Software - Fees, Payment, Taxes, Installation, Acceptance

License fees, Payment, Taxes
What is the cost of the license? When you license software one of the things to be concerned about is the life cycle cost if being able to use the application. For example, you
may be required to purchase maintenance service. If you are not required to purchase maintenance services and you elect not to buy it you would be operating the software on an as-is basis one the warranty period has ended. Another thing that will impact your cost is the period of time that the licensor is committed to support the revision you purchased once a newer version is released. That impacts whether you will be forced to purchase upgrades to get continuing support. If you don’t upgrade and they no longer support the revision you have licensed, you would have the right to use it on an as-is basis.

Similar to hardware or equipment in licensing software one of the first considerations is do you need the right or options to purchase additional licenses? If you do, how long will those license fees remain firm?

What are the payment terms for the license, maintenance fees and other services? In most situations the licensee would not want to make payment until such time as the software is installed and accepted. Licensor’s just like suppliers always want payment to occur as soon as possible. The leverage you have in the situation will determine what you can negotiate. The key is if you do need to pay the initial license fee prior to acceptance, you would want to include the right to a full refund in the event the software fails to meet the acceptance test. In software maintenance fees are usually paid annually with the first payment due at the end of the warranty period. This means that you need to take the term of that warranty period into account in figuring out the life cycle cost of the purchase when you are negotiating the fee. The shorter the warranty period, the sooner you need to purchase maintenance. The actual payment term should be based upon what your normal payment terms are. Agreeing to shorter terms both adds to your cost and can cause complications with your accounts payable function.

Obligations of the parties to pay any applicable taxes. Depending upon who you are licensing from and the location of the sale, the license may also be subject to sales or value added taxes. If the software is purchased for use in another country it may also be subject to duties.
If either of those would apply to your license, the licensing agreement should specify which party is responsible to pay for those. Licensees should want to only be responsible for taxes associated with the use or and import if they are requiring import.

Delivery and Responsibility to Install.

What is the lead-time for delivery? As with any item that you purchase or license the first thing you want to know is when will you get it. As production of media and documentation can be almost immediate this is a lesser concern. For consumer applications most are capable of being downloaded immediately.

Whose responsibility is it to install the software (licensor or licensee)? The more complex the application, the more you may want to may want to have the licensor install the application so
there is no doubt that the supplier is fully responsible in the event the application fails to meet the agreed acceptance test. If responsibility is with the licensee, you need to understand what the requirements for customer installation are so that you can comply with them. That ties back to acceptance. If you comply with those requirements and there is a problem with acceptance it is the licensor’s problem. If the licensor will perform the installation you want to know if the installation cost included in the license fee or is that a separate charge? If there is a separate charge, that’s an addition cost to the purchase and the life cycle cost. If the licensor will perform the installation you want to clearly know when the installation will be performed or what is the lead-time for installation that you can rely upon. If you have to pay a portion of the license fee prior to installation or acceptance, you want this period to be short. Otherwise you are paying a fee for something you don’t have the ability to use.

Acceptance / Acceptance Test:
The right to perform acceptance, and have and agreed acceptance test is the way to make sure that the software is actually meeting your requirements that must be included in a specification. Acceptance test should be designed to reasonably show that the product does in fact meet those requirements. For example, if you licensed software to meet certain speed, transaction volume and performance requirements, you want the time to verify that if does in fact meet those requirements. Those would be established as part of the acceptance and test criteria. As part of any acceptance term you would want to establish how long after delivery do you have to commence the acceptance and testing process, and how long you have to complete the testing. If there are material errors discovered, you should establish how long the Licensor has to correct them? If Licensor corrects the defects your agreement should decide whether the test period re-starts giving you the full duration to perform the testing or whether
You just get added the time it took to get the error corrected added to the period. If the licensor fails to correct errors within the period allowed to correct them the licensor should have the right to terminate the license and get a full refund for any fees paid.

Similar to the purchase of goods, the right of acceptance is critical. That’s because once you accept an item you are fully responsible to pay. Once accepted your future rights to correct problems that exist is based upon the rights you have under warranty.

ADVANCE PAYMENTS.

Advance payments require payment to be made in advance of he delivery of the product or service. For example in a purchase of capital equipment or tooling vendors frequently request payments to be made in advance of delivery. There are three things to be concerned about in making an advance payment. First is the Supplier financially stable where you payment will not be at risk. If you made an advance payment to an unstable supplier at best you would have a purchase money security interest in the product, at worst you would be an unsecured creditor in the event the Supplier ever went bankrupt. Second is how much leverage will you lose in getting the job completed on time if they already have been paid a significant amount of the payment. You never want to provide too much of an advance payment for that reason and could potentially provide a smaller payment with a form of progress payments as the work is done. The third aspect of making an advance payment is the cost to you of the money, especially if there is a difference in payment amounts and terms between suppliers

The cost involved in making an advance payment is the time value of the payments made in advance of your normal payment terms. To calculate the cost of an advance payment you need to know three basic things:
1. The Value that the company places on money.
2. The number of days in advance in which payment is required.
3. The amount of the payment being made.

The formula for calculating the cost of an advance payment is:
Cost per day (value of money divided by 365)
X number of days (Usually starting at Net 30 and counting back)
X Payment Made (Amount of Payment made)
= Cost of Advance Payment

Assume in this case that your value of money is 12% or ..0328767 a day

Example:
Two vendors have quoted on a tooling job.
Vendor 1's terms are:
Cost: $100,000
Payment: 50% with order 50% with first article.

Vendor 2's terns are:
Cost: $101,000
Payment: 25% with order 75% on production commencement.

The schedule is as follows:
Place orders: 1 June (230 days advance)
First Article: 28 September (100 days advance)
Production: 12 December (30 days advance)
Net 30 pay: 12 January (0 days advance)

To compare the two you must calculate the cost of advance payments:
For vendor 1:
You have paid:
$50,000 paid 230 days in advance
$50,000 paid 100 days in advance

1. For the first payment made, take 230 days x the daily rate .0328767 = 7.56 percent
2. You then multiply the percentages (7.56%) by the amount of the payment ($50,000) for the cost of the one payment ($3,780.00.)
3. You repeat the process for the second payment (100 days x daily rate of .032876 = 3.26%.
4. You multiply 3.28% by the amount of the payment $50,000 = $1,630.
5. The total cost of the advance payments for vendor 1 is $3,780 + 1,630 or $5,410
6 The total cost of Vendor 1 is $100,000 (the price) + 5,410 (the advance payment cost) or $105,410.

For vendor 2:
You have paid:
$25,250 paid 230 days in advance
$75,250 paid 30 days in advance

1. For the first payment made, take 230 days x the daily rate .0328767 = 7.56 percent
2. You then multiply the percentages (7.56%) by the amount of the payment ($25,250) for the cost of the one payment ($1,908.90.)
3. You repeat the process for the second payment (30 days x daily rate of .032876 = .985%
4. You multiply .985% by the amount of the payment $75.250 = 741.31.
5. The total cost of the advance payments for vendor 2 is $1,908.90 + 741.31 or 2.650.21
6. The total cost of Vendor 2 is $101,000 (the price) + 2,650.21 (the advance payment cost) or $103,650

What I would then do is tell Vendor 1 that they aren’t competitive when you take into account the cost of the advance payment requirements to get those to change those terms so I would get the best of both, the lowest price and competitive payment terms.