Cost management is vital to an organization’s project planning process in any industry. It involves the planning, estimating and overall control of budget. And the processes are in place to help project teams plan and control budgets during the project life cycle. And to the IT industry, it’s important whether you develop by your own resources or outsourcing a trustworthy partner.
In this article, we’ll dive into the topic of some types of pricing models, what effect an IT project’s price has and how to manage the cost effectively, specifically when you outsource from technology service providers.
An information technology (IT) project is a type of project that deals with IT infrastructure, information systems or computers. Examples of IT projects are web development, software development, mobile app development, network configuration, software implementation, hardware installation, database management, and IT emergency recovery… The manager has to plan, schedule, execute, monitor and report about the project. Since they are often very wide in scope, IT project managers must deal with risk, interdependent integrations, software updates, scope creep and budget as well.
Two models
When you ask a software outsource service provider for a proposal, you may get one of two popular models: time & material and fixed price.
For the T&M (time & material) model, it often bills clients for actual work based on hourly rates of labor. The change can be accommodated by this model easily because resources and timelines are flexible and can be adjusted based on the revised course. You may prefer it if you want to manage a project by yourself or the project is long term with dynamic, changeable or update of requirements. The client usually provides a PO/PM to work together with the service provider to control all the aspects of the project.
The effort is high efficiency and the margin is estimable and stable. However, it is difficult to load resources if you’re in urgent need. You should clearly check proposals about charge rate, number of headcount, duration and ramp-down or replace notice period..
Another model is project based – fixed price. The requirements are locked at the start of the project and estimates are made based on those requirements. A single-sum contract is made where a service provider is accountable for completing the project within the agreed sum set out in the bound. Choose this model if you have had clear requirements and determined deadlines or have fixed budget and scope. It should be transparent with all specified demand, fix budget and pre-arrange the deadline so that there won’t be any surprises.
The Client will not have to spend a large effort in managing the project and the resources can be utilized by the service provider to achieve a high productivity. But it can get complicated if the requirements are not clear and proper agreements about changes are not properly discussed and agreed before signing the contract. Since the client has less control in this model, it’s risky if the progress and quality of the project are not reported and monitored in a timely manner.
What elements affect the price of an IT project?
Many factors define the digital product’s cost. Let’s see what affects it in terms of coding, risks and other factors your software development company may include in the overall cost estimate. The basis on which software houses make the assessment involve non-functional requirements, deadlines and budget. Let’s take a closer look at them.
Scope of work
Defining a scope should be the first thing you do because it shows you and your team the project size – how big it actually is. It covers all the crucial factors, including project requirements, third-party integrations and non-technical factors. In most cases, complex projects are more costly.
Time
It’s also a vital factor in determining the final cost. You should keep in mind that the software vendor will probably raise the hourly rate if you urgently want to release the product.
The vendor’s country
It’s no secret that the cost of services varies from country to country. Luckily, some websites can help you with comparing the prices.
Your involvement in the project
It may surprise you, but your engagement in the process also impacts the costs. For example, if you’ve done a detailed analysis beforehand and provide the team with useful materials from the market and competitor research, it brings down the costs.
Continuous development
It encompasses all the actions after launching the product – adding new features, scaling, update and maintenance.
Software house’s size & reputation
The position of your software vendor on the market may also change the final price of the service. Why? Because along with the reputation comes the development team’s expertise, which means that they’ll probably provide you with all the necessary services. Thanks to this, you’ll have everything done in one place. But that also means that your software development budget may go up.
External libraries and plugins
This includes everything that a digital product needs to work and adds value to its end-users. That means all the features, whether or not the app requires integration with other services such as Facebook or Google and many more.
The degree of the project’s complexity
Depending on how complicated the project is, the price may vary. First of all, more senior developers will have to work there if the project is advanced. Moreover, due to its complexity, it has to undergo more prolonged safety review procedures.
There are some tips for you to manage the budget effectively and have a good product.
Planning & project scopes
Planning is the first step to ensuring a project manager is aligned with the project management budget. During the project planning phase, meet with your team and compile a realistic estimate of costs. Consider all the project phases, tasks and activities the project will likely entail, and make sure the budget contains sufficient contingency. All people, material, hardware and software should be accounted for and the estimate should be used to achieve a baseline budget.
Estimate budget
Once the estimate has been approved and the funds have been released, the project manager will have a baseline budget to work with. The monthly budget can now be worked out by dividing the estimated project length with your baseline budget. This will give you an idea of exactly what you can spend per month to stay on track. It would be better to set aside a budget for cost overruns to deal with unfavorable events or project risks. The estimation should become more refined the project progress and the budget should be updated over time.
Cost control
Clear cost controls should be established (including sign-off responsibilities) for every expenditure. Part of maintaining a smart project management budget is planning who oversees and responsible for expenses early on. E.g Who will be approving and signing off on timesheets, invoices or resource assignment?. Prepare a contingency plan and define corrective actions in case of budget overrun is also a good start to make sure the costs are in control.
Record the cost and calculate metrics
To ensure you are staying within budget, you should be making cost comparisons between your estimated baseline and the actual amount of money being spent regularly. Calculate metrics at the end of each reporting period, then compare the total amount spent with what you were expecting to spend. If the numbers are far apart, it means you’ll likely need to take some action to get back on track and stay under budget.
Update forecasts
If any numbers are off, you need to update your forecasts to have a better understanding of how you will be using future funds more efficiently. You never want to let it get to the point where you are surprised about budget losses and need to ask stakeholders for more. Revisiting these numbers on a monthly basis will allow you to initiate any changes that need to take place and adjust the budget accordingly.
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If you are finding a trustworthy partner to provide high quality software development or to consult about your project, let’s talk to SETA experts via contact@setacinq.vn.
SETA International is one of the leading software solution providers in Vietnam providing one-stop software development services with high quality, efficiency and competitive cost; and being trusted by international clients for the past 14 years like Amazon, Pfizer, American Airline. We provide IT consultation and IT outsourcing services for AI, VR/AR, IoT, mobile, web and cloud.