The fees/rates when hiring a company to assist you with programming [closed]

Question

I work for a small development shop doing server and occasionally desktop apps for customers. We were thinking about developing a product and contacted two studios that have experience with what we like to do. One didnt get back to us. The other listed how many hours each features would take and at the end put a 15% fee for testing and 'unknown'.

While this doesn't strike me as odd, their hourly rate is. They charge $150 USD. For 160 man hours we have a bill of 24k (USD). Some programmers make that amount in 6months, this company/person wants it for one month work. Now the programmers in my studio make about $35 an hour. If we put a guy on it, it MIGHT take us 4-5months which is roughly what our bill comes to be.

But i still think its ridiculous. Is this standard? should i try to find another company? what should i do?

What he is doing is specialized however the SDK required is well document and a microsoft product (so we have faith in the documentation, but its still specialized). The company is located in california.

What are you thoughts?

Answer 1

It's a negotiation pricing strategy, you price high and the potential client will either walk away and you've lost nothing (not gained either but that's a different matter), pay the price as is and you've probably made more than you were expecting, or they'll negotiate.

The price has probably got a baked in 20% that they'd be willing to come down from to still make a comfortable amount of profit, a lot of companies price in similar ways. If you price your normal rate that you have to make then you have no flexibility to come down, and people love the idea they're getting something at a reduced price.

(And it might take 4-5 months, or it might take 10, if it's specialised then there's probably a lot of background to it that makes it specialised so they've got a better knowledge base to work from.)

Answer 2

Yes its standard. You want these guys because they have the expertise you require. They are right to charge for this. If they only take 1 month to do something that would take your in-house team 5 months then they have no problem in justifying this.

There are other factors.

Any software house takes a risk that they will need to employ programmers and pay the rent in between assignments -- this is reflected in the fees.

Any software house takes an enormous risk doing a fixed price project. If the work is more complex than they initially estimated they still have to produce the goods and any overrun eats into their profits. -- again this is reflected in their fee.

Plus there are the normal risks associated with any business. Cashflow -- they need to pay their people long before you pay them. Credit Risk -- you might not pay them for whatever reason. Employee turnover, sickness etc. -- their programmers might all get 'flu or leave in the same week and they still need to deliver the work to you.