Your browser does not support JavaScript!

Chapter 25 - IT Contract Formation

25.8 VITA recommendations for a successful IT contract

25.8.22 IT pricing

While the obligations of the IT supplier to the agency may be complex, the primary obligation of the agency is simple. The agency pays the supplier for its IT services or products. System development contracts are traditionally for large complex projects and commonly cal for progress payments. An agency can manage the risk of these projects by paying in increments based on project milestones, or holding back a portion of the fee until the software/system is deemed by the agency to be acceptable. In order to work within these constraints, IT suppliers are increasingly breaking projects into smaller chunks, covering shorter periods of time. Agencies may want to evaluate whether it would be more beneficial to pay a greater amount for the supplier's services in implementing the software, rather than for the software license itself.

Software license agreements may call for one-time payments or recurring payments, depending on whether the software license is viewed as a subscription or "paid-up." Applications service/hosting and software-as-a-service are normally subscription based. Fees depend on use and may be charged monthly or annually. Maintenance fees are recurring regardless of whether the underlying license is paid-up one time or is an ongoing subscription, and may include additional hourly charges. The maintenance price should be based on the actual price paid for the software after all discounts and negotiations, rather than the list price, which usually will be significantly higher. IT agreements commonly list the amount of fees and the manner of payment in a schedule (exhibit) to the contract. The contract might state that the amounts set forth in the schedule will be effective for the base term after the contract is signed. If the agency agrees to any increases, they should be capped at a low fixed percentage or at a percentage based on published inflation indices, such as the Consumer Price Index. Here is language from VITA's "Solution" contract template:

"As consideration for the Solution and any additional products and Services provided hereunder, an Authorized User shall pay Supplier the fee(s) set forth on Exhibit B, which lists any and all fees and charges. The fees and any associated discounts shall be applicable throughout the term of this Contract; provided, however, that in the event the fees or discounts apply for any period less than the entire term, Supplier agrees that it shall not increase the fees more than once during any twelve (12) month period, commencing at the end of year one (1). No such increase shall exceed the lesser of three percent (3%) or the annual increase in the Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All Items, Not Seasonally Adjusted, as published by the Bureau of Labor Statistics of the Department of Labor (, for the effective date of the increase compared with the same index one (1) year prior. Any such change in price shall be submitted in writing in accordance with the above and shall not become effective for sixty (60) days thereafter. Supplier agrees to offer price reductions to ensure compliance with the Competitive Pricing Section."

The agency should require adequate notice of any price increase so that the agency can replace the supplier if it finds the price to be too high. The agency may also want to include a general clause along the following lines: "For all services that Supplier performs for Agency, Supplier will charge only such amounts as are reasonable and customary. Supplier will not charge Agency more for any such service than Supplier's standard charges for similar services for other customers."

The first sentence above calls for fair prices. The agency will want to obtain quotes from other suppliers to be sure that the prices being requested by the supplier are fair. The second sentence is a most-favored-nation pricing clause and favors the agency. Normally, only agencies that are in the best bargaining position will be able to obtain such a clause. In order to enforce this clause, an agency would want the right to inspect the supplier's books and records.

An easier clause to negotiate might be one that gives an agency the benefit of any better offer the supplier might make to any other public body in the Commonwealth. Here is a clause along these lines: "Supplier agrees that if any offer is made to or agreement entered into by Supplier with any other Commonwealth public body for substantially similar programs in substantially similar volume at a price less than the price to Agency reflected in this Agreement, then the price reflected in this Agreement shall be reduced to such price offered to such public body."

Search the manual by key words or common terms.