Quite often when we speak about project management, we usually refer to the set of monitoring tools that are utilized to ensure that we shall deliver the project according to the three universal criteria:
- Product/service delivered on time;
- It is proper according to the specifications;
- It is proper according to budget.
It is rather simple to list the required specifications and to comply, and it is relatively easy (everything being kept in perspective, of course) to plan the final delivery date for a project. However, it is more difficult to incorporate changes and contingencies that may arise during its execution. In general, project management tools used to manage these changes along the way allow limiting risks, at least on the organization point of view. It remains no less true that these changes have an impact on the financial component of the project.
Therefore, the concept of delivering ‘according to the defined budget’ becomes quite often uncertain.
The importance of billing method is obvious:
If we invoice the real number of hours and related expenses, then the situation is perfectly clear and there are no problems in sight. Whatever the changes involved in the life of the project might be, the billing will be done based on the real number of hours incurred in the performance of services and expenses. However, unforeseen costs may occur after project delivery.
If we bill on a fixed fee basis, the following question will soon or later arise: what do we do if our flat rate billing does not reflect the reality on the ground? In other words, if we charge a lump sum which in equivalence is less than the selling value of the worked hours? Shall we post the difference in losses, or initiate a negotiation with the client? It will depend on the customer’s goodwill and on our negotiating skills.
Anyway, at this point we find ourselves still in the phase of delivery of services, but what about services rendered to customers beyond the delivery date of the project? Although these occur in retrospect, they were not initially budgeted, and as such they will affect the level of profitability of the project.
Let’s take an example: we develop a software solution for the industry.
My project consists of three phases: needs analysis, development, and commissioning. For the entire project I planned respectively 25, 100, and 50 hours for a total of 175 hours. My average hourly cost is $35 and my average hourly rate is $70. The agreement with the client is based on a lump sum of $14,000 (175 hours and a 25 hour buffer at the rate of $ 70).
I underestimated, in my analysis, development needs. In addition, the Beta version contained bugs that I had to fix. In total, I spent 40 hours more than anticipated in my original budget (excluding the buffer). In compliance with the agreement I have with the client, I charged a flat fee of 200 hours and therefore have recorded a loss of 15 hours, representing $ 525 (cost). The software has been delivered. Two months later, the client informs me that there are recurring malfunctions and I have to work twenty hours to correct the situation. In total, although the project has been delivered, I recorded a second loss equivalent to $ 700 (cost). To summarize:
Beyond project delivery, financial loss may occur. It is therefore appropriate to include in the budget a risk factor which would ideally represent the price of one year of service contract. In the example, besides the 25 hour buffer, it would have important to add an amount to cover the risk of post-delivery, for example 10 to 15% of the total contract value. Abak software specializes in time recording, billing and cost management of the project while including a component for budget calculation.