Software Consulting Billing Models

by Lucid Information Technologies
Like with most professional services, software consulting may be offered a la carte or all-in-one. There can be advantages or disadvantages to each model, however, so it is important to understand which models your vendor offers in the early stages of the relationship. Most firms will offer an hourly rate, although this is not always the best value for the client on every consulting engagement. Hourly rates can be subject to cost overruns - especially without dedicated Software Project Management. View our page on what attributes to look for in a good software consultant .

Estimates

There are several important things to consider regarding estimates.

Free Estimates

While free estimates on smaller software projects are common, beware of free estimates on larger project scopes. Good estimates require work - usually even requiring multiple disciplines (architecture, implementation, integration, project management, documentation, release management). They are also highly valuable in terms of reducing project delivery risk as well as budget risk. For this reason, they should come at a price and take some time. Expect this from a good software consulting firm.

Paid Estimates

Paid estimates often come in the form of a "scoping exercise" or "scoping project". This project may be offered on the same price basis (e.g. hourly) as the resulting project, or possibly even a different one. It is common practice for attractive clients to underbid the scoping project so that there is an easier "yes" decision on behalf of the buyer. These scoping exercises can also be a great way to "get to know" your potential custom software vendor. However, be sure that there are clearly identified deliverables at the end of this phase. Unscrupulous vendors may "keep" the scope document if you do not approve the resulting project, so that you cannot use their scope to bid the project out.

Estimate Accuracy

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.

Caps

A Cap is an upper limit (sometimeA 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" $18,000.

Fixed-Fee

Fixed-Fee 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.

Up Front Payments

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.
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.

Milestones 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 Database Structure
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.

Block/Retainer

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 217 hours of a $115/hr Senior Software Consultant or 294 hours of a $85/hr Junior Software Consultant.

Maintenance

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