How to Calculate Software Development Costs

Business software takes a company to the next level. But before implementing digital tools, you have to estimate the costs and predict some pitfalls and over-budgeting, and, finally, calculate the ROI. Also, you should take into account such factors as functionality of your future project, complexity of its business logic, type of hosting, and so on. Thus, before ordering development services, it’s important to evaluate the prospect of implementation and understand what benefits this tool provides.

Because it is almost impossible to estimate the cost of software development without professional help, you should be best assisted by the experts with whom you intend to cooperate. Also, you can use an estimating software development costs calculator designed to get an accurate picture of the situation based on generally accepted factors that affect the production process.

Whichever of the proposed solutions you choose, we recommend that you consider our guide on how to calculate software development costs and what affects its formation. We will also look at possible reasons for over-budgeting and explain how to avoid these bottlenecks.

As for startups, their development and the stages preceding it - for example, the calculation of the budget, have some peculiarities.

If you want to learn more about the startup software development process, visit our Business section.

To choose the right methodology to estimate the cost of a software project, first, you need to understand the scale of software you are going to work on. According to technical complexity, the software can be divided into three types.

For basic software

Basic software provides simple functions and solutions: it can be a plugin or simple script that solves a narrow problem. Usually, to create such a type of projects, developers use the ready-made solutions (MailChimp, Salesforce, etc.). As for the set of functions, this software includes a basic set of functions such as email subscription, easy login, and others. Also, these software solutions have a simple design and cannot process large amounts of data. Typically, the development of such projects takes up to 2 months.

For medium complexity software

Compared to the basic one, this type includes a wider range of functions, such as analytical solutions, payments, private chat, and others. Also, building mobile apps or websites of medium complexity implies a well-developed UI/UX design and adjusting to devices of various form factors. Such a development process takes up to 6 months.

For highly complex software

These software products include sophisticated design and post-launch technical support. Also, software of high complexity has a full range of functions, including support for third-party services, video content, data encryption, and others. In addition, complex solutions imply the presence of optimized performance and compatibility with several software tools. The development process takes more than 6 months.

It should be noted that this classification is generalized, since there are no identical criteria for creating each type of digital solution. Usually, software development cost estimation is carried out by counting the hours spent on work and how much hourly spending on software developers is.

The main reason for possible problems during the development process is incorrect forecasts and inaccurate calculations of the project price. These factors can provoke budget overruns and missed deadlines. Therefore, it is worth discussing project requirements and expectations with the product owner in advance to complete the project successfully.

Based on this, the client and the contractor should hold a meeting to discuss all the details of the project so that both parties clearly understand the expected results.

Let's take a look at the main factors that affect the costs of software development.

Software Size

One of the most important indicators discussed at the development planning stage is the size (scale) of the software, as the timing of its creation and its cost directly depend on it. Also, the price is impacted by the potential user base. The size of the software is determined by the number of screens/pages, and the size of the user base is calculated by the potential number of expected users.

In particular, the project can be small (a website with several pages or an application with a few simple functions), medium (the usual number of functions/pages grows to 5-7), and also large (in this case we are talking about large marketplaces, corporate applications, educational platforms, etc. depending on your business niche).

Functionality

The number of features you want to implement in your software solution also affects its complexity and prolongs the development, testing, and deployment process.

Let's look at three main categories of the project’s complexity.

• The complexity associated with the set of functions is due to the implementation of additional parameters in accordance with the extended business logic.
• The technical difficulty lies in the implementation of advanced technological solutions that traditional methods cannot implement.
• The complexity of the design of the project lies in the personalization of design elements.

Suppose you decide to create a website for an online clothing store and want users to be able to register accounts there. In this case, you have two options:

• regular registration via email;
• registration through social networks.

The second option is designed in case your software solution will need to be compatible with social networks. It will complicate the development process as well as time costs, which ultimately increases software project pricing.

UI/UX design

Creating the best user experience is not an easy task. The job of a professional designer is to develop a unique interface that includes simple interaction with users and optimization for the needs of the target audience.

The cost of UI/UX designer services varies depending on the complexity and amount of work done. Thus, developing an ideal UI/UX can take a large percentage of the total project budget.

Team

Usually, the traditional development team consists of the specialists like this (note that the team can be extended due to the project scale and deadlines):

• Project manager (PM)
• Quality assurance engineer (QA)
• Business analyst (BA)
• Frontend developer
• Backend developer
• UI/UX designer

Surely most customers understand what the work of developers is, but here are the merits of project managers, quality assurance engineers, and business analysts that are often underestimated.

In particular, the development of each software solution should be accompanied by the participation of experienced business analysts who prescribe the requirements for the project and further stimulate its implementation. The business analyst is responsible for forecasting, which can help avoid project delays or over budget, as mistakes like this are the first signs of a failed project. A business analyst calculates all these risks and helps to avoid them during the development of a software solution.

Project managers are responsible for planning the software development cost and defining the scope of work. They also monitor the project and prepare progress reports. Project management is also regularly reporting budget expenditures, detailing risks, allocating funds for contingencies, and completing project documentation.

QA professionals are responsible for rigorous testing of a software solution at all stages of the development life cycle. Product assurance engineers are the “invisible heroes” who coordinate the testing process of a digital solution to ensure the highest quality and reliability. They also develop the practice of creating test plans to use examples to find software flaws before it is launched and deployed.

Platform (optional)

If you plan to develop an application, its budget will also depend on the platform (or multiple platforms) you choose.

In particular, software development project cost estimation (if we talk about app development) depends on what platforms is your solution compatible with. So if, for example, you want to create an application for the private transportation of passengers, then you need to consider all the specifications of software implementation platforms such as iOS, Android, and Windows.

In the case of a multi-platform software solution, you will have to implement support for different operating systems, middleware, applications, and databases. Consequently, software development charges will increase.

Tech stack

The technology stack for your project also plays a significant role in forming its budget. In particular, there are software tools in the market aimed at maximizing the speed of the development process. At the same time, they may not give developers the needed versatility as solutions designed to work on large projects with fairly flexible timeframes. The final choice of development tools directly depends on your business goals. Therefore, the technical stack and, thus, the budget estimation should take place with the participation of specialists who will work on your software solution.

Hosting

The server and hosting part of the project can also greatly affect the budget. In particular, technology, type of servers or hosting, as well as settings and maintenance model can determine the speed and security standards needed in your business industry and thus, increase or decrease the software maintenance budget.

Engagement model

There are three models of cooperation between a product owner and developers, such as in-house, outsource, and outstaff. Let's talk in more detail about each of the models.

In-house

In-house is performed internally by a company department that is hired and managed by the business owner. Own teams are usually located in the company's offices. The company takes full responsibility for the management of full-time employees and their pay.

Outsourcing

If you need to develop a website, or you are facing any other project, and you should meet specific deadlines, then you can outsource it to another company.

In this case, you do not need to control exactly how the task you set is solved and who specifically performs it. The contracting company undertakes control over the work processes, so you just have to wait for the result.

It should be noted that outsourcing is the optimal solution from the point of view of saving money necessary for the implementation of a software product. So, if you want to learn more about our outsourcing software development services, check our Services section.

Outstaffing

In the case when you need specific specialists in your team while working on projects, outstaffing is suitable for you.

The contractor will provide you with the necessary qualifications to achieve your goals. You will build the work process and regulate specific deadlines and methods for solving problems.

In some cases, outstaffing can be more profitable than outsourcing. You pay only for the work of a specific specialist and not for the work on a project in which the contractor takes into account risks and lays down costs for management processes.

Learn more about the advantages and disadvantages of outsourcing software development.

And now, let's find out what methods for software development cost calculation exist and how to avoid mistakes in planning and developing a project.

Straightforward estimate

When you have a more or less accurate understanding of the time frame for your project, you can choose this method. All you have to do is to multiply the cost of resources spent on development by the time it takes to create it.

But not everything is so simple because some resources can play different roles in creating a project. Most of the development contributors do not work full-time. So, for example, if a UI/UX designer has finished the work, then they do not have to stay at work for 8 hours a day. These specialists may be needed to coordinate some aspects, but there is no need to be in the office full-time.

A logical question arises: “Why pay for a full-time team if it is not fully employed?” Now we will answer this question for you.

You pay per development team costs that are averaged based on the amount of work done by each developer or team member on the project. Take a tester, for example. His work is expected to be a certain percentage of the total volume of the project. So, the cost of the tester's services depends on this percentage.

If you need a team of developers to create your software solution, then you pay for the set of skills they have. That is, from the above, you are purchasing premium skill sets at a lower price since you only pay for a percentage of the time the developers use. Therefore, to effectively develop a digital solution, it is necessary to create a project team and draw up its schedule.

Constant interruptions in the project work have a very detrimental effect on it. So it can be challenging to get it back on track. The whole team involved in the project is supposed to do their job harmoniously like clockwork. But, if everything is organized correctly, then the right team members will work on the task at the right time, which will not decrease productivity.

Now, let's look at the mistakes that should be avoided for the successful completion of software development:

• Lack of clarity

  Be clear with your project approach and expectations. Define the project scope, objectives, and deadlines beforehand.

• Lack of stakeholder engagement

  The involvement of stakeholders from the start removes roadblocks and ensures the availability of resources and proper transmission of information.

• Inadequate research

  Extensive market research will be an investment for your project. It will help you not commit common mistakes.

• Poor project scheduling

  Break down the deliverables into manageable tasks and assign them to the concerned team members. Proper project scheduling will help you in task and deadline management.

• Poor metrics for the cost estimation process

  Use the right metrics for precise software project cost estimation. This will save you from time and cost overruns, which ultimately may lead to cost increases. Consult with your team and stakeholders.

Rough estimate

To calculate the cost of software development in a rough way, you need to determine the average cost of services for each of your team members and multiply it by the estimated project duration (in hours). To find out custom software development rates of specialists in specific technologies, you can check such popular job platforms as Indeed, Upwork, and others.

The cost estimate to develop a software system requires determining the approximate completion time frame of the project. We can distinguish between pessimistic, realistic, and optimistic estimates of time costs that include all factors contributing to the delay or breakdowns.

Below, we give a "Storage and logistic system for a wholesaler's warehouses" example of how our algorithm defines development costs and helps to avoid bootstrapping works.

Prototyping

Prototyping this project can take from 40 to 50 hours, depending on how many elements, screens, and pages the software solution requires.

Design

The work of designers usually takes from 90 to 140 hours. The growth of this indicator may depend on the number of projects left by the owner and other factors beyond the developer's control.

Architecture development

The development of an architecture of such a system often lasts from 15 to 20 hours, depending on the complexity of the project.

Frontend

It will take from 140 to 210 hours to develop the frontend. But the final cost depends on the business logic complexity, the chosen server architecture (whether the solution will be based in the cloud or hosted at the local level), and others.

Backend

The cost and duration of backend system development is greatly influenced by the hosting model you choose and the technologies and databases for its implementation. In particular, some types of software may need to be deployed in containers, and some may be hosted on local servers (to name just two of the many options available). Thus, this cost component can only be calculated taking into account a predetermined placement model. Assuming that our system will be deployed in a public cloud, it will take from 140 to 210 hours to implement the backend.

Testing and bug fixing

Quality control or project testing will take between 80 and 150 hours, depending on the size and complexity of the project. Also, after testing, we have additional time to fix bugs. Usually, it can be 10% of all the development time, but it depends greatly.

Considering everything listed above, the development of this example of a digital solution can take from 505 to 780 hours.

EPAM Startups & SMBs is a subsidiary of EPAM, one of the largest software development service providers in Eastern Europe. This company is based on the idea of transferring the best practices of cooperation with world-famous business giants (for example, from the top 100 companies) to projects for small and medium-sized businesses.

We always guarantee compliance with generally accepted industry standards such as HIPAA, PCI DSS, GDPR, and fast NDA signing so that you can be sure of the reliability and confidentiality of our cooperation.

As for the cost estimation of software development models, we offer two options: Fixed price or Time and materials.

The first model is more beneficial for projects where customers have clear technical requirements for the product and have the opportunity to agree on an initial list of specifications before our specialists begin the development process. If this model suits you, fill out the contact form on our website and we will contact you within 24 hours. After that, you and the team may hop on a quick 15-20 minute call to discuss your needs and get our proposal and recommendations that fit your project.

The second model will be optimal for clients who plan to launch an innovative product and do not yet understand what technologies and functions will be optimal for a solution that will be launched on the market. In this case, software development cost analysis is performed according to the resources spent by your contractors (time, paid services, contributions of specific industry experts, and others). If you understand that this pricing model meets the specifics of your project, please contact us to get a budget calculation.

You can learn more about our software development for startups in our Services section.

In short, to estimate software development cost, you can go in two ways: Straightforward estimate and Rough estimate. However, none of these methods, if applied without the participation of specialists who will work on your project, will not be accurate enough. Therefore, for more transparent pricing, we recommend that you contact our experts directly.

In EPAM Startups & SMBs, we offer two pricing models: Fixed price and Times and materials. So if you want to create the scope of the project (features, tech stack, etc) and + estimate budget, please, contact our experts.

Now we propose the answers to frequently asked questions related to the topic of our article.