Edited for Contract Nerds from Foster’s Newsletter, “Mastering Commercial Contracts.”
KEY TAKEAWAYS:
- Acceptance is an important commercial concept to understand as it pertains to Professional Services, especially in a SaaS context.
- For the customer, acceptance terms obligate the customer to pay for the Professional Services and triggers the warranty period.
- For the SaaS provider, acceptance is what allows the SaaS provider to recognize revenue of Professional Services under accounting standards.
For some SaaS products, there may be professional services required to set up the SaaS for customer use (“Professional Services”). Acceptance is the subsection in the Professional Services section that typically receives the most attention in contract negotiations.
For the customer, acceptance terms obligate the customer to pay for the Professional Services and triggers the warranty period. For the SaaS provider, acceptance is what allows the SaaS provider to recognize revenue of Professional Services under accounting standards, like ASC 606.
In this article, I’ll provide an overview of what “Acceptance” means in the Professional Services context, what SaaS providers vs. customers usually look for, and my recommended best practice acceptance terms.
A Background on “Acceptance”
Before I share best practices, I want to level set on what I mean by “acceptance” in a Professional Services context.
In law school, we learn about the formation of contracts, and what constitutes an “offer” and “acceptance.” Put that case law away–that’s not the kind of “acceptance” that you should be thinking about when negotiating acceptance terms in a Professional Services context. If you took a course on Article 2 of the UCC, you have a better introduction to the concept of acceptance as it applies to Professional Services.
While there are differences, if you’re familiar with UCC § 2-606, What Constitutes Acceptance of Goods, then you have a good analog for conceptualizing acceptance in a Professional Services context. Under the UCC, once goods are accepted the buyer is bound to pay for them. The same concept applies to Professional Services. Once the customer accepts the Professional Services, the customer is bound to pay for them.
So, in a Professional Services context, “Acceptance” with a capital A means the customer acknowledges that the Professional Services have been performed and/or any deliverables provided conform to the agreed-upon requirements. Some Professional Services, like implementation, do not have a specific deliverable apart from taking the customer’s SaaS instance live in a production environment. Others, like consultations, are for a set number of hours and may not have a specific deliverable. Others, like setting up a system integration, will have the outcome as the deliverable.
Practical Approaches to Acceptance
There are two general approaches to managing Acceptance in the SaaS context. The first is to have a framework where acceptance will be automatically deemed to have occurred based on certain factors. The second is to have a framework where acceptance criteria are outlined in detail in the applicable SOW. In SaaS agreements, the framework of automatically deeming acceptance is going to be favored because the SaaS provider wants to ensure as few obstacles as possible to recognize revenue and get paid. However, an Acceptance clause can be drafted to provide for more than one means of acceptance where the customer is concerned.
Acceptance in Favor of SaaS Provider
For the SaaS provider, the best practice is for the Professional Services to be deemed accepted once a certain number of days have passed after the delivery. SaaS providers may also consider a variation where the customer’s acceptance occurs on the earlier of the delivery of the services or receipt of the customer’s payment of the relevant invoice. This works well given the nature of the services is that they are deployed remotely and only after testing.
Acceptance in Favor of SaaS Customer
The customer prefers to have Acceptance deemed after a certain number of days have passed since services were delivered . Or, in the case of an implementation, after the customer’s SaaS instance goes live in a production environment.
While you can negotiate the number of days the customer has to accept the Professional Services, you should understand the nature of SaaS deployments. Implementation of SaaS products typically includes a user acceptance testing (UAT) phase. This means that the customer already has an opportunity to identify issues that the SaaS provider needs to resolve and re-test before delivery into a production environment.
As such, the likelihood of the SaaS implementation failing upon moving into a production environment is extremely low. Any serious issues that would require rejecting the services would likely be identified immediately. So while you may want to push for 15 business days as the period for assessing your Acceptance, it would be unreasonable to push for much more than that in most cases.
When the parties do contemplate a Professional Services engagement that has complexity in terms of the requirements and a scope of work that involves many deliverables, then having the Acceptance section contemplate using acceptance criteria in an SOW makes sense. In those cases, you should ensure the business partners are aware of the need to document the acceptance against the criteria in the SOW.
Best Practice Acceptance Clause
The below clause is my recommended best practice for Acceptance terms in a SaaS agreement. By beginning the clause with “Unless otherwise specified in the SOW”, it leaves open the possibility that acceptance criteria may be modified in the SOW. This gives the parties flexibility in how they manage acceptance, while also ensuring there are two paths to deeming acceptance. Accounting departments like this for revenue recognition.
Unless otherwise specified in the SOW, the Professional Services, and all resulting deliverables, including Company Solutions in the case of configuration or implementation, will be deemed accepted by Customer upon payment or ten (10) business days after performance or delivery, whichever occurs first. In no event will acceptance or payment be unreasonably withheld, conditioned, or delayed.
Acceptance is an important commercial concept to understand as it pertains to Professional Services, especially in a SaaS context. It carries implications for both parties in how it triggers certain rights and obligations.
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3 Responses
When I represent a customer, I try to avoid “deemed acceptance” after any number of days, and prefer a proactive acceptance requirement. If a vendor pushes back, they can proactively send written notice that they are waiting for my client’s acceptance, and only then can a matter of days without reply be deemed acceptance.
The other confusion i see in SaaS deals, whether i represent the vendor or the client, is whether it is limited to professional services only. It is wise to clarify, especially when representing the vendor, that SaaS services themselves are constantly delivered in real time and are not subject to an acceptance or rejection.
Great article Foster Sayer.
Brian Heller. Agreed on both. I add Acceptance to all service agreements and create a practical Acceptance process putting onus on both parties within a reasonable period of time to call out inconsistencies, redo the work, and at whose cost.
Great article Foster Sayer.
Brian Heller. Agreed on both. I add Acceptance to all service agreements and create a practical Acceptance process putting onus on both parties within a reasonable period of time to call out inconsistencies, redo the work, and at whose cost.