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A Step-by-Step Guide on Calculating the Software Development Cost

by Iryna Skvoznikova

What is software cost made up? Software development cost is made up of time and effort estimation that are spent on the project. There are several components that make up a total cost. First of them are direct and indirect costs.

Direct costs comprise 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 a 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 a software cost:

  • 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 will show you how to calculate the cost of a software project and what to do to make the price look good for you.

Factors affecting software development expenses

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.

Size

It’s easy to calculate the cost 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. We consider small apps to have about 10-20 screens, medium-sized - 25-40 screens and big apps - over 40 screens.

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.

A small app may cost about $50,000 - 80,000, a medium app may be about $75,000 - $200,000 and big apps may start from $250,000.

Complexity

Here we mean coding and testing if the app should provide any forms of analytics, process big blocks of data and there are a lot of details that require more time during the development process.

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.

Budget

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.

We can compare it to building a house. You find a reliable company that can do it, you set the basement and go on building. You will not have to do everything yourself. However, you will need to supervise the process and make sure the workflow is with high productivity in case here’s the right choice of the technology and solutions.

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.

Related articles:

How Much Does Custom Software Cost and How to Purchase It?
ERP in Operations Management

 

Factors affecting the increase in software production costs

What can make the app development cost a fortune? There are common things that may blow up the budget and make you pay much more than you have expected. And don’t forget about cheating - some vendors do not play fair games and do everything possible to gain more money.

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. Some companies can manipulate the client’s expectations for the quality code. So, you need to be prepared and understand how much time, in general, some specific task can take.

The 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. Show the service provider that you know the difference between junior, middle and senior employees and it will help you to eliminate possible cheating.

Technologies

When you cooperate with the company without positive testimonials from the previous customers and any use cases, you can get fraud. In some cases, such 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. We hope that our tips will help you to build clear and honest relationships with the outsourcing company.

Factors affecting the reduction of product development costs

What can make the app cost less than expected? Here are the key factors that may reduce the price.

Simplicity

It’s a good idea to think about what features you really need and which ones can be omitted. You should provide your users with the right value but not overload them with a series of things that can do with an app. You will make the app easy to use. Simplicity is also a trendy thing these days even in big companies like Apple.

Outsourcing

You will pay different sums of money for the in-house team working hours and the services of an outsourcing partner. One of the good outsourcing destinations is Ukraine where you can find a lot of certified talents and you will love the cost of their work. You will save time as you will not have to train a new group of coders as you would do with the new in-house team.

How to estimate the cost of a software project?

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 a software project, you should know the most common approaches to this issue and key factors that you need to take into account. Below we’ve listed key of them.

Step #1. Involve stakeholders in the process

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. Your customer will be ready to cut unnecessary functionality and just leave only important elements.

Step #2. Create a budget, not an estimate

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

  • Involve more people or outsource?
  • Does it require to launch a startup?
  • Distribute budget this quarter?
  • Do you need to code this set of stories next?
  • When do you need to start working on the first feature?

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

Step #3. Budget

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. It’s up to you whether include in the budget required parts or the range of features.

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

what is software cost

Step #4. Divide requirements to refine transparency

It’s actually 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.

If you love numbers more than words, explore our brief statistics of the cost of the software application development.

  • Low price: $10,000 - $25,000
  • Medium price: $25,000 - $100,000
  • Average price: $100,000 - $250,000
  • High price: $250,000 - $800,000
  • Unique price: $800,000 - $unlimited

what is software cost

 

How Do We Estimate Software Development Costs?

Our company works in accordance with legal co-innovation technology partnerships approach with clear and transparent prices.

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 project 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 and needs 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.

After that, both sides sign a legal agreement - detailed SRS documentation for each iteration.

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 services 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.

How to estimate cost of a software project?

It’s impossible to give you a calculator to quickly sum up the features or the number of hours required for a specific case. What we do is analyzing the case that you have. We need to know what you have now, what you want to have and what kind of business needs you want to solve.

We don’t sell hours, we offer you a whole project completed by our team. We plan our work and define the milestones. The next stage will involve planning the process and delivering you an MVP and further steps that are in our plan. We are responsible for the result you get. If we need more time, you don’t pay extra money for this. If we need more people, the sum remains the same. When we calculate the cost, you get a fixed sum that is not changed anyhow.

Capitalized software costs

Capitalized software costs are expenses such as QA, programmer compensation, and other direct and indirect overhead charges. The overhead factor may be at least twice the developer’s salary, depending on the size of the company.

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.

Let’s consider the benefits of capitalizing software development costs:

  • revenue smoothing
  • ratio analysis
  • tax effects
  • GAAP compliance

Capitalization is often required to be in harmony with generally accepted accounting principles. Businesses have to submit GAAP-compliant financial reports to investors, creditors or governmental facilities.

Using GAAP in agile software development requires project planning to show that “detailed program design” is done. The risk is that front-end planning may be skipped that will badly influence documentation and technological feasibility. This is a common tendency that agile projects demand more planning and, therefore, more documentation.

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 | Diceus

When to Stop Capitalizing and Start Amortization of Software Development Costs?

Once the software is in use, the capitalized costs need to be amortized. When identifying the helpful life of the asset, take into account the effects of competition and technology. According to the fast changes in technology, the software has a short helpful life.

Once the project is completed and the product is already available,  you may stop capitalizing costs. The next step, 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.

Software that companies sell or market to the public | Diceus

The bottom line

When you know what makes up the cost, it’s time to start auditing software development costs and pick up the vendor that offers you the best value for money. Diceus company offers 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.

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