The Custom Business Software Show – Episode 3: A Frank Conversation About Fixed Vs Variable Custom Software Development Price
In this episode you’ll hear our thoughts on:
- What the traditional approach to custom software development and its costs are
- Why clients experience frustration with hidden charges and budget limitations
- When clients face difficulty in understanding the costs of custom software
- Why fixed price important for clients to manage risks
- What the negative consequences of paying for software development by the hour are
- What factors are considered in project cost estimation
- What the timeframe for project completion in custom software development is
- What exclusions and uncertainties are in the project scope
- What concerns with the traditional custom software development process are
- How the traditional software development process involves tapping into a budget pool for funding
- What the uncertainty with the traditional software development process in terms of project completion and cost is
- What the benefits of fixed-price contracts for consumers are
- What the pros and cons of traditional versus fixed-price contracts are
- How the comparison with fixed-price contracts in the building industry helps explain custom software development
- What cost-plus contracts and how they compare to fixed-price contracts
So, listen here as we discuss these!
TRANSCRIPT:
The old mentality of or the majority mentality of how custom software is created.
And that is, companies give you a ballpark figure.
And then they start preparing the software, but they charge out every phone call like a solicitor, they charge out every email, like a doctor, they charge, you know, they start charging.
So the budget that you’ve set per month for this custom software is getting eaten up in things that aren’t actually adding to the value of your software.
Somebody who has no idea about custom software, but wanted to get something made, right?
Didn’t know that.
I had a budget of 70k.
But most of it was spent on admin and meetings and emails, and phone calls.
And very little was actually getting spent on the development.
And I think it’d be really important for the common person who’s looking to get this service to know this.
I know for myself when we were looking at it, then we were told 70k.
And we’re going to see how far we can get with $70,000.
It was a nail-biting sort of experience because you sit there and say, Geez, I hope 70k gets the whole length of this program.
Otherwise, if it doesn’t, how much more until the end of it?
And if I pull out, I got 70 grand just sitting there doing nothing.
And we did the paid full-day workshop.
And even at the end of the workshop, we still did not.
we still did not know have a definitive answer on how much it was going to cost for the full project.
Which look I understand because it’s there are a lot of unknowns in the scale of the project that we were trying to undertake but to give us a very lowball undertaking or lowball quote of, say $70,000.
And say that it can be done for that price.
Because I was economist, it was very misleading.
And I think the reason why software developers or companies like that operate with the mentality of 70k, but 70k budget, yep, no problem at all, we’ll see how much we can get done with the 70k.
That’s not really the answer that you want, as a consumer, does that mean the software is going to be done and I can actually start making money from it, or does that mean that it’s going to be half done, and I’ve now got to fork out more.
And I’m already in the hole, I’m going to have to keep going because otherwise, I lose 70 grand.
And so the mentality from a consumer point of view is very simple, right?
Either they’re all in, and then it becomes an unlimited amount of money.
I don’t.
And whereas the opportunity that we’ve got, which is we’ll give you a fixed price.
It takes the most important risk out of the client’s hands and puts it into our hands as the business.
If you look at a scale of everybody’s ideas of what’s important, and what’s not the number one thing would be to be a budget, because there’s not an unlimited c when people are trying to do things.
So, you know, if someone said to me, I can do it for 100 grand, that software, and that we’re going to probably four to six months, and it went nine months, but it was still 100 and 100 grand, and I didn’t cost me any more, I’m not going to be angry anymore.
Do you know what I mean?
Whereas how I was with the previous company, I was in a position where I was out of pocket, well over 110 I had no software to even try because it hadn’t even I didn’t even have a test system or a trial system that worked.
They did not understand the scope at all, even though I did the whole day workshop.
And even though I had provided them with the Excel spreadsheet, nothing worked properly.
So I did the workshop with the project manager.
And, the big boss, he was there as well for a few hours or a couple of hours.
And they were joining out on the three whiteboards.
And they were taking photos of all three whiteboards of what we were doing.
And then I presented them with my Excel spreadsheet of how I was doing all the calculations and everything else for the software that I needed.
The problem was that it was almost like a winner in one ear and out the other.
Because when I did get an opportunity to even see some sort of calculation or software-related sort of thing that they were trying to do, it was not right.
It was almost like they weren’t watching what I was trying to do.
So it was difficult.
But then, you know you again, as a consumer, you’re not you by that stage, you’re already at the point where you’ve gone.
Should I actually know that I pay per hour now?
Right?
And geez, they charged me X amount of money for that 15-minute conversation on the phone.
So you kind of, then it actually puts more burden on you as the consumer, because you sit there and you say, Okay, I’m going to make sure that when I go back to them with feedback on this section of the software, or, you know, this calculation that I’m precise, because if they come back to me with another question, and then it keeps going round, and round, and round and round in circles, this is costing me more and more money.
And that was what it was like, for us, it was really, to the point where we pulled the pin because then you’re as, as the consumer, you and as the customer, knowing them well, that every single time you open your mouth, it’s going to cost you $1, you kind of well, I know for a fact when it was when we were doing when we were doing that custom software, it was I’d look at, an aspect of the thing that they were trying to create the software they were trying to create.
And I’d go it’s not really working the way it was supposed to.
Is it really that important?
Do I go back to them and ask them to make this work properly, because that’s going to cost me money?
Although I just leave it, just leave it as it is, and deal with it at a later date, because it’s going to cost me money.
So we would do trying to prioritize the issues.
So that wasn’t costing you so much money again, because the budget was at the forefront rather than the product.
And that’s where I think the difference between what we offer and what others offer is a better scenario from a consumer point of view.
Because although we’re very stringent on what we have in our contracts, and how we word our contracts, and what we’re going to have, relative to our contracts, the consumer doesn’t feel that going back to you and saying, Hey, this, this button here doesn’t do exactly what it’s supposed to.
They don’t feel that they don’t feel that restriction, to be able to do that and come back to you and say this is not working the way it’s supposed to, because they’re not worried about the money sort of side if that makes sense.
Because it’s fixed price, whereas I know I was, and then being at the software development companies head office and then seeing people playing ball and sitting around watching TV, not even during lunch breaks, finally got me worried thinking shit, are these people currently charging out to their clients at an hourly rate, to sit around and do nothing or to play pool?
Yeah, and I think and look, I can see where software development companies adopt that way of thinking because it takes the onus off the business owner, or, you know, the general manager, or whoever’s looking after the staff, the supervisors and whatever else to have to make to ensure that tasks are being met.
Because if all the hours of a developer are charged out to a project, then it’s no longer you know, task management, it’s just more well, the developer work for that client for that week.
So that’s who gets charged, if he even only did four hours worth of development, but charged our 36 Well, that’s not our problem.
So the whole, you know, managing your staff to ensure they hit targets and stuff as we do.
Because if they don’t hit the targets as we require them to, we are out of pocket, not the client.
And that’s the difference.
And that’s why I like our business model, even though it’s harder to run our business model, I think it makes us stand out from the rest.
Because we’re transparent.
Our clients know that.
This is how much we’re going to be charged every month, or this is how much the project is going to be charged overall.
Irrespective of whether or not they’re playing pool or watching TV.
So that was one of the best things that we ever come up with.
And it also puts the onus of responsibility back on us as business owners to ensure our staff are actually doing the work.
Yeah, because it’s quite easy to just allow, you know, staff members to run their own show and abdicate the role of, you know, the responsible person, or the you know, the team leader or so on and so forth, or the task manager to ensure that works getting done.
But to be in a delegated position where we have to delegate our roles and ensure timelines and stuff like that are met.
It just ensures that we’re actually hitting our targets.
So from a consumer point of view, it’s more transparent and I think it’s a lot easier for them to understand that.
This is how much the project’s worth.
This is how much you’re going to be paying.
This is how long it’s going to take us.
And you know, there is going to be some exclusions, no, because there’s always going to be unknowns.
Because we don’t know what we don’t know.
But at least there’s some certainty there of how much the client is going to be out of pocket.
And it’s not going to be like I said, it’s not going to be in a position where he where the clients, like where I was, in the sense of, if I put 70 grand down, they’re gonna use it, like a pool of money.
And they’re just going to grab what they need every week from it.
And then once it’s dried up, they’re going to stop working.
And then wherever they’re at is where they’re at.
And that’s, that’s as a consumer, that was the killer because you’re sitting there saying, I don’t know how long this is going to stretch, I don’t know how far the 70 Grand or 100 grand or whatever the budget was, is going to stretch.
The general way custom software development companies run is this, you’ve got a budget, which is a pool of money, that we will tap into weekly fortnightly monthly to cover the costs of the development of your software to date, that costs of development to date incurred will also include admin, communication via email or phone with your team leader or project manager and development costs.
So not necessarily is all that money going to the development of your software, some of it is going to, you know, secondary costs at the end of your budget, but once your budget has dried up, you’re left with software that could be complete, which is great.
But nine times out of 10 is probably going to be incomplete and require more budget or more money to finish it off.
It leaves the consumer in a position of Holy shit, I don’t even know how much this is going to be now.
Do I put more in and just back up that debt with more debt?
Or do I just wipe my hands and walk away and just never want to consider doing custom software?
Again, because I’ve just been burned X amount of money.
Whereas the fixed price and then you go into the fixed price?
Why don’t you say the fixed price one we do, we take a bit of time to make sure that we understand what’s required.
But when we do give you a price, it’s going to be a fixed price.
And based on your scope, I think consumers would understand that a fixed price contract albeit software development or building our home, whatever is going to have a buffer in there to cover the business, right?
It’s not going to be to the nth degree or to the last cent that it’s budgeted for.
There are always going to be buffers in there.
So I think even if you want to explain it, you know, because you want to explain the pros and cons of both methods, right?
You don’t want to just be all solely by fixed prices, the best everyone else’s shit, you want to give the pros and cons of both methods.
Obviously, there are a shitload of pros in the current method that most developers use, which is you got to pull the money and tap into it for the developer or the business, and very little pros for the actual consumer, right?
Because they’re not, it’s unknown how much it’s going to cost them.
Whereas on the fixed price, there are a lot more pros in the consumer’s benefit than there are in the business benefit.
But I guess the only con that would be in that, for the consumer in the fixed price is that they might be paying a little bit more.
Right?
Because, well, they might be.
But at least as a consumer, you can say, well, I know it’s going to cost me 150 grand.
Whereas I could put 150 grand in the bank account and give it to another software development company and say, Hey, I got 150 grand pool here of money, see how far you can get that 150 grand, might not get me to the end, because they’re going to try and milk as much as they can out of it.
More importantly, after that 150 grand has dried up where am I at with the software?
Or is the fixed price I know I’m gonna get this software and it’s going to be finished.
So there are a lot more pros, it’s a lot more customers leaning towards the client customer with the fixed price than it is with the other method.
And look if it wasn’t this if that fixed price thing was not heavily in favour of a consumer or the customer, then the housing industry of Australia and master builders and all the other buildings like the Victorian Building Authority, but more importantly, the law legislation the building Contracts Act would not be pushing for builders to be in fixed price contracts across the board.
They will just allow the opportunity of a fixed price contract or a cost plus contract and they don’t have people do in the building industry?
People do take on cost-plus contracts.
But there are heavy restrictions on that, you know, like a cost plus contract could be I mean, that has to be over a million dollar bill.
That’s first and foremost.
But you use that analogy with software.
It’s a similar, very similar analogy.
I go with a cost-plus contract because the builder I choose doesn’t want to go with a fixed price.
The builder I choose doesn’t want to go with a fixed price.
What do I do?
Okay.
I think it’s going to cost me X amount.
Right?
I think it’s going to cost me say $1.
5 million to build this home.
But I don’t know.
And so you have to have pretty much an open chequebook to go with that sort of mentality.
And that’s the same with software.
You know, everyone I spoke to it wasn’t just the one that the software company that I went with a few other software companies before that, saying the same sort of thing.
If your budget is around the 100k mark, yeah, we think we can do something along those lines, it probably won’t have all the features that you want.
But we’ll certainly get it to a level where you can use it.
And then I’m sitting there saying, what’s the level that I’m going to get it too?
It’s just going to be that I can log in.
And that’s all, I think it’s not just the monetary value, that our business looks at guards to problem-solving issues.
They also look at the current processes that they’ve got in place that may need improvement through integration or custom software solutions.
And I look at it and say, Okay, well, currently right now, it’s very clunky, but we’re managing.
But having said that, you know, Tanya, who does, let’s say, Tanya, who does all that operation, she has been with us 10 years, and she knows the ins and outs of every window or every software package we use.
So that’s fine.
But the problem lies in when tenure leaves, or retires or, you know, finds another position, and they’re needing to replace tenure.
That’s where they’re going to find that, okay, you can’t really put a monetary value on the costs that we’ve incurred thus far, by having these multiple different software packages that we’re using.
But then they start seeing that as an issue when they try and find a replacement for that.
That person that that staff member, that’s where they find the issue.
Because it’s not a streamlined process, where they can put it in a workshop manual or process menu for anyone to just grab it, read over it for a couple of days trial and error, and within a week, bang, they understand the role.
And so from a business point of view, they would look at closing those issues, they would look at, you know, how much is it costing us for tenure to input the data into this software, then move over to this software to input it into that.
But also needs to you can put a monetary figure on the secondary part of this, which is when you need to replace tenure because she’s an expert in her field and trying to get somebody to be an expert in the field straight up is impossible.
And you don’t witness this, and I only witnessed it myself and experienced that myself.
You know, once that happened, there were periods there where we were using multiple pieces of software.
And our staff member was proficient in doing that.
And it wasn’t until she went on maternity leave that we realized Holy crap, we, you know, this extra 10 or 15, or 20 grand that we could have invested into, you know, a piece of software that will do it will do it all like let’s say construction management software, for instance, that did all the accounting and the estimating all in one.
If we had and if we had invested in that whilst that employee was with us, she could have helped implement it, rather than being reactive when she went on maternity leave, and now we’re stuck with.
Okay, four pieces of software we use that aren’t integrated, that now we need to find somebody that’s going to be able to do what she did.
Or now try and implement this automated sort of all-in-one system.
When we’re behind the eight ball.
And upfront, you think upfront when everything’s running smooth, and your staff members are there, and they’re all doing their job.
And even if their job is very clunky, and you know, they’re in and out of pages, putting in the same data or whatever.
You don’t put a monetary value on it.
If we implemented something better.
We would save X amount because you can’t really do that.
It’s not tangible.
It’s not until they leave, or they’re absent that you go holy crap.
I’ve actually got a massive hole in our system here.
We thought it was running smooth, but it’s actually not.
It’s the operator that’s making it run smooth and you can’t ultimately businesses can’t always rely on their operators because, you know, people leave – people move on.
And then you’re single-point sensitive.
But when I was when we were doing when we were shopping around for custom software solutions for our business.
We did six months’ worth of speaking with huge amounts of developers, we never went offshore.
I was never a fan of that in, especially when you’re spending as much money as we were expecting to spend.
But there wasn’t one that offered a fixed-price opportunity.
Because they didn’t want to take the risk of “we will take that on for this much” without putting in the due diligence to find out exactly what was required.
Because it was easier for them to say, yeah, yeah, it’s about this.
And we’ll work to your budget.
And whatever comes at the end of it, it is then it was for them to say no, no, your budgets 100 grand, let’s say, yep, we’ll get the whole thing done with 100 grand because we know exactly what we need to do.
No one took the time, no one wanted to take the time.
So we were just stuck.
Basically choosing a developer from the same sort of mold, if that makes sense.
They all had the same mentality.
And we had to choose at least the best one of that.
And it was very difficult.
And I even remember specifically saying to my business partners at the time, it’d be nice if we could get a fixed price as we do with homebuilding.
You know, at least then, as a consumer and the customer, you know exactly how much you’re going to be up for.
You know, the scope, you know what you’re going to get, and you know how much you’re going to pay.
You don’t always have to go with, you know, fixed price, but there are opportunities in the world to not go with fixed price.
And I think that’s a great opportunity or option for anyone to have.
But if you’re going to go with the non-fixed price or the budget, sort of the budgeted version of development, at least do some general investigation on how much realistically, approximately, it’s going to cost rather than just saying, Hey, Mr Smith, how much money have you got, you got 50 grand here, I could work to that.
We’ll see how far we get with your budget.
If your budget dries up, and we’re halfway through the project, you can either take it and go somewhere else, like they said or put in more money.
And we’ll keep going like it like a pinball machine, it felt like it really felt like a pinball machine, you know, you get up to that third level.
And then you run out of coins and you go, Oh, do I put in more to continue going on to the fourth and fifth and sixth level?
Or do I just walk away happy with the third level that I achieved?
And that’s what it felt like.
Whereas if they had have actually done the questionnaire and actually had the means with the clients to get an understanding of what they needed, which, by the way, is free that we offer.
If they had taken that time, and then sat down and said, Okay, well, based on what we’ve spoken about, here’s the scope of work that we’ve put forward.
Please correct me if we’re wrong and if the scope of work is correct.
Based on the scope of work, this is how long approximately is going to take us based on that.
We’re looking at a figure of blah, which would have given me more confidence to say okay, well, they’ve taken their time.
They understand what we need, and they’ve given us a ballpark timeframe.
They’ve also given us a ballpark figure of 100 grand or 200 grand.
If it goes over, okay, I understand I’ve got to pay more.
But I’m pretty confident with what they’ve got written there, that that’s what they’re going to do to achieve what I need it to be.
Whereas just saying I can work to your budget.
And when you run out of money, you run out of money.
It was like “Jeez”, it’s just like like I said, The best analogy is like buying a pinball game or an arcade game or an arcade game.
Two options, you run out of money you walk away, or you keep pumping money in and try and get to the next level.
And that’s exactly what it felt like.
Contact us to discuss your next project and see how this development methodology can make your project a success.
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