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
© 2021 Axia Consulting Ltd