NET(net), Inc.


Keeping up with Maintenance Costs by jigordon
March 6, 2007, 7:00 am
Filed under: contract management, contract terms, maintenance

I keep talking about contracts sitting in file cabinets and drawers and how you need to have some sort of contract management system to keep things organized. This isn’t, however, a tip just for the buyers/licensees… but rather it’s for everyone involved on either side of a transaction.

Take Maintenance costs, for example. Your average negotiated software license contains a provision for maintenance. Usually based on the initial cost of the licensed products themselves, to some percentage, this provision also usually allows the seller to increase the cost of providing maintenance over time, sometimes limited by a stated percentage. In the event of poor contract management processes, either or both sides can lose out (spending more or decreased revenues) if they don’t pay attention.

Let me use a simple example to illustrate. Say that in 2000, you licensed software for $100,000. Also, let’s presume that you agreed to maintenance costs of 20% of the price paid for the licensed software (ie: $20,000). So your first years’ bill will be $120,000. In 2001, the bill would only be $20,000, and presumably, the vendor would continue to invoice the licensee for $20,000 through this year (2007). Grand total? $100,000 in license and $20,000 * 7 ($140,000) in maintenance = $240,000.

Again, however, it’s never that simple. Maintenance costs increase as a result of inflation and other market forces. So back to the language we go, and let’s now add an escalator to allow the vendor the ability to increase their license fees by 5% per year (this percentage is completely contrived and does not represent the actual increase percentage of any particular vendor).

Now we have a different scenario. It’s still $100,000 for the license and $20,000 for the first year’s maintenance. But in 2001, the maintenance fee can go UP by 5% ($1,000), and it compounds each year by an additional 5% (rounding up to the nearest half dollar):

2001 – $21,000
2002 – $22,050 ($21,000 + 5%)
2003 – $23,152.50
2004 – $24,310
2005 – $25,525.50
2006 – $26,802
2007 – $28,140

Difference as a result of the 5% escalation? $30,980!

This may not seem like a huge amount… but what if the initial cost of the software was $1,000,000 as many can sometimes be? Or, what if the maintenance percentage is based on the “then-current list price” of the particular product (language which I wouldn’t recommend for licensees)?

And what if rather than 5% increases, the vendor is increasing it by 10% – contrary to the license fee? Do the people who pay the invoices in your organization have ready access to the agreements to confirm the agreed-upon amounts?

In all, it pays to be diligent – on both sides of the equation.

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