The purpose of this article is to explain the Website Project Cost Overrun scenario and how it relates to the overall web design process. Cost Overruns and Change Orders are two of the largest causes of profit loss- or even going in the red financially on a project. It is also very important to know that project overruns are extremely detrimental to the billable time business model, which most web designers fall under. As you read this, you will learn how to avoid this problem, and also remain profitable. You may even discover how to earn extra profit on the Project Cost Overrun!
PalmettoSoft has built hundreds of websites over the years and would like to share some of this great information we have learned with you. Because we are developers, this article is written primarily from the developer’s perspective. However, anyone should be able to follow along and hopefully they might learn something interesting- if not a lot more!
What is a Project Cost Overrun?
Every web project features a due date. Some call it “launch” while others say “go-live,” but it is essentially the same thing. It’s the date when the fixed bid project (by the developer) is supposed to launch- and both the client and developer tend to be happy when things happen on schedule.
However, there is a lurking monster called the Project Overrun and it is almost always hidden to all parties involved. The overrun can also have supernatural-like abilities… it blends in perfectly with the surroundings as it waits for the right time to strike. When it does strike, if uncontained, it will always cause some degree of profit loss. To add insult to injury, most inexperienced designers still don’t know what happened even after the fact.
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So What Happens- What is It? The definition is actually very simple: Project Delays of various types and degrees in the schedule ultimately cause it to be delivered late.
Why is an Overrun Detrimental?
Time is Money. First of all, a development shop typically has employees or contractors to pay. In many cases, the final payment of a project can be 50% of the total budget. Imagine being 30 days late on a $5,000 payment- or more! This situation becomes even worse with hourly workers who are on the clock. With every tick of the hand, you can see dollars disappearing.
Esprit De Corps Lowers Among the Team. Jobs need finish. Having them hang around for weeks or even months in limbo is detrimental to the “get things done” mentality of a good team- especially for your project manager (PM)! One trait of a successful PM is having the ability to get things completed.
A Frustrated Customer. Most of them want the project delivered on or before the due date. That is why they hired your firm. When it’s late and there is blame being passed around, you can expect a sizable degree to be placed on the company that was hired to do the job.
Main Causes of a Cost Overrun
Failure Inform the Client Upfront. During the sales cycle and before the proposal is written, you want to mention that you are a billable time company- and that late projects are bad for both parties. And this should always be done in a respectful and easy manner. Your main goal here is simply inform the customer, or “plant the seed” and later they should see a written explanation of this in their proposal.
Not Mentioning the Project Overrun Fee in Your Proposal. In following the above, there should be special language in our proposal mentioning a Project Overrun Fee. In theory, this is how it works: Choose a date in time after the agreed upon launch date of your project. Personally, I like 3-4 weeks afterwards. For example, the Launch Date is 1/1/19. Your Project Overrun Date could immediately follow as 1/19/19. You are essentially giving the customer an “18 day cushion of goodwill” in the event the project is delayed. Keep in mind, as a developer, you have to do everything correctly on your side and meet your deadlines or this will not be enforceable. This includes, but is not limited to: A proactive management style, effective communication and writing style, using a web based project management tool and managing your workflow to avoid logjams. Basically, we are talking about everything from the vendor side being wired tight. There will always be issues that arise in any project, but the vendor should quickly work them out and be a problem solver on a daily basis.
You can add Cost Overrun language to your Proposal. Below is an example.
Cost Overrun Date- 1/19/19
*Cost Overrun Fee- $15/Business Day
*Cost Overrun Fee Explained
If the project is not completed by 1/19/19, a Cost Overrun Fee of $15/Per Business Day will be added to the project. This fee will:
- The fee will be in addition to the financial terms in this agreement.
- Run uninterrupted until the project has been accepted by the client.
- The client will be invoiced for this fee at the beginning of the month for the previous month. They are expected to pay it in full.
- If PalmettoSoft has caused the project to be late due to vendor side error for a period of (9) days or more, the Project Overrun Fee automatically null and void for the duration of the project.
Purpose of the Cost Overrun Fee- The purpose of the Cost Overrun Fee to accomplish (2) goals:
- Protect PalmettoSoft from financial loss due to client-side delays.
- Motivate the client to get their project done in a timely manner.
Disclaimer- PalmettoSoft and the client are agreeing to work together in a timely, coordinated and cooperative manner. In the unfortunate event the client is unable or does not wish to assist PalmettoSoft in the aforementioned effort, the client will pay extra fees which will help offset the increase administrative and management costs associated with a late project.
A Short and True Story
How our Customer used the Cost Overrun Fee to Her Advantage. A few years ago, we were building a website for a medical practice and their office manager was assigned as our point of contact for the project. The practice had a team of five doctors that she reported to during every step of the job. During the beginning (planning) steps, things were moving along well. She was able to provide feedback and approvals on schedule.
Then everything changed. The Mockup Design step was supposed to last one week in order to approve the look-and-feel concept for the new website. One week became two. And two weeks became three. What was happening? Each doctor in the practice wanted the design to look “his/her way” and they could never agree on what PalmettoSoft created.
Enter the Cost Overrun Fee. After weeks of frustration the office manager and I were talking and I mentioned the looming project overrun fee in their website proposal. As we were discussing it, I noticed an immediate happier and more upbeat tone in her voice. We decided she would use the overrun fee as a tool to help solve the problem. During their next weekly internal website meeting, she warned the physicians that the job was about to become more expensive if they did not get their act together. Almost immediately, the doctors nominated one representative (out of five of them) to make decisions for the practice moving forward. Amazingly, the mockups were quickly approved and ultimately the project was delivered on time and budget. I would say everyone lived happily ever after, but that would be stretching the truth (smile). The main point of this story is the overrun fee can be used by both the developer and sometimes by the customer in an effort to expedite development of a job. Very few people want to have extra fees accrue when it can easily be avoided.
If you are a developer or casual reader, I hope you gained something of value from this article. While there are many explanations of a Website Project Overrun, we have shared our concept of it at PalmettoSoft. Some of the opinions mentioned are strong, but are also meant to be. Why? I think you will get more value out of something that has been learned as a painful lesson, rather than a vanilla coated theory. It is much easier to learn from another, than have to go through it yourself.
Also don’t forget, there can be two main profitability destroyers of a web project- Project Overruns and Change Orders. Understanding the Project Overrun and how it affects the billable time business model can greatly increase your chances at delivering a successful and profitable solution.
Rhett Cameron DeMille is the founder and operator of PalmettoSoft, a digital marketing company founded in 2005. Among his peers, he is known as a “process and methodology” guy and loves to help expand the online presence of his customers.
He also periodically writes subject matter expert blog posts on SEO, PPC, web design and reputation management topics. And several of these posts are globally ranked on the 1st page of Google.