How I lost over $14,000, and how to avoid my business mistakes

burning money

burning moneyYep, $14,000. Lost. Poof! Gone. This was the biggest of my business mistakes, and my wife won’t let me forget it–though I don’t blame her. In truth, like any disaster, it wasn’t just one mistake, but several.

A deceptive start

It started a couple years ago when I got a phone call from a new client. They wanted a custom application that would let their users create a report in a fairly simple way, and then manage the data from a web front-end, which would tie back to their main database. Apart from the web thingy–which was and still is out of my expertise–it sounded a lot like other things I’ve done, although on a larger scale and with lots of moving parts.

We had several meetings with several layers of staff to discuss the project scope and requirements, and I was eventually able to create an estimate for the project. The client approved it, and I got to work.

For the web piece, I outsourced that to an overseas developer who actually did a fairly good job, though I learned a lot about how to manage and communicate with contractors whose native language isn’t English. But that piece got done and cost me probably 1/20th what it would have taken me to learn and develop on my own. The outsourcing wasn’t the problem.

Things take a turn, and my business mistakes start

As I developed the reporting and database pieces, I ran into other issues and questions, and the answers ended up changing the project requirements–sometimes very significantly.

In retrospect, the problem started when the specs for this fairly large project weren’t nailed down at the start. The client had the general idea, but several very significant details hadn’t yet been worked out. Along the way, other specs changed and got more involved–if you’ve ever done project management, you’ll recognize this as scope-creep.

Being a people-pleaser, I wanted to do whatever I could to make sure that the project was a success and that the client was happy, so I kept saying “yes” to all the changes–without mentioning how those changes were out of scope from my original estimate. That was the first of my business mistakes, and I made it several times during the project. By the time I finally discussed it with the client, I’d already done a lot of work and the project was already well underway.

In the end, I agreed to cap the cost of the project (another of my business mistakes…), and kept working on the project, version after version, to try to get it done. Now, capping the cost of the project even though there was lots of out-of-scope work to be done meant that I’d end up doing non-billable work on the project–a LOT of non-billable work. I’m talking over 180 hours of non-billable work. And that’s where the $14k was lost. Thankfully I didn’t have to pay out $14 grand in cash, but spending 180 hours of potentially billable time was a big blow, and the non-billable time I spent prevented me from billing as much from paying clients.

How can you avoid these same business mistakes?

Sometimes the best lessons are the most expensive. Here’s a summary of my $14,000 lesson:

  • Estimating:
    • Spend time being thorough and VERY specific on your estimates. Sloppy estimates will cause you stress for either not being able to bill, or having to go back to the client to discuss why the project cost has gone way up.
    • Have a crystal clear idea of the deliverable, and communicate it to the client so that you both agree on what the end product will be.
    • You’ll be tempted–I still am–to under-estimate. DON’T. It invariably comes back to bite you. If a client won’t go for a realistic estimate, then you’re going to lose money and/or time on it.
    • Pad your estimates. For projects that I’m familiar with, I pad 30-40%; for other projects, I might pad 50-60%. Include your scoping hours in the estimate (you wouldn’t be scoping if the client hadn’t asked you for it), but you’ll probably want to roll it into “Project management”. The reason for padding isn’t to overbill the client; it’s to account for unforeseen things that come during the project, and to be able to bill for it–as well as give the client an accurate expectation of the project cost.
    • AVOID capping the cost of a project. For capped projects, you’ll invariably find that it’ll take longer than you initially expected, and there’s little motivation to keep doing non-billable time on a project–which just makes it drag on interminably. These projects that keep giving and giving are the kind you should avoid like egg salad that’s been sitting in a hot car all afternoon.
  • Outsourcing:
    • Good help is hard to find. You’ll likely end up spending a lot of time winnowing through unqualified applicants to find someone who can actually do a good quality job for you.
    • Language barriers can eat up your project management time, and burn through days–especially if the VA (virtual assistant) is 12 hours away.
    • HOWEVER, VA’s can get stuff done a ton faster than you might be able to, and can provide expertise that you don’t have.
  • Client expectations:
    • Your estimate is just and ESTIMATE; emphasize this at least 2-3 times verbally and in writing so the client won’t balk when the estimate changes due to scope changes/creep.
    • If the scope changes, say so IMMEDIATELY. You can still say, “Sure, I can do that, but I just want to point out that it’s out of scope so I’ll have to revise the estimate.”
    • If project specs change, issue a revised estimate.
    • Avoid agreeing to do a project at a flat rate–UNLESS you know EXACTLY what’ll be required. Even then, I’d avoid flat rate projects, since I’ve found that clients who want a flat rate are typically more demanding–meaning you’ll end up doing more work than you originally agreed to just to make the client happy. By the way, this isn’t just my experience–I’ve heard it from other consultants as well.
  • What else you can do:
    • If you’ve already made one of these mistakes, and are saddled having to finish a non-billable project, DON’T PROCRASTINATE. It’s tempting–really tempting–to focus on billable work instead. But just get the stupid thing finished. Do a half hour a day on it. Just keep moving it forward until it’s out of your hair. The last thing you want is to make it drag on any longer than it needs to. You can’t afford to waste any more energy on it than you need to–and stressing about that uncompleted non-billable project will definitely stress you out.

What’s been your biggest mistake so far, and what did you learn from it?

Go ahead, don’t be shy. We’ve all made our share of business mistakes, and the more we own up to them, the less likely we’ll repeat them.

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Andrew Molobetsi - March 20, 2012 Reply

My mistake was agreeing to pay a licensing fee on behalf of a client so she could pay me back tne money together with my fee when the project was completed.

When it was time for her to pay, she refused saying she did not ask me to pay on her behalf. How could she pay now that her pain problem was solved. Sio I had no choice but take drastic steps to get my money back — minus my usual fee. I now collect a deposit before attempting to take on any consulting work. Shows you cant trust anybody where your livelihood is concerned.

At least thats how I felt after making this silly business mistake.

    Greg Miliates - March 21, 2012 Reply

    Thanks for your comment!

    That sucks that your client didn’t pay!

    I had 1 client–a former colleague–who didn’t want to pay after I’d done the work, and nearly had to go to small claims court to get paid. Fortunately, with the thinly-veiled threat of going to court to collect the payment, the client eventually paid. But it was a stressful experience, and one I’d rather not repeat.

    You’re right though: these painful lessons (hopefully) make us act more wisely so we don’t repeat the same mistakes.

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