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 Simple to understand, widely used Only a few payments to make, easy to administer Traditional stage (partial progress) payment terms – Disadvantages 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 Software installed, is not the same as being able to use it live running – there are many implementation stages in between You take on much more of the project implementation risk Very limited form of progress payment Milestone based stage payment terms – Advantages 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 The project implementation risk is reduced and shared more with the vendor Your cash flow is improved, with smaller payments over a longer period of time It is a very clear indicator of project implementation progress Milestone based stage payment terms – Disadvantages It is more complicated and more time consuming Need to carefully define and agree each milestone, so that both parties clearly understand the trigger(s) for payment Need to carefully monitor and verify each milestone completed – although this could also be an advantage for managing the project Negotiations are needed Multiple payments to make, so more administration 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 checklists and questions, visit: Software vendor support, Implementation support, Reference site visit checklist, Vendor accounts, Vendor personnel, Vendor software product development, Software payment terms, Final software decision, Software agreement checklist
Software Payment Terms A comparison of software payment terms and why you should look for Milestone Based Stage Payment Terms when acquiring software

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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 Simple to understand, widely used Only a few payments to make, easy to administer Traditional stage (partial progress) payment terms – Disadvantages 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 Software installed, is not the same as being able to use it live running – there are many implementation stages in between You take on much more of the project implementation risk Very limited form of progress payment Milestone based stage payment terms – Advantages 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 The project implementation risk is reduced and shared more with the vendor Your cash flow is improved, with smaller payments over a longer period of time It is a very clear indicator of project implementation progress Milestone based stage payment terms – Disadvantages It is more complicated and more time consuming Need to carefully define and agree each milestone, so that both parties clearly understand the trigger(s) for payment Need to carefully monitor and verify each milestone completed – although this could also be an advantage for managing the project Negotiations are needed Multiple payments to make, so more administration 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 checklists and questions, visit: Software vendor support, Implementation support, Reference site visit checklist, Vendor accounts, Vendor personnel, Vendor software product development, Software payment terms, Final software decision, Software agreement checklist
Software Payment Terms A comparison of software payment terms and why you should look for Milestone Based Stage Payment Terms when acquiring software
© 2020 Axia Consulting Ltd
All rights reserved. Contact Us

Axia Consulting