Random Ramblings on LabVIEW Design

The Numbers Game

Hello G-Stringers,

I'm listening to King Gizzard and The Lizard Wizard as I write this and rather jolly they are too!

I'm stupidly busy at the minute so forgive my lack of output!

This particular article is about numbers. It's the numbers we charge and the what they mean. I'm hoping it will help people starting out in the trade and help when a customer is considering hiring a company.

SSDC are a LabVIEW consultancy and as such we charge people for our services. There are 2 ways you can charge for your services, hourly (time and materials) or fixed price.

For hourly the customer takes on the risk (although there is always a limit to what your customer will pay), for fixed price the risk is on the supplier. As such the price you use to calculate a fixed price job should always be higher.

How much higher is the important question?

I'll drag up a story from the past to give some context.

When we started out our rate for fixed price work was £35 ($50)/hour and we struggled! Every job was hand-to-mouth, we couldn't offer the customer service we wanted and it was generally hard. If you can't offer decent levels of customer service you won't get the repeat business that makes life so much easier. Things were bad so I did some maths!

For my company I needed to know how efficient we are. The easiest calculation is hourly rate * number of hours worked in a year = £67200/person/year. If I got an hourly paid job at my hourly rate I'd earn £67k ($100k). Trouble is we were doing fixed price work and this dropped us down to a net turnover of £40k($57k), take out 20% tax, business expenses, insurance, transport and it all begins to look a little sad!

It dropped to 40k because we were 60% efficient, this means we were spending time on unpaid work -> Sales, Marketing, quotes, accounts etc etc. So even if we were fully employed we were still barely earning enough to pay the mortgage.

And this 60% efficiency shouldn't be regarded as a bad thing!, you should spend time on all of those things, you just need to account for them.

The other assumptions here is that you'll always win on fixed price work, I would suggest that even if you were good at software estimation you'd still only win 50% of the time (and I'm still waiting to meet THAT person!).

Lastly on fixed price is what happens if it all goes wrong....you don't get paid!

So when calculating a rate to apply to a fixed price job you need to take the hourly rate you would be happy to earn if you had a contract for the year, factor in your efficiency. You can then apply this rate to the estimation of hours and add in a contingency (we'll come back to this).

So for us we should have been aiming for an hourly rate of £58.3 ($83.3) when calculating fixed priced work.

Disclaimer: these numbers are circa 2000 and we are considerably more expensive now!

Coming back round to contingency, we use this help us cope with uncertainty. So if for example there are some requirements that are poorly defined, you could bully your customer into divulging all the details or you could just add some contingency. This is where experience really helps.

So the final fixed price equation should be at least