A few years ago I managed the design and development of the Design Council’s website (the previous one) with Flow providing the user testing (I think Iain Barker did the work at Flow)… Anyway we ran the project just as you’ve described. Every week we either tested the latest designs, or (alternate weeks) worked on the next iteration and ‘we’ meant designers, project manager (me), UX Consultant (Iain), software engineers and the client. And it worked a treat: better buy in, clear understand of the requirements, no last minute changes, less design foo foo, less risk etc.
Basically it massively derisked the project and so cost a lot less and the final product was much better (IMHO).
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