What Software Billing Models can I use keep costs down?

SOFTWARE CONSULTING ESTIMATE ACCURACY

Yesterday we covered the dangers of hourly consulting and what to avoid with “free” estimates. Today I would like to share some advice on how to keep costs down on your software projects.

As a customer, you should know that hourly projects will tend to run over the estimated budget more often than under. The larger and more experienced the software consulting firm, however, the better the estimation techniques and less likely to see budget overruns for a given scope of work.

A Cap is an upper limit (sometimes called a “not to exceed” or NTE) of pre-approved hourly spending on behalf of the customer. Especially with newly formed software consulting relationships, putting a “cap” in place is a good idea until you as a customer become comfortable with the time efficiency of the firm and have a good feeling of value for money of the software consultants’ time. For example, you might approve $150/hr for a given scope, “not to exceed” $40,000.

Fixed fee projects offer a fixed scope of work to be delivered for a predetermined fee. While it may seem that a fixed fee would be the best option from a customer perspective, it is important to know that an experienced consulting firm will build in a premium over their actual estimated work to account for unforeseen challenges, extra meetings, and various other risks. This means that you will be paying a risk premium for the software consulting firm to shoulder all of the financial project risk.

With larger Fixed Fee projects, Milestones are a common practice. In the Milestone model, a larger project scope is broken down into several smaller sets of deliverables. Some example deliverables might include:

• Develop and Deliver Scope Document
• Design and Document System Architecture
• Deliver Database Schema
• Implement Database Structure
• Deliver Proof of Concept
• Implement Initial set of Features
• Deliver a final product
• Perform software training

Milestones are generally a good idea for both consultant and customer, as they provide for more predictable delivery, as well as enforcement for the proposed project timeline.

Often, fixed-fee projects will require some amount of up-front payment. This serves several purposes for the consulting firm:

• Engage the client – Once money has changed hands, all parties are engaged and should be actively pursuing results. This helps prevent a casual client from shirking client responsibilities.
• Finance the project – The consulting firm is paying its employees to begin work on your project, and an up-front payment helps offset the ongoing cost of development.
• Demonstrate client’s ability to pay – While a contract represents a willingness to pay, a check shows the ability. This can also serve to measure the timeliness of the client’s AP department.

Block Hours and Retainers are two forms of pre-paid services and are the least common among all the Billing Models in software consulting.

The Block Hour model involves pre-purchasing a set quantity of hours, which are then available to the user in an on-demand model. Block Hours are most commonly found when a software consulting firm does not offer a differentiated rate structure (that is, all services are offered at one rate, rather than an individual rate for each service). For example, you may pre-purchase 200 hours of work @ $100/hr for a total fee of $20,000.

Retainers are similar to Block Hours, but are a pre-purchased dollar amount of work. They are commonly offered when a variety of hourly rates are present, say, for various different skillsets (project management vs. development) or various different levels of seniority (senior software consultant vs. junior software consultant). For example, you may purchase $25,000 of work, equating to 200 hours of a $125/hr Senior Software Consultant or 250 hours of a $100/hr Junior Software Consultant.

Maintenance Agreements are akin to Warranties. In a Maintenance Agreement, a software consulting company will offer a set of guaranteed services in exchange for a fixed periodic payment. For example, Computer Programmers Inc. might promise to fix all bugs related to your custom accounting software for $12,000 per quarter. More often than not, Software Maintenance Agreements offer:

• Service Level Agreement – guarantees on turnaround time, on/off site support, quantities of hours, phone support
• Fixed Price
• Periodic Payment
• Defined Scope of Services – typically will not include any “new” software development

For more, visit out Agile methodologies page…