How to win at web development contracts

If I had to tell you the complaint I hear most frequently from clients, it’s normally something about their last developer and it tends to be somewhere along the lines of “I paid thousands of dollars and never saw a completed product” or “The finished product wasn’t what I wanted it to be” and I attribute that, largely, to the large block approach to both development and pay.

I’m sure you know what I’m talking about if you’ve ever commissioned a piece of software. You pay 50% of the total project price up front and fork over a long list of requirements. At the end of the project, you’re handed a product that probably does about ¾ of what you thought it would and you’re expected to pay the final half of the bill. You may not have had much input along the way or you don’t feel like the final product is what you wanted it to be, even if that’s what it was on paper.

These situations aren’t necessarily anyone’s fault and don’t have to come from bad contractors or bad clients. Often, the way these projects are structured leads them to failure before they get off the ground.

You see, when structuring a contract you have to look at what behavior that contract is really rewarding. When you choose a “Half now, Half later” payment approach, the incentive is to sell as many contracts as possible(the first 50%) and close as many contracts as possible with the minimal effort necessary to receive payment. Speaking purely from a numbers situation, a consultant “wins” in the short term when they can complete less than 50% of the contract while keeping payment or close a contract at 100% payment with as few features as possible.

Now, I’m not saying that everyone in the industry going to think in those terms or is out to do the minimum. What I am saying is that it can lead to asking good people to work against their own self interests in order to uphold their integrity. Whenever possible, aligning other’s best interests with your goals tends to lead to superior results.

So how do we do that? Well, my personal favorite is to push work from a project based approach to an hourly one but to do so with clear controls and milestones in place. To expound a bit there; Let’s say we’re talking about an E-Commerce site. Now we might normally spec out all the features and set a price at $10,000 for the full design but what if we quantified the expected hours for each feature. We’ll start with a data import, assuming you’re coming from another platform. Let’s say that data import should take about 10 hours but could take up to 20 or 25 with complications.

Now, if I were doing that import for you and you insisted on fixed price, I would set the price at a point where I could comfortably spend 25 hours because I don’t want to lose money on your website. If we’re working on an hourly basis, it’s a bit different. Let’s say we decide to work hourly with pay on a regular time line(say, weekly or every two weeks) and quote out that import at “10-25 hours”. I’m no longer betting on a time to completion because you’re paying hourly, and you’re no longer paying enough to offset my gamble. When the project actually does only take 10 or 15 hours, you haven’t paid for 25 and if it does take 25, I haven’t lost by under-bidding.

Taking a step back, there’s another clear advantage to this approach and that’s modularity in both compensation and work. If someone quotes a certain number of hours for a portion of a project, you have a clear yardstick to measure their progress. If you’ve paid for 10 hours of work on a 10 hour piece of the project, you should have a tangible piece of completed work in your hands for what you’ve paid. You can very easily asses how well the project’s going by looking at the completed milestones alongside hours to completion of various milestones.

Furthermore, if you’re on a “pay as you go” schedule, completed work is yours. Should you choose to take what’s been built half way through and walk away with it, there should be no argument from your developer about doing so. You’ve paid for their time, not the work done, and they’ve been compensated fully. There’s never a situation where they feel like they own your project because there’s only been a partial payment and you’ll know about problems sooner because you’re paying for time as its accrued.

As I propose hourly billing, I can hear some people saying it can’t work because there’s no incentive not to let costs balloon. I won’t lie, there is some truth to that. There are two things I can say to counter it though. The first, is that, with frequent billing, you’ll understand very quickly if your team is becoming wasteful. The moment that 10 hour project hits 12 hours, you can step in and ask why.

The second is that project overruns will happen regardless, the question is where you see the cost. Most companies can only lose so much money. If a piece of software is going to take 40 hours to complete instead of the expected 20, the developer can:

a) Eat the costs

b) Charge for 40 hours

c) Cut costs and make it take 20 hours.

Very few people can afford to take option A. If you’re paying someone a set lump sum, they’re much more likely to take option C because option B isn’t really possible. If you’re paying hourly, you should have the opportunity to choose whether the company chooses to cut costs(i.e quality) or if you just pay more for the product. At that point, you’re given a decision instead of a bad product.

 

When to go fixed price

Alright, now that I’ve bashed fixed price contracts a bit, there are a few cases where they can be quite useful.

The first is with very small low-risk projects. Cases where you’re paying someone $50.00 for a very simple logo design or to install a pre-built theme for you. These types of projects are very unlikely to extend far in any direction and often have very sharp criteria for success. If you wanted a theme installed and it’s now installed, you’ve achieved success. Setting a predefined value for that success is an easy way to control costs and it tends to be a quick win for the professional who knows what they’re doing.

The second time fixed-cost can be appropriate is with a team you’ve worked with over a long period of time on past projects. In short, when you’re working with people you trust explicitly and you have a strong understanding of the value they bring to the table. If you understand well from past experience what a certain dollar amount can be expected to accomplish, all parties can step to the table in full understanding.

So, what if you really want to do all of your projects fixed price? If fixed price is a requirement for you, I would suggest capturing as much of the value of an hourly contract as possible by insisting on a few things.

1 – Build multiple milestones into the project at a fairly granular level. Let’s go back to our data port example. The data import, in this case, is a well defined piece of the overall website build and can be looked at in isolation and priced as such. If you set a price for that particular piece, payable when it’s complete, you retain the ability to break the project down and avoid situations where you’ve spent half your budget without commensurate results.

2 – Write your contract in a way that gives you full rights after each milestone. If you’ve paid for a theme design, that design is yours regardless of whether the rest of the contract is completed or paid for. Ensure that this is understood. If in doubt, frequently ask for a copy of the project. Most honest professionals who have already been paid will have no problem zipping up the work they’ve done and sending it to you as an archive.

 

The Mini-Project – Let’s see what you’ve got

One of my favorite propositions is the mini-project. Often, if a client is pursuing a large project($10,000+) I’ll suggest a mini-project to get started. This could be an initial site setup/theme install or something as big as a software prototype, if the product is entirely custom. Either way, the goal is to show the client what they can expect while working within a limited budget on a tangible product. A mini-project is usually between $300-$1,000 and should result in something that adds solid value for the client even if they don’t choose to proceed with the larger project.

At any scale, the mini-project is a good way to test someone’s skill without getting in too deep and should help avoid pitfalls of working with someone who isn’t up to the quality they claim to be.

In parting…

At the end of the day, the two most important components of any professional relationship are trust and communication. If you establish trust with small projects, communicate, and insist on a front row seat to the work that’s being done, you’ll likely have better relationships with your best vendors and will quickly learn to prune those not working in your best interests. Work with someone who will see you as a partner, instead of a sale, and build long term relationships with reliable people. I think you’ll be pleased with the results.

Tariffs, and the 4 ways they hurt the economy (explained in plain English)

Tariffs, and the 4 ways they hurt the economy (explained in plain English)

What’s a tariff?

A tariff is a tax imposed by a government upon certain imported goods from other nations. It’s a protectionist measure enacted by the government meant to insulate domestic producers from competing foreign industries.

The logic follows that, if foreign-produced goods are artificially made to be more expensive than domestic goods, then citizens of that country will be forced to purchase goods manufactured at home, thus inciting growth in the nation’s own economy.

Among his plethora of anti-establishment promises, President Donald Trump vowed to levy a 45 percent tariff on all Chinese exports to the United States during his campaign run. It was one of his chief rallying cries — American manufacturers are threatened by cheaply made foreign goods and is driving down the American economy.

Just like any action of the government, the argument is motivated by emotional appeal. “My industry is being destroyed by foreign competition,” says the lobbyist. “If the government does nothing, my industry will flee the country or go out of business. Thousands of workers will be out of work and poor!”

To ignore the plight would seem calloused, cruel, utterly inhumane. Indeed, that industry probably will die out and result in many job losses.

Yet the mistake made by those ignorant of economics is looking only at what immediately results from an event, and ignoring the long-term side effects of the action. True economists are swayed by logic. Not emotion.

While we believe that there are big problems with the American economy that require radical, sweeping solutions, imposing tariffs will do more harm than good to the burgeoning eCommerce industry.

As of this writing, the online retail industry is experiencing record growth. According to the U.S. Commerce Department, online sales accounted for more than one third of all total retail sales in 2015, a level unmatched previously. The National Retail Federation expects that online retail will increase 8-12 percent in 2017, which lands anywhere from $427 billion to $443 billion — three times the growth of the traditional variety. There’s no doubt that e-Commerce is set to become the economy of the future, though a tariff would slow down its growth along with all other industries.

Whether brick-and-mortar or on the Web, a free market is always the healthiest market. Government manipulation of the economy almost always produces a result opposite to what was promised, and favor a few industries at the expense of many. Tariffs are no exception. From Adam Smith to Murray Rothbard, classical economists have unanimously agreed that tariffs are not going to make America greater.

They will make us poorer.

1. Higher prices

Of course, that’s the whole idea of a tariff: to use political force to artificially raise the prices of foreign competitors in your country. Domestically produced products are now the cheapest. Consumers will flock to goods made in the homeland, and business will return. Right?

But by artificially increasing the price of foreign goods above the amount the free market allows them to be, that interferes with the ability for individual people to exchange with each other at the rates they choose.

It isn’t just the protected industry whose products grow more protected. The prices of all products that contain steel or rely on steel also increase and the price of services that rely on those products will also rise. So the unintended consequence is a continuing spiral of rising prices.

Adam Smith stated the case for free trade in The Wealth of Nations:

“In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it the cheapest.”

In a healthy economy, prices would rise due to increased demand. But under a tariff, demand actually decreases — consumers will sensibly purchase less of a more expensive product. With the added price to the product “protected” by a tariff, consumers have that much less to purchase on other products. Less cash flows into other industries.

It takes generations of propaganda from governments to rid people of their natural common sense.

Forcing people to pay more for stuff is never going to grow the market.

2. Reduced wages

Take a current example: in 2002, the current president George W. Bush passed a tariff on all imported steel, in response to lobbyists from American steel companies.

In brief, it was incredibly short-lived and ravaged the American economy.

The legislation was meant to rescue the U.S. steel industry from doom. Not only were its effects on the steel industry nonexistent, but it wreaked havoc upon all the companies that relied on cheap steal for their production. Metal manufacturing, machinery and equipment, and transportation industries all suffered.

As stated above, companies that relied upon steel to manufacture their products suffered a loss of profits from the increased steel prices. To compensate, the company reduces the wages of its workers. This resulted in approximately $4 billion in lost wages during the year 2002, according to a report prepared for the CITAC Foundation.

3. Job loss

If lowering wages does not mitigate the damage of a tariff, a company will resort to outright downsizing of its employment. According to the report on the 2002 American steel tariff, “200,000 Americans lost their jobs to higher steel prices during 2002.”

Say, wasn’t it the threat that a particular industry was going to go extinct and cause unemployment, that the tariff was enacted in the first place?

To add salt to the wound, the report elaborates: “More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself.”

Do you see the familiar pattern yet? A tariff, like any legislation passed by the government, has unintended effects that are opposite from the original intentions.

4. International tension

If you listen closely to the language politicians use when talking about tariffs — “protection,” “trade abuses,” “cheating,” among others — it is nearly identical as when they talk about war. The very concept of a tariff acts as a wall to repel an army of invading foreign goods.

If a nation raises a tariff wall against another nation, it should be expected that the other nation will retaliate with a counter-tariff. Mexico has vowed to raise “mirror” tariffs on apparel products imported from the United States if Trump imposed his tariff.

Combative trade barriers can even lead into a full-out war. Heavy duties imposed by the British crown were what led to the American Revolution. The Townshed Acts were a series of taxes Great Britain imposed on imports into the American colonies, in an attempt to generate revenue for the salaries of governors, so that they would remain loyal to the crown. There was resistance from the colonists, which eventually led to the English occupation of Boston, the Boston Massacre, and the American Revolutionary War. The Declaration of Independence condemns King George for “cutting off our trade with all parts of the world.”

“When goods do not cross borders, armies will.” Often attribute to economist Frederic Bastiat, the historical occurrences of tariffs, unfortunately, proves his point.

With less variety of goods for people in either country and higher prices, everyone loses.