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Software Payment Terms Compared 

Why you should look for Milestone Based Stage Payment Terms when acquiring software

Software payment terms (whether for on-premise or SaaS software) vary enormously. It is clearly in the vendor’s interest to receive payment as soon as possible. But paying for new software can be moved more to your advantage, (or at least to a fairer basis) rather than the software vendor’s advantage.

Enterprise software purchases are often made on a stage payment basis, rather than paying 100% on contract signing. But there are different types of stage payments. They range from the traditional part progress (with a few large payments mostly up front) to milestone based payments (with multiple smaller payments spread over the implementation).

An example of traditional (partial progress) stage payments is:

  • 50% on signing the contract
  • 40% on software installation
  • 10% retained for 30 days

Compared with an example of milestone based stage payments:

  • 20% on signing the contract
  • 15% on successful installation
  • 15% on successful functional testing
  • 15% on completing software tailoring and customisation
  • 15% on successful user acceptance testing
  • 10% on successful data migration
  • 10% on successful ‘live running’

 

Traditional stage (partial progress) payment terms – Advantages

  1. Simple to understand, widely used
  2. Only a few payments to make, easy to administer

Traditional stage (partial progress) payment terms – Disadvantages

  1. You pay for the software, yet will not actually be able to use it for some time (may be several months) until the implementation is completed
  2. Software installed, is not the same as being able to use it live – there are many implementation stages in between
  3. You take on much more of the project implementation risk
  4. Very limited form of progress payment

 

Milestone based stage payment terms – Advantages

  1. There is a big incentive for the vendors to help with any implementation problems, as they will only get the next payment on successful completion of the respective milestone
  2. The project implementation risk is reduced and shared more with the vendor
  3. Your cash flow is improved, with smaller payments over a longer period of time
  4. It is a very clear indicator of project implementation progress

Milestone based stage payment terms – Disadvantages

  1. It is more complicated and more time consuming
  2. Need to carefully define and agree each milestone, so that both parties clearly understand the trigger(s) for payment
  3. Need to carefully monitor and verify each milestone completed – although this could also be an advantage for managing the project
  4. Negotiations are needed
  5. Multiple payments to make, so more admin

 

Whilst there are advantages and disadvantages to both types of software payment terms, the advantages of milestone based payment terms more than outweigh the disadvantages. So…

Look for milestone based payment terms when checking out the software vendors. If they are not initially offered, ask for them and negotiate.

 

For more due diligence information and checklists visit: Vendor Support, Implementation Methodology, Reference Site Visit Checklist, Due Diligence Supplier Financials, Due Diligence Supplier Personnel, Vendor’s Software Product Development, Making the Final Decision, Negotiating Software Agreements

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