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How to build a project planning process for a software company
To keep your project profitable no matter its stage, you need to establish these two critical dimensions: time and money.
Estimating them might seem easy. But if you’re running a software development company, you probably know how difficult it can get.
The core of a project planning process is defining your initial cost and profitability assumptions at a given stage of your project. Once you get that out of the way, project planning is bound to get much easier
I wrote this article to answer the questions I keep getting from COOs and Resource Planning Specialists about how to make estimation and project planning more accurate.
Read on to explore industry best practices in project management planning for Fixed Price and Time & Material models.
What is a project plan in software development?
Let’s start with a project planning process. Your objective here is to define the scope and goal of your project. Ideally, this should go together with key project milestones (deliverables) and budgetary resources available for each stage/scope.
A project plan formalizes this process. It’s a collection of documents that define everything from the execution to the control stages of your project.
A project plan consists of:
- Timeframe - How long will the project be running? Do you know its end date in advance, or is it an unlimited project?
- Scope of work (SOW),
- Billing model - Will the project be realized in the Fixed Price or Time & Material billing model?
- Financial estimates and project budgeting - What is the potential revenue of a given project? What kind of profit margin is it going to bring?
- Resource allocation considerations - Do you have the specialists the project requires onboard? Are they available during the expected project timeframe? And if not, how long would it take you to hire new specialists?
Why is project planning important for software companies?
Better control over profit margin
A good project planning process helps to determine the expected costs and revenue at every project stage. You can make such an estimation already at the pre-sales stage when the project is still a tentative one.
If you run a large company, you might be struggling to set your average hourly rates per technology stack or seniority. Planning will help you identify it and stay real. By comparing our estimations to reality, you’ll learn whether your approach brings you the profit margin you seek.
Ability to forecast
When planning in advance, you know what your employees will be doing months from now. You will also see which specialists will be on the bench or whether you should start filling potential vacancies.
Easier resource allocation
A well-developed project planning process is a great opportunity to start thinking about which employees could potentially work on the project. You can also check how assigning different people would impact the project’s profit margin. And make sure that the right number of specialists will be working on your project to keep the employee utilization rate in check.
And if you don’t find any available specialists, you now realize who you need to hire on the long-term horizon. If you know that it usually takes you three months to recruit a new employee, you should plan your projects three months in advance.
Project planning process - step by step guide
1. Planning a tentative project in the pre-sales stage
Everything starts at the pre-sales stage. When the project seems realistic and the client is interested, you need to make estimates.
Decide when to start estimating
That’s why your first step is to decide when it makes sense to start estimating and planning a project. The best way to do it is to assign a probability value to the project (reflected in %). Then you can set your threshold.
For example, let’s say that you set your threshold at 70%. This means that if the probability of closing the deal on a project is 60%, you’re not making any moves yet. If it’s 80%, then it’s time to make some preliminary valuations and forecasts.
Prepare a project scope
At this stage, the most important task is to roughly prepare the scope of the project and use it as a foundation for scoping it in line with the required deadlines and the time measured in person-hours/deliverables.
Have clarity on the billing methods
Once the project’s scope is known, you can start thinking about the method of settlement with the client.
In other words, you need to choose between the Fixed Price and Time & Material model.
If you’re planning to use the Fixed Price model, you need to focus a lot on estimating your project costs correctly. If you make a mistake there, you risk running a project that doesn’t bring you a decent profit margin. Or worse, it only generates costs.
And what if you pick Time & Material? Then you should decide whether you’re going to bill the client for the number of hours actually worked or for full days? The question of project costs is important here as well.
You probably know already that to get realistic costs, you need to count in both the salaries of your employees and the average overhead cos per employee.
Not sure how to calculate your overhead? This article explains everything you need to know: How do you calculate overhead cost per employee?
So, by establishing the project’s timeframe, the scope of work, and billing model, you have the initial information to make some preliminary, rough estimates.
The decisions you make at the pre-sales stage related to the billing model or initial rates will have a massive impact on the profitability of your project.
The above is just a summary. Let’s zoom on all these ingredients to ensure that you’re making the smartest choices for your business.
2. Timeframe: Planning a short-term vs. long-term project
You’ll probably agree with this one: it’s easier to plan a short-term project than a long-term one. Here’s why.
In a short-term project, most of the time you’ll be working with a fixed timeframe and scope. A short-term project is easier to estimate because you don’t need to divide the project into stages.
Planning a long-term project - example scenario
Let’s say that a client needs a developer or two to maintain their infrastructure. Estimating the time dimension of this job will be hard unless your contract specifies this.
Moreover, it’s not a set of services in a package like delivering a mobile application. It’s long-term support that consists of ad-hoc tasks the client sends over once in a while.
How can you make it work?
Solution: Divide your project into phases
For medium and long-term projects, it’s smart to divide the project into phases/stages, scopes, or orders. This helps to estimate the project more easily and accurately.
For example, you can estimate the backend phase, fronted phase, and design phases separately, possibly adding scope for change requests during the project.
3. Billing model: Planning projects in Fixed Price vs. Time & Material
Next, you need to decide which settlement model you’ll be using: Fixed Price or Time & Material.
Be more accurate in Fixed Price
Since the budget will be based on your estimation, you need to be as accurate as possible. You don’t want to end up with an unprofitable project.
Add profit margin to costs in Time & Material
In the Fixed Price model, you don’t need to add the profit margin to the average hourly cost in your project. Instead, you can add the entire revenue for a given phase, scope, and order. This isn’t the case in Time & Material where you can’t be accurate about the scope, so it’s best to stick to hourly or daily rates.
Set the settlement time
At this point, it’s also smart to decide when you’ll be charging the client. This decision will have a massive impact on your cash flow.
In Time & Material, monthly settlement is a good idea. In Fixed Price, you can ask the client to pay you 50% of the price at the beginning and the rest upon its completion.
4. Estimate the project
Here’s how you estimate the profit margin of your project:
- Calculate your overhead cost per hour (if you don't know how to do that, read this article),
- Add the average cost of an employee working in a given technology/seniority level to it.
- Add a mark-up to keep the project profitable. Most IT companies try to maintain profitability at the level of 30%, so that should be your main goal.
A note about cost estimation:
When crafting your project planning process, focus on how you’ll be dividing your estimation.
It’s smart to divide estimation into stages, but also by tech stack. If you have specialists who tend to be more expensive than specialists with other skills, this already gives you an accurate average cost.
For example, if you set your average cost at $50, you have no chance to keep costs at bay if the project requires a senior PHP developer whose hourly rate is $100.
Okay, now you have some preliminary estimates. Send them to the client as a pre-proposed budget and see what they say.
Don’t think the job is done once the project is booked and the work begins.
5. Compare estimates with reality for forecasting
Go a step further and compare your estimates with reality on a regular basis.
How project planning software can help
Before the rise of project planning software, companies had to maintain a collection of documents like Excel spreadsheets. Combining data from separate files manually is very time-consuming.
Project planning software has become a key tool for COOs and Resource Planning Specialists because it streamlines and automates many of the tasks we outlined above.
Software development companies use project planning software to facilitate processes such as budgeting, resource allocation, budgeting and cost estimation, risk monitoring, and project forecasting.
Must-have features of project planning software
- Resource Planning - for scheduling the right specialists to the right projects,
- Resource & Skills Management - for manage employee’s skills, generating blind CV, checking the contract history and managing leaves,
- Finance Management - for planning, tracking and forecasting budgets,
- Timesheets & Time Tracking - tracking people’s work and comparing it to your plans,
- Business Intelligence - for generating powerful reports & improving operations.
The project planning process that requires answering many different questions. But it’s definitely worth your time. Otherwise, how can you plan ahead and make sure that your specialists are fully booked, and your company is turning a decent profit?
If you want to be accurate, you can’t leave projects to chance and fate. Or to Excel spreadsheets where the potential of human error is real.
Project planning can be easy if you have the right software solution at hand.
Give Primetric a spin - sign up for a demo to see how automating project estimation works in practice.