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Anna / 25.04.2018

Getting the price right - what does the process of order valuation in a software house look like?

Valuation of orders is probably one of the most discussed issues in the industry: it raises doubts of both customers ("what am I paying for, why does it cost so much?") as well as the contractors themselves; freelancers and small agencies, especially, are looking for proven solutions and good practices. How to approach the topic: do we start with our costs or maybe the client's budget? What to consider, how to calculate profitability and how to communicate an estimate that is both thorough and concise so as not to scare away potential contractors with excessive details? Today I will let you behind the scenes, to show you the process between receiving an offer, signing a contract and issuing the advance invoice.

 

What do we need to valuate a website?

 

An inquiry from a customer that is sent to our inbox (our livechat, Dribbble account or another communication channel) usually contains very general and truncated information. "Good morning, we need a website / store / project of marketing materials for our company, how much would it cost?"

 

If that is the case, during our first meeting with the client, we try to collect as much information as we can. The procedure depends on whether the client knows more or less what he wants - does he even have a preliminary specification? If not, our role is to ask the right questions and create a framework agreement.

 

I will describe the process using the simpleset example - a website. The task of the project manager, who receives such a  lead, is to determine:

  • the number of subpages expected

  • necessary additions and desired effects

  • the clients overall vision - we often ask for examples of websites that the client likes and whose style he would like to see in the design,

  • how much content will there be do upload or transfer?

  • when does the client need the order to be finished?

 

Why is this so important? Because it allows us to estimate the complexity level of the order, and in turn - the time and resources needed to complete the site. The standard valuation of a website usually includes a graphic design (individual or based on a template selected with the client), coding, configuration of the selected CMS, basic SEO optimization (setting of headers, title, etc.), implementation of a specified number of content measured in standardized typescript pages, hosting, configuration of mailboxes, training the customer in the use of the CMS.

 

The choice between a dedicated design or a template, as well as the level of complexity of the client's vision may change the valuation two or threefold. Additional plugins, effects, forms also affect the final cost. Moving a large number of articles and photos from the client's previous page may require an additional custom script. The standard delivery time for a website is 4-6 weeks, but sometimes customers ask for the possibility of a quicker turnaround  - then, depending on available resources and complexity of the project, we are able to complete the order in half the time, but this usually increases the valuation by 15-20 %.

 

On the basis of all this information, we prepare a contract and specification in the form of an annex, taking into account all the elements of the contract, i.e. what the customer buys.

 

Valuating large projects

 

The situation is different in the case of invitations to tenders and inquiries regarding advanced applications and websites. In these situations, customers often have pre-prepared extensive project documentation. That being said, the final valuation is often based on modified project assumptions. This is a result of our belief that the aim of a software house is not necessarily to provide the client with exactly what he originally came to us with. We see our role as that of a partner that will - in cooperation with the client - develop solutions that suit its business goals.We spend a lot of time on discussion, research and analyzes to best understand the companies need. Sometimes this need is not compatible with the solutions proposed by the client in the previously prepared specification. As a result we try to offer a different - more effective, less costly, simpler in maintenance and development - solution.

 

This evolution of a project is particularly visible in the case of startups - which, having some initial business idea, model, sometimes a mock-up or even MVP, attach themselves strongly to their original assumptions, dismissing important technological barriers or the possibility of later modifying the project. As a software house, we must remember that our task is not to, point by point blindly follow the specification. Our job is to at the end of the development process give the client a working product. And that requires an understanding of what the client actually brings us and based on our experience, knowledge of technology and business, proposing an optimal solution.

 

The specification on the basis of which the client starts a conversation with us is treated as a starting point to better understand his needs: a set of hypotheses and assumptions about his business that can be verified at least partially before the development and drowning of costs.

Perhaps at the beginning, you will not need advanced, multi-step solution, only simple MVP allowing to determine the interest of the target group with the product and improve its (desired by potential customers) functionality or redefine the business model?

 

That is why, sometimes what the client takes away differs from the original idea - final decision is however always up to client and takes it’s official form in updated specification added to the contract.

 

What if client does not have a specification? In case of large projects, narrowing down the needs is of highest importance for securing interests of both sides. It allows agency for preparing valuation considering time and costs of commission and on the client side - helps judge level and quality of realisation when the work is done. This way we avoid misunderstanding. Writing down contract appendix with work schedule including project stages and payment details significantly improves the quality of cooperation.

 

Needless to say, valuating and accepting commissions without specification is risky or even reckless. That's why we recommend that clients who come to us with only preliminary assumptions prepare such a technical document with us. It is paid work because the preparation of several dozen pages of technical document involves our programmers at least a dozen or so hours of work. I would like to emphasize, however, that the specification prepared this way does not oblige the customer to cooperation. Upon completion of the documentation the customer decides whether he wants to cooperate or prefers to look for a cheaper contractor. In the first case, the cost of the specification will be subtracted from the total cost. When the customer chooses the second option, after the payment of the invoice, the specification becomes his or her’s exclusive property.

 

Do business size and brand matter?

 

Yes and no. In the end, the client pays not for the size of agency but for the good execution of the project. However, the size of the team, experience, portfolio and experience on the market can all affect the level of project implementation. A large company usually also have more efficient procedures, better infrastructure, more reliable warranty and post-warranty service, often also liability insurance. Brand recognition and the command mechanism, recommendations and references are also important in the context of credibility and trust in the success of cooperation. All this certainly improves the contractor's negotiating position, so it is worth communicating these aspects on the website and in the company's presentation.

 

Valuating a project and running your business

 

I do not want to spend too much time on the cliches about the costs that company generates, although for a beginner business - also in the IT industry - this can be a valuable guide in pricing the order. This strategy worked well at the beginning of our activity, when as freelancers, then two or three people, we performed small, low-complex orders that did not require the simultaneous involvement of many specialists. What is the amount of your fixed fees? Office, Social Security, accounting, servers, licenses you work on, equipment leasing? How many hours can you spend working in a month? How many commissions can you get? On this basis, specify the cost of your man-hour and check if by multiplying it by the time needed to implement the project, you will receive a number satisfactory for both sides - you and the customer. Remember to allocate a reasonable hourly buffer for corrections, unforeseen difficulties and activities related to order processing itself - contract preparation, meeting with the client, searching for needed plugins, etc.

 

In a larger company, things get a bit complicated because the lion's share of the fixed monthly maintenance costs is absorbed by the team's remuneration. Therefore, the cost of a given project and its profitability are directly related to the number and type of specialists involved in the project. For example, the implementation of a mobile application for the company X will involve a four-person team: two graphic designers and UX / UI (senior, who prepares the overall concept and design of the main screen and junior, who maps the main idea and graphic theme on subsequent screens), php and react programmer, front-end and project manager. Each of them plays an important role in the project team, everyone is necessary for the proper execution of the project. Senior designer will spend 10 hours to project, junior 25, developer 50 and PM 15. Cost of their man-hour depends primarily on experience and competence. The final valuation of the project will take into account the sum of their working hours, multiplied by the fee for each of team members. An even more accurate method of calculating the internal profitability of the project, used by large companies, is based on adding fixed costs - office, administration, marketing, leasing, etc. to the hourly rate specialists involved in the project. Another strategy is flat fee / flat rate, which is the average rate in the field the entire company at any given time without going into details and breaking into components. The strategy chosen by the agency depends largely on its previous experience in this field.

 

Fixed price or time & material?


Two models of cooperation compete in the IT world: fixed price and time & material. Fixed price valuation is a model in which the price for project implementation is determined in advance, based on specifications, at the stage of negotiating terms of cooperation. It is necessary to take into account the cost-time buffer safe for the contractor and the customer, in the event of difficulties which are not foreseen by both parties (which are almost bound to happen, regardless of the contractor's experience). However, as I mentioned earlier - the needs and assumptions of the project change over time. The client adds new elements and new ideas come up. It is good to consider the possibility of such changes in the contract: what percentage of deviations from the agreed scope of work will be acceptable? A frequently used solution is to assume the possibility of annexing the contract and adding further changes in the form of additional work stages and payment periods. Then, the contract should specify the cost of each additional hour of work.

Another approach to billing is the time & material model, which assumes a very general cooperation framework at the outset. In this model, the customer only pays for the work actually done. The next elements of the implemented system have separate specifications and ranges, the settlement is made on the basis of the working time register and the invoice issued monthly(usually). It’s a safe model for both parties. For the agency - because the actions performed and the time used are rewarded and for clients - because they know what is being paying for while maintaining full flexibility to develop their project.
 

How it’s done in JCD.pl?


In our company's practice, the fixed price model works best for websites, application design projects at a predetermined number of screens and simple orders, while time & material - for programming orders and cooperation with startups, whose model evolves over time. We attach great importance to the transparency of valuations and transparency of settlements. All arrangements, schedules, potential costs and a record of working time in the case of fixed commissions are annexed in the contracts, so that this last stage of cooperation - the invoice after receiving the product in it’s final shape - is not an unpleasant surprise . Effect? Satisfaction of both parties, honest cooperation and good recommendations from customers.

 

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Anna
Anna Karcz-Czajkowska

CEO w JCD.pl

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