What a 15% Overrun Does to a Software Project Estimate

Every software estimate starts with the hours you expect the work to take. Your costs come from the hours the team ends up using. When the work runs long, the way you charge decides how much of that extra cost stays with you.

With a fixed price, the client pays the same amount while your labor cost rises. Time and materials can bring in more money, but only when the contract allows it and the client approves the extra time. A job that looked profitable can end below the margin you need.

I check for that before the price goes into a proposal. First I add the extra hours the team expects and see whether the margin stays above my minimum. Then I test the part of the estimate I am least sure about.

Take a $165,000 fixed-price project with 820 planned hours and a 45.9% margin. If the work takes 15% longer, the hours rise to 943 and the margin falls to 39.6%. The profit margin drops by 6.3 percentage points without any other cost changing.

With a 40% minimum, the estimate falls short by 0.4 points. I would change the $165,000 price or the work plan before sending it.

Compare both ways of charging

That is why I built the free Software Project Estimator. It puts fixed price and time and materials side by side, then shows how the profit changes when the team needs more time.

For the first check, I add the same 15% to every role while all other costs stay the same. That shows what happens when the whole team needs more time. If one role is more likely to run long, I change those hours next.

In the table, delivery cost means what you pay the team, plus the other costs and contingency entered for the project.

With fixed price, the client still pays $165,000. The extra $10,395 in delivery cost comes out of the project's profit.

When billing by the hour, charging the client for 75% of the extra time brings in another $15,525. The margin stays near the first estimate, but the business still pays for the hours that cannot be billed.

That 75% works only if the contract allows the charge and the client approves it. Any limit on extra charges also needs enough room. I would use a lower share if either condition looked doubtful.

Check the part most likely to change

A 15% check is a first look. One role may need more hours, a vendor bill may change, or the client may pay for less extra time than you expect.

I change one of those at a time and check the margin again. The first likely change that puts the margin below my minimum is the issue to solve before the proposal leaves. It may change the price or the work plan.

Keep your costs and margin inside the business. Give the client the price and a clear description of the work. Explain how extra work gets approved.

Learn from the finished project

After delivery, I open the original estimate and replace one planned item at a time with what happened. The change that moves the margin most shows what needs a better estimate next time.

Price and scope still belong to the owner.

Key Takeaways

• A 15% hours overrun on the example $165,000 fixed-price project cuts the margin from 45.9% to 39.6% with no other cost changing.
• Fixed pricing leaves the full cost of extra hours with the business, while hourly billing recovers part of it only when the contract allows the charge and the client approves the time.
• The 75% billed share in the example depends on contract room and client approval, so use a lower share when either looks doubtful.
• Test an estimate one change at a time, and fix the first change that puts the margin below your minimum before the proposal goes out.
• After delivery, replace one planned item at a time with what happened to find which part of the estimate needs better numbers next time.

Try the free Software Project Estimator