Choosing the right method of billing research and development work may decide on the success or failure of the project. What system to choose in order not to overpay?
Don’t waste your resources!
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Many myths have arisen around hourly billing, which makes entrepreneurs afraid of this form of budgeting their projects. You can lose a lot by consequently choosing a fixed budget, even where it is even harmful to the project. |
Fixed budget
It would seem that there is nothing easier than to settle a project in this way, right? The client and the development team agree on a fixed price, and upon completion, an invoice for the work done is issued. A steady budget has certain advantages.
When to use a fixed budget?
- When you have a very well-defined scope of the project. Choose a fixed price model if you are sure that the analysis of business needs has been done reliably and you know exactly what should be included in the scope of work.
- When the project estimations show a small number of hours. A short list of tasks can be efficiently summarized in a fixed budget. It is a simple and time-saving solution for both parties to the settlement.
- When everyone gets along well. If you feel that you are perfectly understood and the whole team shares your vision, so you are not afraid of a large number of corrections.
But what if the scope or duration of the project changes? Or when it turns out that the quality of the final product is not satisfactory after long months of work? Then it is better to look for more flexible settlement methods.
Time and material billing
How does hourly (T&M) billing work? It is a pay-as-you-go model based on labor costs. The client is invoiced for the number of man-hours spent by the implementation team on tasks.
When to use hourly billing?
- In test projects where a lot may change. If there is a high risk of having to perform a pivot, constant budget recalculation simply does not pay off. Let the team focus on the project at hand!
- Where the scope of the project is loosely defined. Instead of negotiating an invoice by invoice separately for each task that “falls” into the register, agree with your team on an hourly rate. You can make discuss the work on a regular basis, e.g. on daily fifteen-minute meetings, to make sure that everything is going according to plan and that the contractor of your project is achieving the set goals.
- When the project duration or total budget is difficult to estimate. Are you uncertain if the first version of your idea will meet the assumptions or are you afraid of complications in the process? Making the budget more flexible by hourly billing will be a good solution.
- Where a quick release of the MVP matters. If you want to stay ahead of the competition and test the implementation in market conditions, and then gradually improve it, especially in combination with the Agile project management methodology, you have a better chance of achieving success if you use hourly billing.
- If the financial risk of the project is high. In smaller iterations, it is easier to plan and control work. If some of the project’s elements do not move the work forward, using too much time, you can always give them up or come back after rethinking the goals to be achieved. In the worst case, if the project fails, it is better to settle every hour for the work done than to leave with the feeling that you have paid too much.
Why should you not be afraid of time and material settlements? Most of the issues that raise investors’ doubts are:
- budget burnout,
- lack of information on the total budget to be secured,
- paying for low-quality services and corrections to them,
- measuring the time spent on implementation.
At IDO Electronics, we have great ways to deal with all of these issues!
Choose a tool that’s best for the project
Hourly billing perfectly complements the methods of project management known under the common name of Agile. The so-called Agile methodologies are nothing more than the incremental production of the project’s partial products. Accounting for an iteration in accordance with the man-hours spent on it and the work performed is more rational than the estimated cost in advance for all iterations, or only after the project is completed. Thanks to this, you can control the project budget and work progress at the same time.
Agile methodologies very often put emphasis on communication and control of project progress. Detailed valuation of tasks before starting them allows you to see how time-consuming it will be to implement a given option and decide if it is worth its “price” in man-hours. The product owner not only knows in advance how much he will pay for the work but can also keep his finger on the pulse and react if there is a threat of delays or budget overruns.
How do you measure the time devoted to tasks? The software used for project management often has a built-in timer to record the working time. IDO Electronics has its own software which, in addition to the tracker, contains many other useful options for managing the project and the project team.
Summary
Every method of doing things has its advantages and disadvantages – and the same applies to the methods of settling research and development works. Choosing the optimal method for the size, complexity and even nature of the project allows for savings, which then translate into a higher rate of return on the project.
