Is it Possible to Increase the Estimated Amount for System Development Afterwards?

The task of system development involves a large number of people from both the ordering user side and the receiving vendor side. Therefore, it is not easy to proceed the project with everyone perfectly coordinated. Needless to say, the planning is extremely important, but at the same time, it is not always the case that the ordering user can compile appropriate information and convey it succinctly to the vendor. Once the development process has progressed to a certain extent, whether or not it is possible to charge additional fees on top of the initial estimate if changes in specifications or additional functions are requested afterwards is a matter of great concern for those who accept the work.

Under what circumstances are such rights legally recognized? Also, how is the remuneration for additional development and function modifications determined? This article will organize various questions about these issues.

When Can We Consider Additional Development and Function Modification?

In system development projects, the types of contracts we usually undertake are either subcontracting contracts or quasi-delegation contracts. In either case, the tasks that the contractor should perform (i.e., obligations) and the corresponding remuneration (i.e., rights) are paired and indicated in the contract. Therefore, if tasks not included in the original scope of work are added later, they can be considered as additional development or function modification. Conversely, if tasks are included in the original scope, they are treated as per the initial specifications (i.e., within the framework of the original contract).

However, if we were to say that everything, including minor adjustments to the fonts displayed on the screen, is additional development unless specified in advance, it could significantly hinder smooth business transactions. Therefore, it is not easy to draw an uniform line when considering these detailed specification discussions. However, if we were to provide a general guideline, it would be in cases such as:

• AFurther additional functions were ordered after the specifications have been finalized.
• Modifications were ordered after the program implementation is completed.

In such cases, it can be said that there is a high possibility that the claim has a certain validity under the law.

Court Cases Where Whether It Constitutes Additional Development or Modification of Functions Became a Point of Contention

Affirmative Case: A Case Where the Specifications of the Basic Design Were Changed Afterwards

The following case involves a change in specifications afterwards.

Software development proceeds through the development process of ① requirement definition, ② external design, ③ internal design, ④ creation of source programs (program design, coding), and ⑤ various tests (unit tests, combination tests, system tests) (omitted). The initial specifications (omitted) are realized by the work from the internal design stage onwards, and this is the scope of work that stands in the relationship of remuneration claim rights and consideration based on the development contract in question. A request for a specification change is legally interpreted as a new contract for additional work that exceeds the scope of work based on the original contract by the client, and if the contractor completes the work related to the additional contract without presenting an additional construction cost and without an agreement on the additional cost, it is reasonable to interpret that a new contract for work without a specified amount of money has been established between the client and the contractor, and that an obligation to pay a reasonable additional development cost arises.

Osaka District Court, August 29, 2002 (Heisei 14)

Keeping keywords such as “consideration relationship” and “new contract” in mind will help deepen your understanding of this judgment.

Incidentally, in the above judgment, another very interesting point was made. That is, minor adjustments such as the placement of buttons and the typeface of personalitys do not fall under the specification changes mentioned here. The relevant part is as follows.

However, in software development, it is not the case that details such as the typeface for displaying characters on the screen and the placement of buttons are determined at the stage of external design, and it is normal for some modifications to be made to the details after the specifications have been confirmed through discussions between the parties. Considering this, it is not appropriate to consider requests for detailed specifications as specification changes.

Osaka District Court, August 29, 2002 (Heisei 14)

The judgment uses the interesting term “specification detail.”

• A case where something that was supposed to have been decided was overturned later
• A case where something that could have been decided while doing it was deliberately not decided and proceeded

It can be said that this shows the idea that the legal treatment should be different in these cases.

Other Affirmative Cases

Other cases where additional development and function modification were recognized include:

• A case where the number of programs delivered was about twice as many as originally planned (Tokyo District Court, April 22, 2009 (Heisei 17))
• A case where the work period was extended to about three times (Tokyo District Court, January 22, 2010 (Heisei 22))

As you can see, the extension of the work period is also considered as a broad definition of additional development, and it is understood that a certain level of legal protection is provided.

“Agreement on Additional Development and Increase in Remuneration” and “Establishment of Initial Contract” are Separate Issues

Two important points about these issues is that:

1. The scene of “whether a contract for system development (initial contract) was formally established between the two companies in the first place”
2. The scene of “whether a contract for additional development was additionally established once the system development was formally established”

The court’s judgment criteria are different. To put it bluntly, the court tends to be:

• Strict on 1 (it is not easy to recognize the establishment of a contract in a situation where there is no contract)
• Relatively lenient on 2 (even if there is no contract for additional development, it is flexible in recognizing increases in remuneration, etc.)

Negative Case: A Case Where It Was Treated as Included in the Same Contract Content Legally

However, on the other hand, there are also court cases where an increase in remuneration was not recognized. In the case of the judgment quoted below, it was disputed whether an increase in remuneration could be recognized because the content of the work was changed after a contract for system development was once concluded.

The issues in this case are: (1) what was the content of the work that the plaintiff undertook in the contract, (2) whether there was an agreement to expand the scale and increase the price for the said work, (omitted), and so on. (omitted)

First of all, the contract in question is a contract for work that agreed to make the contract price a definite consideration for the work undertaken by the plaintiff, and the number of steps and unit price for the work undertaken are nothing more than internal documents for calculating the contract price internally, and the increase in the number of steps, etc., is completely unrelated to the contract price. (omitted)

As recognized above, the plaintiff’s work was changed on February 25, 1987, and was limited to system management, contract construction cost accumulation, and a part of the utility, and the rest was to be handled by the defendant. However, the work of the plaintiff after the change is still within the scope of the development work according to the original contract, and the consideration for this work is covered by the contract price that was agreed upon as a definite price at the time of the contract.

Tokyo District Court, June 12, 1995 (Heisei 7)

In this judgment, even if the content of the work entrusted to the vendor was changed, the development content was considered to be within the scope of the original contract, and it was judged that it should be covered within the remuneration promised initially.

Ultimately, considering what kind of work the remuneration amount was decided to do, it is considered that additional remuneration should be recognized for work that is not included in it.

How is the Remuneration Determined for Additional Development and Function Modifications?

In the field of system development, it is not uncommon for specifications that seemed to be confirmed at one point to change later. Each time this happens, it is not practical to prepare a new written contract and proceed with the contract procedures. If the project stalls without being able to carry out such procedures, how should the remuneration amount be calculated for matters that should be added or modified?

The following Article 512 of the Japanese Commercial Code (商法) can be referred to in such cases (the underlined part is emphasized by the author).

Article 512 of the Japanese Commercial Code: When a merchant takes an action for another person within the scope of the merchant’s business, it may claim reasonable remuneration.

The issue is how much the “reasonable remuneration” in this article will ultimately be in particular situations. Looking at past court precedents, it seems that the idea of bearing the cost in proportion to the man-hours, volume, or duration of the work has been adopted. This is probably because system development is a kind of service industry, and the cost is basically labor cost.

Therefore, despite the abstractness of the phrase “reasonable remuneration” in the Japanese Commercial Code, estimating the market price of additional remuneration in this context does not require difficult calculations. Let’s look at some court precedents below.

Case 1: A case where additional remuneration in proportion to the increase in man-hours was recognized

The development man-hours based on the specification change in this case is reasonably considered to be a total of 257.5 man-days, and if this is converted into the development cost per man-day, which is the same as the development contract in this case, of 32,500 yen (in Exhibit A3, the unit price is 650,000 yen per person/month, and if the number of working days in a month is 20 days, the development cost per man-day is 32,500 yen.), the additional development cost based on the specification change request in this case should be reasonably considered as 8,368,750 yen.

Osaka District Court, August 29, 2002 (Heisei 14)

The keyword here is “per man-day”. It shows that man-hours are used as the basis for calculating additional remuneration.

Case 2: A case where additional remuneration in proportion to the number of programs was recognized

Considering the reasonable amount of remuneration including the additional part in this case, since the majority of the cost of developing a computer system is the personnel cost of technicians, and this personnel cost generally corresponds to the volume of programs to be created, the initial contract amount of 23,250,000 yen is divided by the number of programs completed by the second inspection, 206, and the amount obtained by multiplying this program unit price by the number of programs that have passed the third inspection, 414, is 46,725,728 yen (23,250,000 ÷ 206 × 414 = 46,725,728), which is considered reasonable.

Tokyo District Court, April 22, 2005 (Heisei 17)

Although many numbers are mentioned, if you read calmly, you will see that it is not doing a difficult calculation. Based on the initial contract content, it simply multiplies “unit price × quantity” after confirming “how much was the unit price per program estimated”.

Case 3: A case where additional remuneration in proportion to the length of the period was recognized

Then, considering that 60 million yen was set as the consideration for the work as a quasi-mandate for the period of three months from January to March of 2005 in the Exhibit A3 contract, while the work after April of the same year includes work to be performed free of charge, it is assumed that the workload increased after April of the same year when the system for course registration, etc., was operated due to the start of the new school year, compared to the period until March of the same year. From these points, based on the 60 million yen set as the consideration for the work for the above three months, it is reasonable to set the remuneration for the work for six months from April to September of 2005 at 120 million yen.

Tokyo District Court, January 22, 2010 (Heisei 22)

The above judgment indicates that the additional remuneration is calculated by a simple proportional calculation for the extended period as well.

Summary

As we have seen from the various court cases presented above, it seems that there are certain patterns and commonalities in the legal treatment of additional compensation for the work of programmers and engineers. In principle, it appears that the approach is to calculate as simply as possible based on relatively objective indicators such as the amount of time and effort spent, the formal amount of work (such as the delivered program), and the time and duration of work.

Considering that additional development and feature modifications occur precisely because of failures in precise proceduralization or perfect effort estimation, it may seem rather bland to say that additional compensation arises only for the amount of manpower invested, the formal amount of work done, or the time spent. However, from the perspective of the contractor, even if the aim is to prioritize the client’s interests while carrying out the work, the fact that such rights are likely to be legally recognized is meaningful in terms of crisis management.