Pricing software is (in many ways) similar to estimating a building project; alongside labor hours, you have to account for building materials, equipment, permits, utilities, etc.
Creating and testing software takes time (labor), in addition to a whole other set of costs you get to factor in:
Out of all these costs, time may be the trickiest to manage — which is why we put this together: a guide on time tracking and billing for your software projects.
Here, we delve into time tracking, because accurate time tracking can change your company’s bottom line. We explore the challenges of applying time tracking in an Agile environment, and look into the methods and tools you can use to make it happen.
Let’s start by recapping the most used software development billing models.
The billing model you apply to the project is a good place to start; and these are your options:
In which one of these models does time matter most? That’s what we’re about to find out.
Now, let’s delve into the significance of time tracking within each of the four contract types we just covered.
A T&M contract includes (among other things):
In an ideal world, the payment schedule and hourly rates would be enough to charge your T&M clients. In reality, however, clients come with budget expectations and a desired timeframe — and you must do your best to meet those requirements.
T&M projects require you to give T&M clients budget estimates ahead of start, and track progress as you go. You can’t just wait and see how long a project is going to take. So, unless your team logs time accurately, and builds time-tracking history over time, you’ll have trouble succeeding.
And though you may be charging for completed work (as the number of hours spent), you’re not making the most out of tracking time in T&M projects; there’s more to it than billing. Time tracking allows you to make budget estimates with a level of accuracy, and know for certain whether a project is progressing according to schedule and within budget.
By tracking time, and knowing who logged what time entry, you can calculate your remaining budget. Simply attach hourly rates to each team member or their role according to a rate card, and use a good tracking tool.
Keep in mind that hourly rate is not the only factor to consider; your (internal) cost rate matters, too. By associating it to your time entries, you can account for your project costs and track profit.
Also, each time a team member logs time for a task, the needle moves forward on the activity timeline; letting you know whether the project is on time, or not; and by how much.
When it comes to milestone-based contracts, the activity timeline plays an even more important role.
In this case, clients also pay for the time spent on the project, while you keep hourly rates and a budget in mind. But payments are bound to specific moments on the timeline: the project milestones.
Each milestone is a payday in the payment schedule; and tracking time accurately is how you make sure to charge at the right time. You need to associate each task with a specific milestone, and estimate the task’s duration.
In fixed-price projects, tracking time accurately can help you build a historical record of time spent on similar tasks, phases, or projects.
By looking at past data, you’ll be able to improve your future effort estimates, i.e. project prices. And the longer your time-tracking record goes, the better you are at estimating and pricing.
You won’t be billing fixed-price projects based on time, but you’ll still need to track it internally. Besides, how would you know your costs, profit, and how close you are to finishing projects and charging clients?
Moreover, think about your hourly and cost rates internally; those rates unknown to your fixed-price clients. Keep in mind that different team members have different rates when calculating costs and profits.
In dedicated-team projects, you won’t be billing clients for a specific number of hours. Instead, you’ll be charging them based on your team’s salaries, as well as hiring and training costs, and operating expenses.
Nonetheless, knowing that you’re on schedule for timely delivery, and billing on the right day, comes down to precise time logging.
Also, are your employees required to work a minimal number of hours — billable, non-billable? Each week? Each month? Are you tracking how productive your team is? More reasons to show you how tracking time internally matters — even in dedicated-team projects. You need to thoroughly delve into your track record to be able to draw conclusions about performance.
You also need access to accurate and up-to-date tracked time to calculate your team’s capacity. And you won’t know for sure how busy they are if they don’t record time accurately.
Now this topic has inspired extensive debate.
Some people may argue that time tracking goes against the principles of Agile development; we disagree and here’s why.
Tracked time is a measure of project progress — in Scrum terms, that’s a sprint’s progress. Team members log time onto user stories, then product owners look into hours spent versus hours remaining to spot roadblocks that need fixing.
An accurate time log also supports the definition of story points, minimizing the risk of unrealistic estimates. As a result, you get to plan iterations and manage the sprint backlog more effectively.
So far, so good.
Now, if you were to use time tracking as a micromanagement tool, your team wouldn’t like it, and you’d be going against the Agile principles. Moreover, manual time tracking is a tedious and time-consuming process. It slows down teams, affects their productivity, and can lead to them filling timesheets randomly, with made-up time estimates.
Manual time tracking is a major no-no; instead, you need a robust time-tracking app that can log time in real-time.
While not all time dedicated to a software project is billable, it is still essential to accurately monitor all of it for various reasons.
Project burn rate is a project management metric for team efficiency. You can use it to evaluate the time and budget that your team is spending while working towards project goals.
Team members fill in timesheets with time spent on tasks; and based on that data and rate cards, a timesheet management platform is able to calculate the budget spent over time. Project managers will analyze the numbers and conclude how likely it is for the team to stay within budget, and see if adjustments are necessary. The more accurate the logged time is, the better those adjustments can be.
You don’t want to bill your clients less time than your team needed to work on their projects, right? But when your team members forget to log billable time, or fill in their timesheets, your revenue goes down the drain. You won’t be able to send your clients a bill for all of the hours you could be charging them for.
Time management systems generate time reports from tracked time, using worked hours and hourly rates in this case. You get to be precise as to how you charge your clients, with invoices generated automatically from accurate data.
No client enjoys overpaying for software development. And, surprisingly, many clients don’t appreciate the feeling of underpaying their suppliers either. Charging a fair price for your software development services is entirely up to you, and how accurate your time tracking is.
From a client’s perspective, fair billing is the foundation of trust. When you bill based on precise time data, you build reputation and trust. So, instead of charging for idle time, provide detailed cost estimates backed up by accurate time-tracking history.
Clients come to you with a planned project budget and timeframe in mind. For them, it’s crucial that they’re able to trust your cost estimates. They know that those figures determine your quote and estimated delivery date.
Interestingly, on top of that, clients tend to show more trust towards suppliers who track worked hours. They assume that suppliers who track time, have a built-in historical record of actual time spent on software development tasks over time, making them more aware of what projects cost.
When your projects run systematically late, there might be something wrong with your cost estimates. You might be estimating costs inaccurately — time included.
Most likely, you’re not relying on a historical record of time costs. And a time tracking application can help you build that record, so you may figure out how long it takes for your team to complete tasks in various types of projects and phases.
With accurate cost estimates, you can prioritize future projects better (high-profit first), and calculate team capacity with increased precision.
If you run into issues that will unexpectedly raise estimated costs, then there’s no escape — you must communicate that to your clients.
Thanks to reports generated by time tracking software, you can show your clients exactly why the costs will be rising. Most of the time, an informed client understands and accepts that some project setbacks are unpredictable.
The data insights provided by time-tracking solutions allow you to determine if you’re undercharging for your team’s work.
The billable hours they’ve reported, their hourly rates, and your profit on completed projects can help you decide if it’s time to lift your pricing. Besides, an accurate time-tracking log can point you in the direction of the right rates.
Your team members must track — not only billable, but also non-billable hours. That’s how you’ll be able to spot whether they’re focused on chargeable work, or work that isn’t chargeable but contributes to generating revenue.
For instance, by closely examining time reports, you can identify that some of your team members are spending way too much time on non-billable tasks. Encourage your team to differentiate between non-billable tasks that require deep-focus and tasks that don’t. They can group less intensive tasks together to tackle during off-peak periods, while making sure that the bulk of their concentration hours is dedicated to tasks that need more attention.
With accurate time tracking, you’ll have visibility into the amount and distribution of non-billable time throughout your team’s workdays. You should share this visibility to your team members, so that they can proactively adjust their habits and schedules, and become more profitable.
If your contractors charge you by the hour, ask them to use a time tracking tool and fill in timesheets. After all, you don’t want them to overcharge, and an accurate time record will help you make sure of that.
Using a time-tracking platform is a competitive advantage for any brand. It makes business owners look professional in the eyes of prospective clients; and standing out from the competition gets you more closed deals.
The last stop in our journey to mastering the art of tracking and billing software development contracts is finding the software you need to make it all come true.
All the best time-tracking practices in the world wouldn’t cut it; we’re human and we make mistakes.
When we lose focus, we might forget to log time. And when we rely on spreadsheets and manual processes, input and calculation errors are always around the corner.
Besides, switching windows to log time makes companies lose profit. And this is especially true when team members juggle tasks from multiple projects.
Remember the last time you logged a time entry with a description saying, “Time tracking?” Exactly! No one does that.
And if you give it some thought, businesses don’t even consider time tracking a cost. Instead, they see it as a quick procedure that isn’t part of anyone’s job description.
That being said, time tracking must be an unobtrusive activity taken care of by a time management tool.
Automatic time tracking brings forth reliable time records and generates accurate invoices — the exact data you’ll need to minimize profit loss, reduce paperwork, and bring productivity levels up.
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