Outsourcing
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Each business owner aims for a well-planned project with clear requirements. Software development cost is what can affect the project implementation greatly.
The two main questions about software development with a vendor are "How much?" and "When will it be completed?" Each has an incredible amount of details. Let's examine the cost breakdown of software development and learn how to make estimations effectively.
Making cost estimations is more than knowing the price. It is also about project planning, success, and profitability of the future product. Although cost estimation is never 100% accurate, you should carefully plan your budget and foresee the risks of cost overruns.
Precise budget planning can help you in several ways. It facilitates setting clear expectations, allows you to find budget areas that keep costs high (and ways to avoid them in some cases), identifies project risks and opportunities, and ensures you can set aside additional resources if an unexpected situation occurs.
Overall, careful software development cost estimation ensures project feasibility and allows to avoid budget overruns, resource shortages, and delays that may undermine the whole project.
When calculating the cost of your future app, you need to understand the difference between time and effort.
The time required for the project indicates how long it takes to develop an app, while effort is how many hours you need for development. For example, you have strict project deadlines. Then, you need a larger team to complete the development in time than if there were no rough time limits.
The key to every software project cost estimation is finding the right balance between time, effort, and the resources you can afford. You can discuss the team size and hours of work required for the project with your software development partner. They can provide you with their estimations and vision of the project.
A thing to bear in mind is factors outside the development vendor's control that may hinder the project timeline. Such client-side obstacles may include internal acceptance procedures, access control, requirements shift, etc. To define them, you should:
Recognizing these barriers aids in more accurate scheduling forecasts, which contributes to better organization and financial planning.
Sometimes businesses lack internal expertise or time to estimate future project cost. Who to address then? One of the solutions is to ask a software development company for advice.
As a seasoned software development agency with 15+ years of experience and over 300 projects completed, NEKLO has vast, relevant expertise in estimating software development costs.
What occurs after you submit the "Contact Us" form on our website or reach out to NEKLO in another way? What does the estimating flow look like? Here’s the process of how we do software development cost estimation for our clients, step by step.
We gather essential data during the first call. We inquire about your needs, deadlines, budget, scope, and business priorities.
Based on this information, we assess the project's feasibility, the results you expect, and determine our ability to meet your requirements. Subsequently, our project managers and CTO evaluate the project further and prepare for a detailed discussion during a second call.
The second interaction involves NEKLO’s technical specialists, who delve deeper into the project's technical specifics. Prior to this stage, we typically propose signing a non-disclosure agreement (NDA) and request access to any existing solutions you might have.
During this phase, we explore project requirements, functionalities, your business idea and objectives, key challenges, and establish KPIs. We also determine the necessary tech stack and integrations, outline the project’s vision, and showcase relevant case studies.
After this, our development team provides an initial estimate, and we prepare a proposal for you.
When preparing a project proposal, we delineate the scope of work, list and prioritize features, and select essential features for the Minimum Viable Product (MVP). The team considers the potential budget, technical constraints, time limitations, and conducts a risk analysis.
Risks associated with software development cost estimations include:
Following the risk assessment, we perform technical estimations to define the future software’s architecture, APIs, integrations, logic, data structure, and interfaces. We then plan the necessary resources, decide on the team's size and structure, and the seniority level of developers.
The scope of work is divided into tasks, with time estimations for each, including buffers for tasks with uncertain durations.
"NEKLO's estimations are based on thorough assessments of time and resources by our technical team, providing three scenarios for project implementation: worst-case, realistic, and best-case."
Alex Mokievets, NEKLO's COO
During the third call, we present the proposal to you, highlighting high-level estimations and discussing any risky or unclear project elements that might extend the timeline.
During post-discussion, NEKLO adjusts the software project cost estimation and scope of work as needed. After your approval on the estimates, our business development team finalizes details like project milestones and payment schedules, and prepares the contract.
Once the contract is signed, the project is handed over to the designated development team. The project manager then schedules a kick-off meeting, marking the start of development.
An experienced software development agency like NEKLO will consider many factors when estimating the cost of a software development project. Let's dispel the mysteries surrounding app building cost and see what is likely to affect the final cost of your tech project.
A project type boils down to the range of tasks the development team is supposed to do, from custom software development to certain activities like data migration or system modernization.
Creating new software starts with ideation and market research, continuing with the crystallization of the requirements, and going straight to creating prototypes and mockups. And this is where the scope of work can vary.
MVP development is one of the most common and cost-effective ways for startups to check whether the audience will love and support their product.
An MVP project is smaller than a full-scale development. Yet, it should have enough features and appealing design to succeed. Depending on the requirements, the project can take an average of 12 weeks.
Launching the entire project will take more time and effort. A specialized in-house or outsourced dedicated team works best for both to achieve consistent results and a disruption-free development process.
Modification means adding new features and functionality to the existing software solution. Some applications face scalability and performance issues, others need new functionality to attract more customers, and others just become outdated and need robust renovation because of the high total cost of ownership. Legacy systems, for example, can consume up to 75% of the total IT budget.
Despite this, the development cost of such applications may include changes in architecture, technology, design, hosting, and more.
No matter if the intention is to refresh a legacy system, incorporate additional features, or refine an application, the process of estimating software project costs entails evaluating the present solution alongside the needs for its adjustment.
The specifics of software project cost estimation implies that you consider parameters like technology compatibility, data migration, and testing efforts, along with the defined scope and requirements.
For example, you need to connect your ERP system data to your CRM. Without pre-built connectors, the development team must define the data flow, build integration architecture, and ensure data accuracy and consistency.
Software development costs for web projects depend on the number of web pages, complexity, and design. Hosting, maintenance, security, and content management systems have ongoing yearly costs.
Consider post-launch costs like performance monitoring and on-call support, which can make up 15-20% of the initial budget annually.
Considering mobile app development, you need to first decide on an app's platform. Android, iOS, and cross-platform are the options. Build Android and iOS apps if you want to use native platform features. Choose cross-platform development to create a universal solution without platform-specific advantages. It saves costs through reusable codebase and effectively expands the user base.
The project's durability directly influences software development cost estimation and cannot be overlooked. On the other hand, the more complex the project is, the more time and resources it requires, driving up costs. That is why we’ll consider these two concepts together.
Complexity comes from the number of features, integrations, design complexity, compliance and security requirements.
Small and simple projects: include few requirements and improvements, need little interaction with the client, and lasts 2-4 months. They have well-defined requirements and a predictable path to solution, contain minimal integrations, and have straightforward user interfaces.
An example is building a static website or a simple mobile app (500-700 hours).
Medium-sized, moderately complex projects: include well-defined deliverables due to closer communication with the client, lasting from 4-8 months to a year. Such projects have more dynamic requirements involving custom functionalities and some level of integration with other systems or third-party services.
An example of this type of project is an e-commerce platform with custom feature development (700 to 1200 hours).
Large or enterprise, highly complex projects: include multiple integrations, features, database components, modular architecture, high levels of technical risk, and high impact on business operations.
Such projects last from 8 to 12+ months. They have robust security features, logging and error handling, and multiple data sources, and require close collaboration of the development team and the client.
Implementing enterprise-level ERP systems is a good example of such complexity level (1200+ hours).
You can work with an in-house team, freelancers, or outsourcing partners, the latter being a cost-saving and reliable option.
All the above options are viable. The choice depends on resource availability and the balance between each option's advantages and potential disadvantages.
Developers' hourly rates vary depending on the region and are tied to the country's living cost, so your team location directly influences the final software development cost. The location is also closely connected with the hiring model you choose. Let's look at the main regions for hiring the development team.
Team size and structure are other points of evaluation when estimating software development costs. The basic team consists of project managers, developers, and QA engineers. The larger the project, the more team members and diverse roles it requires. Team expansion increases productivity but also raises development costs.
Sometimes, especially in small teams, members combine different roles, such as project manager and business analyst, or developer and QA engineer. The smaller the project, the more likely developers are to test their code themselves.
A UI/UX designer, DevOps engineer, system architect, database specialist, domain-specific experts, and additional developers can enrich the development team according to the client's needs.
The more complex the tech stack, the higher the cost. Different technologies have varying levels of complexity and learning curves, which is why hourly rates for Ruby and PHP developers can differ. If you are looking for rare professionals, also expect higher spending.
Additionally, certain frameworks and development tools may not be free and require licenses. For example, cloud services, hosting, SSL certificates, and push notifications software can potentially increase project costs. When estimating software development costs, consider the long-term costs of maintaining the chosen technology and its strengths and weaknesses.
It's time to explore the roadblocks you might encounter to the perfect software development cost breakdown.
Team sizes may vary, increasing or decreasing as needed throughout the project's lifecycle. Also, when hiring a large team, it's important to note that not all members will work full-time at every project stage. Furthermore, individual team members may take on multiple roles, which can complicate accurately estimating their specific contributions to the project.
Solution: Costs for a dedicated team are based on the estimated amount of work each team member fulfills. As a client, you don't pay for a full-time team. If you favor a time and material pricing model, it is easier to monitor the team's performance and scope of work with project management tools and time tracking.
Vague requirements may lead to misunderstandings, increasing costs and additional time spent on development. Lack of communication between the development team and the client adds even more uncertainty when developers interpret the requirements.
Solution: Establish communication channels and set meeting schedules (daily or weekly meetings). Discuss requirements with your team to avoid unexpected results. Send feedback on the completed tasks to remain on the same page with the developers.
Sometimes, you don't know all the features you need from the start, and then you realize it in the middle of the process. Adjusting the requirements mid-project increases costs and slows the time to market. Better late than never, yet it's one of the reasons approximately 70% of software development projects are not delivered on time.
“Minor variations in software development estimates are common, often resulting from adjustments to the project scope or new client requirements that emerge during the development process.”
Alex Mokievets, NEKLO's COO
Solution: Define project requirements as clearly as possible before launching the development. If you anticipate sudden project scope changes, choose flexible pricing models like time and material or a dedicated team to introduce the changes seamlessly. Apply an effective change management process to track shifts in scope and their influence on the final cost.
Time constraints might prevent you from allocating enough time to the budget planning stage. Estimating software development costs requires no rush; otherwise, it may lead to unpredictable expenses and project scope.
One common reason for not meeting deadlines is unrealistic project completion time. According to a BCG survey on software projects, the top three reasons why development projects are delayed include lack of clarity or alignment on business outcomes (43%), lack of realistic timelines (42%), and lack of resources fully dedicated to the project (36%).
Solution: Break down the project into small pieces for easier estimations and allocate resources effectively to achieve timely results without sacrificing quality. Don't underestimate the planning stage and spend enough time on analysis.
While making effort estimations for software development projects, teams might be too optimistic or pessimistic, which results in inaccurate budget planning. The typical reasons for estimation bias include using unreliable data, ignoring potential risks and unexpected events when planning, and underestimating the problems' likelihood.
Solution: Use peer review and data-driven analysis to mitigate estimation bias risks. Encourage transparency and objectivity while estimating costs. Rely on factual data and realistic assumptions.
Being outside anyone's control, external dependencies, such as third-party integrations, vendor relationships, and regulatory requirements, may complicate cost estimation for software development project. Such uncertainties may result in overhead costs and project delays.
Solution: Identify the dependencies, estimate the costs of each task, and adjust the costs for the dependencies. Then, adjust your development plan to reflect the dependencies.
Software project cost estimation models allow you to make estimations depending on your needs, circumstances, and available data. You can choose the model that suits you best, or develop a hybrid method by combining parametric and bottom-up approaches.
It uses parameters such as the project's type, size, complexity, team size/composition, and calculated project time to make software development estimates. The parametric approach allows for quick estimations, reduces subjectivity in estimating, and provides high accuracy. Nevertheless, it will be less reliable if there is no clear scope of work or robust data behind the model.
What do you need to create a parametric software project cost estimation model?
The parametric method offers a scalable, data-driven, and efficient software development cost estimation. It's particularly effective when past project data is available, and the correlations between variables and costs are clear.
The analogous method is one of the simplest and quickest ways to estimate software development costs. It uses historical data of similar projects to estimate costs — the past projects become the reference point for future development. First, you should identify such projects. Then, the differences between the current and past projects will be found, and the cost estimations will be corrected.
What do you need to create an analogous software project cost estimation model?
An analogous approach benefits small or simple projects and does not require detailed project data, making it suitable for early project phases. Unfortunately, historical data may not be representative, and gathering it may require additional effort from the project manager and the rest of the team. Changes in the technology and market may affect estimation accuracy.
This approach involves estimating individual project elements at the lowest possible level of detail and then summing these estimates to derive the total project cost. It also analyzes the activities and tasks the team needs to perform.
Bottom-up cost estimation is comprehensive, detail-oriented, and offers granular analysis. Its advantages include accuracy, detailed budget tracking and management, and better risk identification and mitigation at the task level. Nevertheless, bottom-up is the most time-consuming and resource-intensive software development cost estimation method.
What do you need to create a bottom-up software project cost estimation model?
This method is widely used in projects where the scope is clearly defined, and the stakes are high, such as software development projects. It is also ideal for unique projects with many uncertainties or where precision in cost estimation is crucial for project success.
The majority of budget overruns result from scope creep, inaccurate initial destinations, miscommunication with the team, poor risk management, and the absence of contingency plans.
Exceeding the initial budget is common: for instance, 47% of ERP projects ended up with a budget overrun in 2023. Here is a step-by-step strategy to avoid incorrect software development estimates:
At the planning stage:
During the development:
"Our commitment to transparency ensures that we immediately inform clients of any emerging additional costs throughout the duration of the project."
Alex Mokievets, NEKLO's COO
Software development cost estimation cannot be 100% precise, yet it helps you plan your resources. To determine project cost, clarify the project's requirements, size, complexity, and hiring model. If you clearly understand the project scope, use cost estimation techniques or ask an experienced service provider for a consultation.
As an established software development company, NEKLO is well-versed in estimating different types of projects. Get in touch and discuss your project with our business analysts and receive a free estimate.
US-based and operating globally, NEKLO spearheads digital transformation initiatives for businesses worldwide. We deliver software solutions complying with your market and legislation.
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