Writing software on a consulting basis can often be a losing proposition for developers or clients or both. There are too many things that can go wrong, and that ultimately translates into loss of time and money. The “15% rule” we’ve come up with is intended to create a win-win situation for both parties (or at least make it fair for everyone). Clients generally get what they want, and development shops make a fair profit. It’s not a perfect solution, but so far it seems to be working for us.

This may come as a surprise to some, but we make very little money selling software licenses. The vast majority of our revenue comes through consulting services–writing code for hire. Having now done this for several years, we’ve learned some hard lessons. On a few projects the lessons were so hard we actually lost money.

A few months ago I put together somewhat of a manifesto-type document intended to address the difficulties we’ve faced in developing software for clients. I’m pleased to say that it’s made a noticeable difference so far for us. My hope is that this blog entry will be read by others who develop software on a consulting basis, so that they can learn these lessons the easy way rather than the way we learned them.

What follows in this article is a summary of one of the main principles we now follow in developing software–the 15% rule. If you’d like, you’re welcome to read the full “Our Approach to Software Development” document.

For the impatient, the 15% rule goes like this…

Before undertaking a development project we create a statement of work (which acts as a contract and a specification) that outlines what we’ll do, how many hours it will require, and how much it will cost the client. As part of the contract we commit to invest up to the amount of time outlined in the document plus 15%. That is, if the statement of work says that the project will take us 100 hours to complete, we’ll spend up to 115 hours (but no more). As to where-fores and why-tos on how this works, read on.

Those that have developed software for hire know that the end product almost never ends up exactly as the client had pictured. There are invariably tweaks that will need to be made (that may or may not have been discussed up front) in order to get the thing to at least resemble what the client has in mind. And, yes, this can happen even if you spend hours upon hours fine tuning the specification to reflect the client’s wishes. Additionally, technical issues can crop up that weren’t anticipated by the programming team. In theory, the better the programming team the less likely this should be, but it doesn’t always end up that way (Microsoft’s Vista operating system is a sterling example). These two factors, among others, equate to the risk that is inherent in the project. Something isn’t going to go right, and that will almost always mean someone pays or loses more money than originally anticipated. The question is, who should be responsible to account for those extra dollars?

Up until relatively recently, we would shoulder almost all of the risk in our projects. If the app didn’t do what the client had in mind, or if unforeseen technical issues cropped up, it generally came out of our pockets. For the most part it wasn’t a huge problem, but always seemed to have at least some effect (the extreme cases obviously being when we lost money on a project).

This seems kind of unfair, doesn’t it? The risk inherent to the project isn’t necessarily the fault of either party. It’s just there. We didn’t put it there, and neither did the client. As such, it shouldn’t be the case that one party shoulders it all. That’s where the 15% rule comes in.

The 15% rule allows both parties to share the risk. By following this rule, we’re acknowledging that something probably won’t go as either party intended, so we need a buffer to handle the stuff that spills over. By capping it at a specific amount, though, we’re also ensuring that the buffer isn’t so big that it devours the profits of the developers.

For the most part, the clients with whom we’ve used the 15% rule are just fine with it. It is a pretty reasonable arrangement, after all. We have had the occasional party that squirms and wiggles about it, but, in the end, they’ve gone along with it and I think everyone has benefited as a result.