Updated: Mar 17
What’s best: “under-” or “over-” when it comes to software development project budgeting?
Peter Faleskini, Chairman of the Board at Digital Village Cambridge, is convinced, “People from large organizations tend to over budget and entrepreneurs tend to under budget their projects.” But both options would reflect on results in a negative way.
You probably guess how underbudgeting affects a product. Often it leads to a lack of vital features. It makes the solution legacy "at birth". All of us suppose that over budget is better than under budget, but it's not.
Here you’ll discover how cost overrun can “eat” investment without providing desirable outcomes.
Common Reasons Why IT Projects Exceed Their Budget
Lesia Kasian, Head of Delivery at JEVERA, shared that a situation where final costs overrun an initially planned budget is not extraordinary. Having expenses over-budgeted is disappointing, especially considering the effort spent for perfect budget planning. We discussed the possible reasons for it and highlighted the most spread.
“Try to find a development project where client requirements remain the same from the very beginning till the end of the development cycle. Or where engineers didn’t find some issue requiring extra resources.
All of us strive to make a product better in some manner. A client wants to add one more feature. A vendor aims to create a robust and working-the-best-ever solution. Every new idea for implementation leads to additional investment for both or at least one party.
The impact of scope creep is not just about fixed-price projects. Time & material ones don’t have infinite budgets either. Trying to minimize the possibility of crossing the line and correct planning of total project cost are crucial tasks in delivery.”
“Custom software development is not a one-day process. Sometimes it takes a couple of years. It’s a whole life!
Everything is changing, and efficient things in 2019 are not so popular now. When creating a roadmap for a particular project, many companies don’t think strategically about the further fate of the solution.
Will it be relevant? This question occasionally comes only during the development stage. This question occasionally comes only during the development stage. So engineers & businesses have to adapt all they’ve designed before to new market conditions. It leads to cost overrun compared to an initial budget.”
“Businesses don’t like to wait. Vendors face it every time a client asks to estimate a project ASAP or for a few days at best. They expect you to dig deeper into the processes, get familiar with dozens of its requirements, calculate everything and provide an accurate delivery cost. They suppose it's a task for a few days.
Estimation is not an easy task, no matter the project scale. Without a properly organized discovery phase but based on “guesstimation”, projects will be over-budgeted victims with high probability.”
You may also like: Role of Estimation In Software Engineering
Time & Material vs. Fixed-Price: Can the Payment Method Prevent Overspend?
It was stated already: both fixed-price and time & material projects eventually can face cost overrun. But the reasons, prerequisites, and consequences would differ.
Despite the prevalent opinion that a fixed price method secures project budgets, the reality is often the opposite. So, neither fixed price nor time & material can ensure you budget-suitable satisfactory results.
Time & Material
You make a project budget more agile by choosing the time & material model. A new requirement means a new investment, and it's okay for both parties. It's too tempting to add more features to your wish list. Maybe, you need to release a solution faster. That's why you decided to increase the delivery team. Consequently, you will pay for it.
If you don't control your budget, you risk turning your project into a fat man bringing zero ROI.
It seems like the fixed price model here is more reasonable to apply. This way, companies can achieve an ultimate goal following their common expectations.
However, changes appear. If a client accepts them, their delivery will increase the overall project cost.
But even discussions between vendor and client eat time and resources. Clients can lose without understanding it. Negotiations can lead to a 10-15% loss of planned resources for long-term projects.
So, both methods can have a cost overrun for different reasons. It means that the fixed price is not a magic wand, and companies should keep an eye on the budget during the entire development cycle.
You may also like: Migrating Monolith To Microservices: What Pricing Model Is Applicable
The Bottom Line
So, what is the cost overrun: convenient flexibility or necessary measure? - Both, depending on the situation. However, proper budget planning and accurate project estimation can reduce extra spending allowing a company to receive a desirable product on time.
Have you experienced issues with over budget and are afraid to feel it one more time? You might get closer to reasonable project budgeting with just a few clicks.
Drop us a line to explore JEVERA expertise and see what our specialists can offer you.