Blog

by Paul Hershenson, President & Co-Founder

I often hear clients complain that their projects with other development companies are behind schedule. That's normal enough. Most software projects take longer than anticipated. What surprises me is when they wonder if the developers are actually working on their projects. My first question in response is to ask if their contract with the development firm is time and materials or fixed price. The answer is always "fixed price".

Time and materials projects are transparent. If you're wondering whether your developer is working on your project, just review the timesheets. If they're only working 10 hours per week, you're only being billed for 10 hours per week. Provided you trust your developer to report their time honestly (and if you don't, you should fire them immediately), you always know where you stand with a time and materials project.

Not so with fixed price contracts. You can't see inside your development partner's resource management. You can't know whether the developers assigned to your project are also working on 2 other projects. You can't know whether a project is late because it is harder than anticipated, or because the developers are over-committed. Both problems look the same from the client's perspective, but have dramatically different implications for the relationship.

It is common practice in the software development outsourcing industry to over-allocate developers. Labor costs are high and margins are slim. It's tempting for development firms to increase their profits by grinding every last ounce of productivity out of their developers, especially if they're exempt, salaried employees. I was recently told, in confidence, by a friend who used to work for a prominent Los Angeles outsourcing firm that he was 300% allocated at the time he left. No wonder why he left. He was working 3 full-time jobs simultaneously and only getting paid for one.

Fixed price projects add an even more insidious factor into the mix. Development firms normally are paid when they achieve milestones. Earlier milestones are generally easier to achieve than later ones. This is the old adage about the last 10% of the project requiring 90% of the effort. If you're desperate for cash to make payroll and you have a choice between working on the new project with an easy to achieve early milestone or an old project with a thorny, complicated, final deliverable, which one are you going to choose?

The answer is obvious. It doesn't mean that the development firm is dishonest or unethical. It just means they were naive enough to have gotten themselves into a very difficult situation with no positive outcomes. This is one of several reasons why Art & Logic simply won't agree to a fixed price contract. It may be counter-intuitive, but a fixed price contract is a classic lose/lose proposition for both the developer and the client. It's best for everyone involved if they are simply avoided.