your contract negotiation plan.



Include an appendix in the contract which details your functional requirements, use cases, and the vendor's self scoring of functionality expected.

Depending upon the number of modules being purchased, you can expect to have hundreds of requirements.

Licensing structure

Define what structure works best for your organization - user seats, CPU, volume, server, site, or enterprise. This is a key philosophical and financial decision. You will want to model the costs of the various structures and gap the model against your business plans.

When defining your licensing structure in the contract, make sure anticipated growth is accounted for including: same store growth, M&A growth, and expansion.

Licensing needs to consider events such as a partial or full sale of the vendor or customer organization; as such, define a transition of service process.

Fee structure

The scheduling of payments for licensing fees should be aligned with key milestones in the implementation methodology. We suggest a down payment of no more than 20 percent, a second payment at completion of the pilot, and a final payment either at project completion or at a minimum, at the end of the first system testing phase. (Of note, the securities and exchange commission will enforce a software vendor be in receipt of all payments within 12 months.) We strongly urge that you are completed with the first pass of system testing before you make the final software payment.

Escrow of source code

Define and include scenarios where the source code will be made available to you.

Define and include parameters around source code escrowing such as updates to code, right of use, supporting documentation, and support fees.

Guarantee of software performance

Most vendors will have completed performance testing of their software and can provide you with metrics of software performance. If this is not available, you will need to define and come to consensus on software performance metrics.

Similarly, most vendors will have a customer support service level agreement and a customer support manual. Include both in the contract if they are available.

Maintenance & support (M&S)

It is critical to assign a maximum annual increase in M&S cost. Tying such increases to the consumer price index is always a good start.

Make sure to clearly define the level of support expected for the specified annual dollar amount. Include the ability to adjust M&S if the support SLA is not adhered to.

Third party software (if third party software is used)

Define the expectations of and approach by your vendor if they and a third party's relationship terminates.

Define support metrics and processes for the third party software.

Ensure that contracts for the third party software will be negotiated. Depending upon whether the support is being provided by your vendor or the third party vendor, the contract may need to include detailed support components.

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