5 hacks in project budgeting
The most typical approaches to pricing IT projects is fixed project pricing, or time & material model. Both have pros and cons, whereas the general rule is that agreeing to a fixed budget may give the client safety, but may reduce quality, in the end resulting in budgeting an extra 2nd project to fully comply with client needs. On the other end, the time & material model is considered as most comfortable for the contractor, and risky for the client. But, provided that there is trust and honesty between the two parties, this model can lead to reducing risk, costs and improving on speed and quality.
| PROS | CONS | |
|---|---|---|
| Fixed pricing | Clients financial security Requires less trust between client&contractor | Project scope modification possible as a new project. Requires very detailed documentation. High risk of further costs Higher risk of tensions Possible lower quality due to budget restraints |
| Time & Material | Comfortable for the contractor. The contractor will not charge for extra risks in the project Possibly less expensive and higher quality for the client Requires a lot of trust between client&contractor | Difficult “fixed” budgeting Possibly more expensive if the contractor is untrustworthy. |
There is no way to make a simple choice between those two. In fact, rarely at our company will we stick only to one model with the client. Each and every project is different and requires a slightly different approach. However, we would like to share a few hacks to make the budgeting process smoother and client oriented.
1. Start with time & material.
Executing projects that are uncertain in scope is a pain. Usually, either the contractor will be unsatisfied, or the client will have to pay a large margin for possible overrun risks. As a solution to this problem, we try to establish a preparatory stage in the project with a limit of up to 50 hours as preparatory budget. After this stage is complete we are able to set a fixed budget at least for the next part of the project if not for all.
2. Set up an expenditure monthly limit
When using time & material the worst-case scenario is when the client is surprised by a high monthly invoice. As a result, the contractor loses the most precious thing in B2B relations – trust. The solution we use is quite simple, we usually agree upon a maximum monthly budget.
3. Release budget in parts
Big projects tend to be risky and tough. Of course, the client will not pay upfront nor will the contractor agree upon payment after the final delivery protocol. A common practice is to invoice monthly rounds. This is a reasonable approach in maintenance agreements, but for projects payments should be aligned with project parts. If both parties would agree that each part needs to be finished and fully paid in order to proceed to the next one. This way both the contractor and the client will be motivated to close parts as soon as possible to move on. No more unhealthy prolonging, or uncomfortable waiting for payment by the contractor.
4. Gain trust
If you consider bitcoin to be the most appreciated cryptocurrency, you may be wrong. For B2B relations trust is the ultimate value between a client and a contractor. You will never achieve a high degree of quality, speed and moderate pricing without it. Trust is produced when both companies do what they are supposed to do and show empathy to the other side when things go wrong.
5. Monitor all contractors work
Real management without controlling does not exist. An honest contractor will not have any problems with exposing task lists or time tracking reports. Monitoring the project by the client is simply a must. There is a positive correlation between client involvement and finals projects quality. Monitoring gives the client tools to act if something is out of control.
This does not apply to small tasks or projects, that be delivered within one working cycle (usually a week).
IT has never been a low-risk area and sometimes things simply go wrong. Creating budgets for IT is one of the hardest tasks in executing a successful project. The most difficult part is to assess the risks of overruns. Believe it or not, it’s not only about the total amount in the signed contract. The above hacks will let you consider methods to make budgeting a more smooth and less risky task.
