The Essentials: Operate a Software Development Company

How do you scope projects to protect margin?

Write a statement of work with deliverables, assumptions, exclusions, acceptance criteria, milestones, and a change-request process. Estimate in ranges, add contingency, and have a second engineer review the estimate. Bill milestones, with a deposit often in the 25-50% range, and use change orders for anything outside scope, priced at your standard rate. Track planned versus actual hours weekly, and review each finished project for estimate accuracy. Custom software attracts requests for one more small feature, and without a process they quietly consume unbilled time.

Should you hire employees or use subcontractors?

Employees give you control, continuity, and knowledge retention, but they create fixed payroll: a U.S. developer's salary plus taxes and benefits can be well over $150,000 per year for a mid-senior engineer, depending on market. Subcontractors flex with demand but require vetting, clear IP assignment, security expectations, and code review. Worker classification matters: contractors must genuinely control their work under state and federal tests. Many agencies use a core team of employees plus a vetted bench of contractors for peaks. Hire your first employee when you have several months of committed backlog, not after one busy month.

How do you keep quality and documentation consistent?

Adopt shared standards: repository structure, branching strategy, pull request review, automated tests, continuous integration such as GitHub Actions, linters, secrets management, and a README plus runbook for every project. Use error monitoring such as Sentry and infrastructure as code where practical. Require at least one reviewer on every merge, and schedule quarterly audits of a sample of client repositories. Clear handoff documentation lets another developer take over a project without a costly investigation, which matters when people leave or work spreads across many clients.

How do you handle security and client compliance?

Clients increasingly send security questionnaires and ask for SOC 2 or ISO 27001 evidence. Start with basics: multifactor authentication, a password manager, least-privilege access, encrypted laptops, offboarding checklists, and dependency scanning. Follow the OWASP Top 10 in code review. For health data, sign business associate agreements and follow HIPAA; for EU users, follow GDPR. Use written data processing terms with clients and vendors, keep production data out of development environments, and carry professional liability and cyber insurance.

How do you build recurring revenue after delivery?

Maintenance and enhancement work often has lower acquisition cost than new projects. A common rule of thumb is that yearly maintenance costs 15-20% of the initial build, covering security updates, bug fixes, and hosting oversight. Offer a monthly support retainer with response times, included hours, and a separate rate for new features. Check in with past clients quarterly and offer a lightweight technical health review. Track retainer revenue as a share of total revenue, since it stabilizes cash flow between large projects.

What numbers should you review monthly?

Track utilization, which many agencies target near 70-75% for billable developers, effective hourly rate, gross margin by project, estimate accuracy, bench cost, accounts receivable, and revenue concentration. Watch proposals sent, close rate, and backlog in weeks. If backlog falls below six to eight weeks, raise sales activity before the schedule empties. If margin on fixed-price work is low, adjust estimates, contingency, and change-order discipline.

How do you plan capacity and avoid feast-or-famine cycles?

Keep a rolling capacity plan showing each developer's booked hours for the next eight to twelve weeks, the sales pipeline weighted by probability, and the bench cost if projects end. Start new sales conversations when backlog drops below about two months. Stagger project start and end dates, and use maintenance retainers to absorb gaps. Payment terms matter: bill milestones on time, follow up on invoices at 15 days, and consider late fees and pausing work on overdue accounts. A cash reserve of two to three months of payroll gives room to hire and to survive a delayed payment.

How should you manage client communication during a project?

Set a weekly cadence: a short status update, a demo at each sprint or milestone, and a shared board such as Jira, Linear, or Trello. Give clients one point of contact, document decisions in writing, and record who approved which requirement. Raise risks early and in writing, especially schedule and budget risks. A client who sees progress every week is less likely to dispute the invoice or ask for unplanned changes at the end.

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