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    0 Replies Latest reply on Jan 7, 2013 1:47 PM by kellydrill

    Price vs. Value: Understanding Estimates for Development Work

    kellydrill Adventurer

      Want to build a custom web app? Looking to create a website for your business? Cost will be an important consideration, and you’ll probably request bids from two or more firms. But before you sign on the dotted line, be sure you understand a) the risks behind the prices quoted; and b) how those risks might affect the outcome and cost of your project.

      Most web design and development firms present quotes (or proposals) in one of two ways: as a fixed bid or an estimate. Here’s what you need to know about each type of proposal and the risks associated with both.

      Pricing 101

      Custom web design and development work starts with a set of requirements – a description of what you want. Based on those requirements, an estimator will craft a proposal, which will describe the project as s/he understands it and lay out the costs associated with its completion.

      If the estimator provides a fixed-bid proposal, that means the price for your project is finite. The amount you pay won’t be determined by the actual time and resources it takes to complete your project. Instead, you will pay a fixed amount – that you’ve agreed upon – for the whole thing. Fixed-bid projects are risky for contractors because the actual time and resources expended might exceed the amount charged to the client.

      A proposal that includes an estimate is different. This type of proposal means that the price you pay for your project will reflect the actual amount of time and resources the contractor expended to complete it. The estimate you receive when you hire the contractor is just that – an estimate of what it will take to complete your project. Ultimately, you may end up paying more or less depending on how quickly and cost-effectively the work is completed. So, in this case, you – not the contractor – are assuming most of the risk.

      Pros and Cons of Fixed-Price Contracts

      A fixed-price contract is advantageous in some key ways. Most importantly, it allows you to understand (and budget for) exactly what you’re going to spend on your project. Assuming that your requirements don’t change midstream, you’ll get what you’ve asked for and pay what you expect to pay. You never have to worry that you’re being overcharged or that you’re paying for something you didn’t agree to.

      But because a fixed-price arrangement carries so much risk for the contractor, the estimator will almost always add “cushion” to account for the unknown. For the client, this may mean a higher price than he or she might have paid otherwise. And if the contractor completes the project in fewer hours than estimated, the client still has to pay full price.

      On the flip side, if the project takes longer than expected, the contractor – not the client – makes up the difference. While this may seem like a benefit to the client, it also means less flexibility. As the project progresses, ideas may arise that are “out of scope” (a phenomenon known as “scope creep”). Those ideas often can’t be accommodated within the fixed-price budget, which can be frustrating for the client – who ultimately wants the change, but doesn’t want to pay a higher price for it.

      Pros and Cons of Estimates

      An estimate gives you more flexibility, but can also make it more difficult to budget for your project. The benefit of this type of arrangement is obvious: you only pay for work that is actually done.

      Many contractors provide estimates as price ranges, not target prices. The less that is understood about the project, the greater the range will be. Software and web development come with a special kind of risk. Projects often involve the development of completely new technology – something that’s never been done before. Estimating how long it will take to do something you’ve never tried before is extremely challenging, even for the most experienced contractor.

      The greatest disadvantage of an estimate for the client is the fact that there’s no price guarantee. Getting the most for your money takes some discipline on your part. You’ll want to watch for scope creep like a hawk and provide clear direction at every stage of the project. And if you do opt for this type of arrangement, be sure you understand how costs will be communicated. A good design and development firm will keep you informed about costs as they are incurred and ask you to approve the cost of any changes before those changes are made.

      Getting an Accurate Quote

      It’s important to keep in mind that both types of quotes – fixed bids and estimates – are guesses based on the information you provide when requesting the proposal. In both cases, that can either help you or hurt you.

      Here are some tips for getting more accurate bids:

      1. Know what you want. Clients, particularly those seeking design or development work for the first time, often don’t know how to express what they want. You’ll save time and get a more accurate quote if you do a little legwork in advance. If you’re commissioning a website, for instance, bring examples of sites you like, and be prepared to discuss any features or functionality you feel are critical to the project. Clearly outline your goals for the site, your intended audience, and how the site will fit into your overall marketing/branding plan.
      2. Clearly define your budget. If you already have a budget in mind for your project, be sure the estimator knows that. Even if the amount you’ve allocated isn’t enough to cover everything you want, the estimator should be able to show you a) what you can afford; and b) how much you would realistically need to increase your budget in order to meet your goals for the project.
      3. Identify risks. In any web design or development project, there are unknowns. To get the most accurate quote, try to identify areas of risk in advance. How likely are you to change your mind about something once the project has started? Are there any factors on your end that might slow the project down or make things more complicated? Ask estimators: “Is this something you’ve done before? What leads you to believe it will be this easy (or difficult) to accomplish?” To the extent that it’s possible, expecting the unexpected is always the most prudent strategy.

      Whether you choose a fixed-bid proposal or an estimate ultimately depends on the level of risk you’re willing to assume. With custom work, there really is no perfect solution. But understanding these two pricing strategies – and the risks that come with them – will help you to better distinguish between proposals and determine which is likely to give you the most for your investment.