In their roles, software engineers are accountable for quick estimations. They must be able to give a reason for what logic stands behind the price. Inaccurate calculations are likely to cause major problems for IT companies and their customers as well. How much does it cost to develop software? That’s the main question we ask in our article.

Generally, the cost is made up of time and effort cost of software projects that are spent on the project. There are several components that make up a total cost. First of them are direct and indirect expenses.

The direct cost of software projects comprises the income of every team player, payments for the hardware that is used, spendings on other things required for work. We can also state some sums that are spent on specific risks related to the project. Indirect costs comprise control of the quality, audits, security issues. In simple words, they are not addressed for a specific project or its part.

Here are a few more things that make up the average cost of software development:

  • Efforts that are spent by people on the needs of the project.
  • Tangible resources required for completing tasks.
  • Purchase and maintenance of equipment.
  • Software purchases and maintenance.
  • Renting an office, paying the bills.
  • Risks related to the project.

We’ll guide you through the factors that influence the total cost. In addition, we will show the estimation basics and tips to optimize price. 

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Factors Affecting Software Development Costing

There’s hardly a fixed list of things that will make up a total of the software development cost for every single project. However, we can talk about the key factors affecting the cost. Here they are.

1. Size

It’s easy to calculate the cost of software development here. The bigger number of screens you have the more work will be performed before the release. And the more you will pay for the app. 

What is considered a screen? In simple words, it’s what the user will see after launching the app, clicking or tapping on any of the elements and so on. A screen view with the personal profile and a screen where the user is editing their details are two different screens.

We consider small apps to have about 10-20 screens ($50,000–$80,000), medium-sized – 25-40 ($75,000 -$200,000) screens and big apps – over 40 screens (from $250,000).

2. Complexity

Here we mean coding and testing. Design matters and we can add it to the overall complexity of the project. If you need custom fonts, images or icons, you will need to have a designer to deal with all of these. It’s good to consider that there may be several iterations and re-design attempts after giving feedback.

Think if you want to integrate your app with third-party apps or systems. If you want to let your users choose between one of several available payment systems, you will need to integrate with all the systems and provide your users with this choice. This may be a bit challenging task but a lot depends on the vendor you choose.

Complexity also comprises data migration. You may need a simple script that will transfer data from one system to another. There might be a lot of details that need to be solved to complete the process. There will be a need to check if everything is working the right way to prevent any problems in the future.

3. Budget

What is software cost?

It’s obvious enough to understand that you cannot spend more than you have. You will probably have a limited sum of money that you can spend on building a new project. It’s great to find the vendor that will now blow it up. If you have a very limited budget and the number of features you want to have costs much more, there will be a need to set the priorities or find the money.

Define the budget before you begin a new project. Discuss what you will do if the vendor requires more hours or more people for finishing the process. There are software development vendors that do not request any additional payments if they fail to finish their work on time. Cooperation with such companies will give you a guarantee that you will not blow up the budget.

Do you need more insights into resource planning and estimating? Then read about ERP in Operations Management.

Positive and Negative Impact of Factors

Apart from general points, there are certain forces and causes that may increase or decrease the final software development costing. Look at them in the next two sections. 

Increasing Costs

What can make the average cost of software development a fortune? There are common things that may blow up the budget and make you pay much more than you have expected:

  • Overestimation. It means that you need to get from the developers and other IT staff the number of hours that they plan to work in order to exclude any cheating. It’s vital to understand how much time some specific task can take.
  • Substitution of workers. Dishonest IT companies may trade you up the junior employees as seniors that will influence the quality of the end product. So, you need to ensure that you pay for what you really get. 
  • Technologies. In some cases, fraudulent IT companies describe that the customer needs expensive frameworks and tools that don’t even exist. So, feel free to ask as many questions as you want and check their work. 

Decreasing Costs

What can make the cost to the project less than expected? Here are the key factors that may reduce the price:

  • Simplicity. It’s a good idea to think about which features you really need and which ones can be omitted. You should provide your users with the right value but not overload them. Simplicity is a trendy thing!
  • Outsourcing. You will pay different sums of money for the in-house team working hours and the services of an outsourcing partner. For instance, in Ukraine, you can find a lot of certified talents and you will love the cost of their work. 

Estimating the Cost of Software Development from A to Z

You cannot successfully handle what you cannot gauge, and what gets measured gets done. If you want to know how to estimate the cost of software development, you should know the most common approaches to this issue and key factors that you need to take into account. Below we’ve listed the key points. 

Basics of Software Cost Estimation for Businessmen and Managers

First and foremost, there are three main aspects involved in the process of estimation:

  1. Costs – measure them in dollars (or your currency). 
  2. Durations –  measure them in calendar time.
  3. Efforts – measure them in person-months. 

Efforts and costs are closely interconnected. Efforts are calculated in person-months and can be converted into a particular price in dollars by defining an average payment/rate per a certain period of time and then multiplying this rate by the efforts. Today, most teams still meet the following challenges:

Expert judgment/opinion is frequently used as one of the ways to calculate the cost of software development. This method is associated with the fact that most teams rely on the experience to estimate the cost of the project. However, it comes with some issues such as different specifications and lack of experts. 

Instead of judgment, dev teams tend to use quantitative methodologies, both analytical and empirical. The empirical methodology of project estimation uses information from past projects to calculate the cost of software projects to be developed. The analytical methodology is based on the problems to be solved and the development rates.

Product lifecycle and expenses

Key Rules and Steps to Estimate Your Project

So, what makes a good estimate? Here are the key attributes of the right software cost quote:

  1. A quote is based on a reliable estimate methodology.
  2. A quote is comprehensive containing all the details.
  3. A quote is developed by the entire development team.
  4. Calculations are approved by all stakeholders.
  5. Calculations are based on similar project experience.
  6. Risks are understood and measured.

Based on these points, the estimation should be completed in a few steps. Below, we list them in the correct order. 

Step #1. Define the Scope and Velocity

First off, understand how large your project is. It is often recommended by experts to focus on a minimum viable product (MVP) which is the minimum of product features needed to develop an application. It’s not a big deal to generate the basic vision. Just research the audience, understand its needs and wishes, and deliver relevant features. 

To measure the velocity, you can use any of these models:

  • Run sprints to understand how the development is going on. 
  • Determine the number of fulfilled user requirements. 
  • Use the team’s velocity from a similar project.

Don’t forget about the so-called ceremonies – periods in Scrum. This time needs to be distinguished from the work. It is critical as it allows the team to move quickly and keep productivity high.

Software cost factors

Step #2. Plan Everything with Team Members

Planning is the next thing you should do to evaluate the average cost of software development. The staff gets together and discusses the details. During this process, team members talk about user stories and determine the timescale of the project. Only the development team members are allowed to vote. Stakeholders’ opinion is valuable to identify compulsory elements of the software development cycle. Moreover, it brings a shared vision of the entire process. For example, if your client has unrealistic expectations about the project – just show him the expected budget. 

Step #3. Create a Budget, Not an Estimate

Harvard Business Review proved that 1 in 6 IT projects has an overrun of 200%. It means that even experienced professionals fail to provide an accurate software cost estimation. To reduce this risk, stop creating a software cost estimation and start developing a budget. What does this mean? Brainstorm about such valuable decisions:

  • Code this set of stories now or later?
  • Distribute budget this quarter or no?
  • Involve more people or outsource?
  • Launch a startup or no?
  • Start working on the first feature now or later?

It’s obvious that the in-house development cost of software projects will be higher than the outsourcing cost to the project. In both cases, you can have a fixed sum that will not greatly depend on the number of hours spent.

Step #4. Budget the Software Development Costing

When you’re using the Lean Startup approach, then it’s time for the mentioned MVP. To speed up the process, use specific software, for example, Ballpark, Centage, Scoro, etc.

The main thing to do is identifying “must-have” and “nice to have” elements of the project. What is the difference? Compulsory features will influence the whole project while additional components will make a product/service more functional. 

Step #5. Divide Requirements to Refine Transparency

It’s actually a Scrum methodology when a team works on each feature in a short time, and then move on. It helps to see whether the expected budget matches the reality and what additional expenses may arise in the future. This point partially connects with the previous one as it’s important during the development phase. 

Step #6. Use Both Capitalization and Amortization

Capitalized cost of software development includes expenses such as QA, programmer compensation, and other direct and indirect overhead charges. Software capitalization includes internally-developed software to use only inside the company. These are membership tracking systems, accounting systems, cash management tracking systems, production automation systems.

Capitalization is often required to be in harmony with generally accepted accounting principles. Capitalization is a complex procedure, so feel free to hire a certified public accountant. There is no right way for the capitalization because everything depends on the specification of your company that makes professional help more desired than ever.

Software development for internal use

Once the software is in use, the capitalized costs need to be amortized. Amortization will be based on the percentage of the outcome. Bear in mind that an organization’s amortization and combined IT depreciation cannot be more than 20% of the entire IT budget.

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How Much Does Custom Software Cost in Diceus?

Our company works in accordance with legal co-innovation technology partnerships approach with clear and transparent prices. We’re building custom software, that’s it.

We know that without a needed business analysis, any web development process looks as traveling without an understanding of the final destination. Moreover, when you travel like that, it can be an adventure for you, but in business, it brings you a huge risk.

So, before making a software cost estimation, you need to have a vision about the purposes and know the results that you’d like to reach. That’s why our business analysts provide deep research of your specific business expectations to plan the work. Such business analysis allows to accurately predict the outcomes. Besides, it helps us to take responsibility for the whole product or services and deliver software development on time.

The development process is built with the Agile approach in mind that helps you to monitor each stage of the work. Our customers know exactly when the IT service or product will be delivered and what features it will have. On-time delivery and quality are guaranteed.

This approach helps us reduce expenses and time for development. Moreover, this model and our deep experience help to eliminate any cheating because all the processes are transparent and easy to understand. We are proud that our customers trust us and enjoy totally secure operations and collaboration.

For more insights into the concept of outsourcing and our approach, check the ultimate guide about IT outsourcing in 2019

The Bottom Line – Tips for Software Cost Estimation

When you know how much does custom software cost, it’s time to start auditing software development costs and pick up the vendor that offers you the best value for money. We at Diceus offer high-quality services and on-time delivery of the product. You can get in touch with us to determine the development cost and the time required for completing the project. We don’t sell hours of work, we offer a 101% result at a fixed cost. 

Software cost estimation notes

And here’s the last bunch of tips for effective cost calculations:

  • Don’t forget that many estimation projects fail. The most frequent failure reasons are poor communication and insufficient resource planning, etc.
  • Involve customers in the process. Start communicating with clients as early as possible because they know what they need. 
  • Set clear requirements. Product owners are leaders who must answer developers’ questions. Make sure you have the right managers. 
  • Utilize modern methodologies. Agile, Scrum, and Kanban can help in the seamless calculation of the costs, as well as with the development itself. 

Hope, we answered the question “how much does it cost to develop software?”. Remember that good partners always can decrease the average cost of software development.