Let’s say we’re an IT services company/software development company and a customer comes to us and asks us to do an IT project. We sit down, we price it, we send a quote. Ahem – well, that’s what we do – we price it.
Some time ago, one of the founders asked a rather simple, but at the same time interesting question: how to price IT projects?
We will try to answer this question as simply as we can, presenting one of the ways that works surprisingly well (of course, abstracting from the time & material method, which is also very popular).
How do you price IT projects? First, the hours
In short, you sit down with the client and describe all the project requirements (even if the client has provided you with a pre-written specification!). Ok, written down? Then you sit down with all the team members who will be responsible for completing the project (graphic designers, webmasters, developers, marketers, etc.). You discuss the project and all(!) of its elements with each member. You dissect each and every feature, view, or mechanism. Ok, dissected? Then you price each element of the project by the hour.
It will take 6 hours to create the layout of a given element? This is what we type. Cutting the layout takes 4 hours? We type it. Programming 3 hours? We type it. Now let’s add tests. And we’re done. Element priced. Now the next, and the next, and the next. Until we have them all priced. Have we got them all? Now let’s add in all the testing, installation, and configuration on the target production server.
And we already know how many man-hours the project will take.
Let’s add a safe hourly limit
Now let’s look at what we just priced. Realistic? We probably think so now.
So let’s add something to our valuation. Specifically, let’s add 20-30%. Let’s add such a surplus to each hourly valuation of a single element (to the valuation of layout, webmaster, programming, etc.).
Money + cap
We already have a (reasonably safe) hourly valuation. So let’s turn it into money.
How much does graphic design work with you cost? 40 EUR per hour? Then let’s multiply the number of hours needed to create a layout by this rate. Webmaster costs 50 EUR per hour? Then multiply the price by the number of hours. Backend is 60 EUR? Same as before.
We have hourly rates, we have specific monetary rates. So let’s add it up.
And so we have reached the cap. That is, the maximum amount that the customer will pay for this project.
How does the cap work?
The cap is nothing more than the maximum cost of the project. That is, if the project takes exactly as many hours (or more) to complete as we estimated in our quote – the client will pay exactly that much. If less time is required for the project – the client will pay correspondingly less.
Why the cap?
In short, it gives safety.
More specifically, the contractor can provide the client with a higher quote for the project (adding some sort of safety limit/surplus to each element performed).
The client, on the other hand, doesn’t feel cheated. They receive accurate hourly reports from which the amount they will pay is derived.
If:
- The contractor prices the project to their disadvantage (by contracting too few hours), the client need not worry – they will pay as much as quoted.
- The contractor prices the project to their advantage (by contracting too many hours), then the client will pay less.
Win-win
So here we have a real win-win. Everyone wins, feels secure, and doesn’t end up feeling cheated.
Of course, you just have to make sure that you have:
- Proper education of the client so they understand what the cap is.
- Good hourly rates and a not exaggerated but safe overage for each item the contractor will create.
- A good and reliable hourly report that shows how much time was spent on a specific task.
The end.
