Underestimate and therefore undercharge your clients— what would you do?

Creating an accurate quote and being able to fit into time and money estimated is one of the most important things in the software development services. If the underestimation occured once, eat the costs and learn your lesson. It will make you stronger. If it repeatedly happens, then you are doing something wrong, and you won't last on the market.

It is reasonable to try to negotiate with the client only if the underestimation happened because of some new information, like some new functional or non-functional requirements.

When you make a quote or proposal ALWAYS leave some room for maneuvering. If you think you will use 100 hours, quote for 120 hours (20% is just an example, of course).

This margin is always needed because:

1. one tends to underestimate complexity
2. the customer always makes some small additional requirements
3. unexpected technical or domain problems may arouse

This security margin depends on your own expertise regarding:

1. the language / tools / software and hardware platforms to use
2. the application domain

If you have made a lot of similar projects you can bid very tight (low security margin). When you are new to the technologies to use AND the domain area, better charge by the hour or just let the business pass.

Once on the project, keep control of invested hours. When the customer asks for small changes, and you are under your time budget, just give it to them. They will always remember it and will be happy to do business with you again.

If the changes or new requirements are big, the better way is to finish the current project as initially contracted, and make a proposal for a second stage of the project. Accepting important changes in the middle of a project is a sure-fire way to end with trouble both for you and your customer.

I believe this would all depend on the terms of the contract with the client. Does it allow for variances, etc?

If you don't have a contract or it doesn't cover such an occurrence, I believe the best thing to do would be to contact the client and talk it through with them. Many clients are very understanding, and will work it out with you in a civil manner.

I know of a company (its a US based company who has setup its shop in my city) - won't name it - which realised that its estimation was off by $200K for a $1.2M project. This was after it had started work on the project and had hit 1 milestone.

They simply asked the client to cough up the money (which they didn't) or take a reduced feature set project for which they were paying (which they ended up doing). Needless to say, this definitely soured the relationship. I would have borne the cost myself.

But the simple answer to this is: Depends on how much leverage you have!

Do you really, really need their work? Or are you better off not actually working and taking the hit. In the example above, the company felt that it had too much work (which it doesn't now - BTW) - and dissed the client. In other cases, you may be really hard strung for money and have no choice.

Again, it also depends on what stage the project is in.

If I am a customer, I would feel bloody cheated if after the work started (or contract was signed), the developer comes and tells me: "Oops! We made a mistake. It will cost you twice as much now!"

I ran my own software consulting company for four years and we have had this issue a couple of times - but both times it wasn't major (about 20% extra effort) and we were able to bear the expenses instead of going to the drawing board again with the client.

However, we learnt later to spend a lot of time documenting the requirements, etc. because most of the times the feature creep, etc. resulted in the client thinking of something else and you having an idea of implementing it in another way. So having a strong initial spec written by you will only reduce heartburn later on.

I believe this would all depend on the terms of the contract with the client. Does it allow for variances, etc?

If you don't have a contract or it doesn't cover such an occurrence, I believe the best thing to do would be to contact the client and talk it through with them. Many clients are very understanding, and will work it out with you in a civil manner.

Make sure you quote prices with hours and quote an hourly price for going over the estimated amount of time.

for example:

This project has been budgeted at 100 hours, including 8 meeting hours: cost $7500.- For extra time needed the standard hourly rate of $85,- will apply.

I found that clients like it more if the initial price is a bit higher but I stay within the set time than the other way around.

If you really need twice the amount of time, you will have to talk to them. If they do not pay you for the hours you work, you can't do the project.