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06 Mar

Charging by the Hour or Capping Project Cost?

Posted by vertexpd
Charge by the Hour

Several times in the past, when a potential client comes to us and presents their new product which they would like for us to design, engineer and develop. We provide them with a proposal and after a few weeks we are informed that we did not get the job as another design firm won the bid.

This is all okay, and I have no problem with it. This is the beauty of the free market. Sometime you win and sometimes not.

I can recall five to seven projects which we bid on and lost, HOWEVER, the potential clients came back to us after several months or a year and asked us to help them with solving the problems which the "winning" team is facing or not willing to fix.

The main reason these things happen is due to the fact that when we bid on a project we base our estimate on our past experiences and on the time and effort we think will go into each phase of development. These are only estimates to provide the client with an idea as to what he is in for. We always make sure that the client knows that during the project we will bill by the hour, what was originally estimated was just that, an estimate. This is the point at which we lose some of our potential clients.

Some clients like to have a cap on a project so they know that they will not need to spend more than $x amount, this is an understandable need. But, when it comes to product development, R&D and engineering, this is very difficult to predict. Some of the projects that we lost were due to the charging by the hour billing structure. The client simply moved to work with the other firm which was willing to set a cap on the project. Most such clients came back to us however, and asked us to help solve the other firm's problems. These clients looked for a bid with a cap and wound up redoing the project or even starting it from scratch.

In our 15 years of operations, we never worked on a capped cost project. When a design firm is willing to work on a cap based project, one of three things can happen:

1. They (the design firm) will of course estimate the cost of the project and add to it some buffer for unexpected obstacles. They will start working on the project and try to finish it in a shorter period of time than they estimated. The bigger portion of what they asked for stays with them as pure profits so they can move on to the next project. If they are lucky and very talented, this will work and everyone is happy.

2. They will estimate the cost with the buffer, and start to work on the project. Once they encounter some difficulties and a few design change requests by the client, all of a sudden they see that the clock is ticking faster. They are already at the buffer zone and this is the time to start cutting corners and compromising attention to details. They start reaching the point at which this project is not so profitable, and in fact they are starting to lose money. Any request for a change from the client is typicality resisted and avoided and most of the time contingent on additional funds.

This is the typical point at which that client starts looking for a way out and for someone else to take over the project. The design firm is hoping for the client to move elsewhere since this has stopped being profitable and the relationship is now strained.

3. They will estimate the cost with the buffer, work and face some difficulties,enter the buffer zone, work on some more changes and keep working. Now they are losing money, BUT they are still working. Integrity is what is keeping them from giving up or dropping the client altogether. Although this is rare, I believe it is possible to find such a firm. At the end the client is happy, the design firm maybe too but most probably lost some money on this project but gain the trust and possibility of a returning client.

We (and most design firms) are trying to avoid all of the above. Clients need to understand that R&D takes time, sometimes more time than expected/estimated. Clients also like to change their mind and tweak things, which is perfectly understandable, but these things are hard to predict, and cannot be a part of a cap cost project.