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How to charge for software design


#1

I have a prospect with both an idea and an existing customer of theirs who want to pay for this idea to be implemented.

The customer want to pay only when the implementation is complete. My prospect has separate investors that will fund the implementation.

The prospect wants to know how much I will charge for the implementation so that he knows how much to ask the investors for. Before I can estimate reliably I need to work with the prospect to develop an implementation plan.

This planning work will take time that I want to charge for. The prospect doesn’t have enough money to pay me until the investment.

I want to make sure I am paid for the planning.

How can I resolve this?


#2

How much planning time are we talking about? 5k, 10k, 30k?


#3

Smells like spec work to me; unless they’ll pay, walk away. I’d give the prospect an estimate for the planning stage and tell them the only way you’ll work with them is if they work out with the customer a way to pay for your time, regardless of whether they get the investment.

If neither the customer nor prospect are confident enough in the idea that they’re willing to stump up their own cash for the planning work to secure the investment, then the chances are they’re not very committed to it, and it’s not going to work out well for anyone - least of all you.


#4

Probably about £2500


#5

No pay - no work. See? Nothing to worry about.

Get real. If you’re strictly hands-for-hire, the investors should understand you do not work for free. They will have to invest a small portion of their budget into your spec work first. (This is called Round A, I believe).

All you need to do is to estimate the spec efforts. And then 3x it, as per best practice.


#6

Same thoughts as @radiac, when a prospect is having a hard time unlocking money for you from investors : stay away. I’ve learned with time that if a client/investor is hesitating or having problems sending you money, they’ll ultimately end up skipping payments and such.

Last team I worked on was a total nightmare. Huge prospect, get the contract, worth 2 millions+. We were all amazed at how big the contract was (it was with a few huge automobile factories in US). Developed a whole new ERP that would replace SAP and even make the flow better for those factories. Everybody is enthusiastic and telling us to keep up the good work.

We get the first payment (350 000$) and everything is great. Then a few months later, we’re supposed to fly to the US to make a demo to investors. Get plane tickets and everything, everybody are like “OMG this is going to be awesome”. A week after, no word from the US. CEO make a phone call:

Project been disbanded, investor from Russia decided to blew the whole thing off. We worked 3 whole months for that next milestone/payment. CEO ended up with 350 000+++$ worth of debts, had to sell the business to somebody who simply fired 3/4 of the team (including me). Yes I got paid, but that CEO had a big lesson learned, so do I at the same time.


The thing is, this can apply for a 5000 bucks project as much as a 1mil+ project. Stay safe OP.

EDIT: If anyone is curious, I’m talking about Sparrow’s Point (RG Steel in Baltimore) you can read more about it here: https://www.baltimorebrew.com/2012/05/25/six-reasons-why-the-sparrows-point-steel-mill-collapsed/ Yes it wasn’t related to ourselves but to a bigger reasons but still shows that sometimes it’s not your fault or the fault of the person who’s telling you you’re going to get money but it’s the fault of some bureaucrats in higher ranks.


#7

That little?

If you don’t get that money will you still be able to afford your lifestyle?

Sometimes you have to take a leap of faith. I’m 2, almost 3 years into trying to make a product work and I’ve blown at least twice that much on hosting and tech costs.


#8

I wouldn’t do even an one hour work for free. Matter of principle. They can pay, so they shall pay.


#9

Well its a risk/reward scenario. Gotta spend money to make money, entrepreneurship is all about risk, yadda yadda.

All depends on the relationships you have with people, what contracts you have in place. My account receivables are > $3500 or whatever in euros all the time.

I saw on your profile you outsource work on ODesk to develop products that haven’t been successful yet. Whats the difference between what your doing and what the OP scenario? Isn’t risk of not getting paid the same as the risk as your product not being successful?

Guess the difference is if everything falls through you both are out of time, but you have a piece of software that is providing no financial value to you.

If had a good relationship with a group or person, a strong contract in place, a project I found interesting and the possibility of a nice and healthy financial reward I’d put in the time ( $2500 is < 40 hours for me ) to see what could work. I wouldn’t reject the idea just out of some principal.

Inversely if the deal was 400 hours of my time with a group I’ve never met, no contract and a boring idea I’d insist on getting paid up front. No need for any principals, just not rational to do.


#10

Sure, but it sounds more like the OP’s taking all the risk and getting none of the reward - working for a potential hourly rate if the investment is secured, rather than for equity or bonus. If, for whatever reason, a potential client is saying “We’ll pay you when this pans out”, what they’re really saying is “We’re not sure this is going to pan out, so we’d prefer you take all the risk and we get all the reward”, it’s never going to end well - especially when your only source of income is your billable time.

I’d be prepared to do a few hours spec prep work before a meeting if I was competing for a contract I wanted, but here we seem to be talking about a significant chunk of time that could be spent on something which would actually pay. I’ve made a whole bunch of mistakes when freelancing, but the single biggest lesson I’ve learnt is that unless the client is 100% behind the idea and is prepared to shoulder the risk by committing to paying for your work, run a mile.

The different is fairly significant - when you pay someone to build a product, you’re the entrepreneur - you have enough confidence in the idea that you’re willing to put your money into it so that you can reap the rewards when it succeeds. When you’re working on an hourly rate building someone else’s product, you’re a developer working for the entrepreneur - you don’t have to buy into the idea, you’re getting paid whether it succeeds or fails.


#11

I see your point.

Investment is something that can bring potentially unlimited payoff for a limited pay. For the OP, it is not an investment, but a postponed fixed payment with a risk of not being paid at all. There is little upside to it, unless the OP is not having a comparable income at all.

P.S. In case of me investing time into products, I’m paying all my contractors on a weekly basis, so they do not have to risk that my faults will cause their financial loss.

In case of OP, there is a bunch of cheapskates trying to abuse the relationship by coercing someone to work for free with a promise of future pay. They do not even promise a stake in the success, just a delayed payment.


#12

At my age, the time is much more valuable than money.

Those hours I would waste on this I could invest into my products (with unknown potential payoff) or just plain working for my client (bringing the cash immediately). I really do not see why would I work for someone for fixed price and delayed payment.


#13

Echoing “no pay, no work.”


#14

I would only be interested in something like this if I believed the idea can be successful and I would directly benefit from the success.


#15

To put it plainly, you’re being asked to take on some of the customer’s risk of not getting this investment as your own, and from what I can tell, there’s no promise of future upside beyond your hourly rate for the work performed. In general, this is a bad idea because your role and relationship to the client becomes unclear - a lot less clear than “this many hours = that much cash” anyway.

I’ve done things like this before, even with clients with whom I had and still have a good relationship, and not been paid, and it’s led to bad feelings on both sides. Your decision should take into account your own tolerance for unpleasant conversations.